----

----

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

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

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

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

| Date of event requiring this shell company report.......................... |
|-------------------------------------------------------------------------------------------------------------|

|   | Title of Each Class                 |   | Name of Each Exchange on Which Registered |   |
|--------|-------------------------------------|--------|-------------------------------------------|--------|
|   | Ordinary shares, NIS 0.01 par value |   | NASDAQ Global Market                      |   |

----

----

| P A R T   I |                                                    | 1        |
|----------------------------|---------------------------------------------------------|----------|
| ITEM 1.                    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS  |   2 |
| ITEM 2.                    | OFFER STATISTICS AND EXPECTED TIMETABLE                 |   2 |
| ITEM 3.                    | KEY INFORMATION                                         | 2        |
| A.                         | Selected Financial Data                                 | 2        |
| B.                         | Capitalization and Indebtedness                         | 4        |
| C.                         | Reasons for the Offer and Use of Proceeds               | 4        |
| D.                         | Risk Factors                                            | 4        |
| ITEM 4.                    | INFORMATION ON THE COMPANY                              | 19       |
| A.                         | History and Development of the Company                  | 19       |
| C.                         | Organizational Structure                                | 35       |
| D.                         | Property, Plants and Equipment                          | 36       |
| ITEM 4A.                   | UNRESOLVED STAFF COMMENTS                               | 36       |
| A.                         | Operating Results                                       | 50       |
| B.                         | Liquidity and Capital Resources                         | 55       |
| C.                         | Research and Development, Patents and Licenses          | 60       |
| D.                         | Trend Information                                       | 60       |
| E.                         | Off-Balance Sheet Arrangements                          | 61       |
| F.                         | Tabular Disclosure of Contractual Obligations           | 61       |
| ITEM 6.                    | DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES             | 61       |
| A.                         | Directors and Senior Management                         | 61       |
| B.                         | Compensation                                            | 64       |
| C.                         | Board Practices                                         | 66       |
| D.                         | Employees                                               | 74       |
| E.                         | Share Ownership                                         | 75       |
| ITEM 7.                    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 77       |
| A.                         | Major Shareholders                                      | 77       |
| B.                         | Related Party Transactions                              | 78       |
| C.                         | Interests of Expert and Counsel                         | 79       |
| ITEM 8.                    | FINANCIAL INFORMATION                                   | 79       |
| A.                         | Consolidated Statements and Other Financial Information | 79       |
| B.                         | Significant Changes                                     | 81       |
| ITEM 9.                    | THE OFFER AND LISTING                                   | 81       |
| A.                         | Offer and Listing Details                               | 81       |
| B.                         | Plan of Distribution                                    | 82       |
| C.                         | Markets                                                 | 82       |
| D.                         | Selling Shareholders                                    | 82       |
| E.                         | Dilution                                                | 82       |
| F.                         | Expenses of the Issue                                   | 83       |
| ITEM 10.                   | ADDITIONAL INFORMATION                                  | 83       |
| A.                         | Share Capital                                           | 83       |
| B.                         | Memorandum and Articles of Association                  | 83       |
| C.                         | Material Contracts                                      | 86       |
| D.                         | Exchange Controls                                       | 86       |
| E.                         | Taxation                                                | 87       |
| F.                         | Dividends and Paying Agents                             | 94       |
| G.                         | Statement by Experts                                    | 94       |
| H.                         | Documents on Display                                    | 95       |
| I.                         | Subsidiary Information                                  | 95       |

----

| ITEM 11.                     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 95  |
|------------------------------|------------------------------------------------------------------------------|-----|
| ITEM 12.                     | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 97  |
| P A R T   II  |                                                                         | 98  |
| ITEM 13.                     | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 98  |
| ITEM 14.                     | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 98  |
| ITEM 15.                     | CONTROLS AND PROCEDURES                                                      | 98  |
| ITEM 16.                     | [RESERVED]                                                                   | 99  |
| ITEM 16A.                    | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 99  |
| ITEM 16B.                    | CODE OF ETHICS                                                               | 99  |
| ITEM 16C.                    | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 99  |
| ITEM 16D.                    | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 100 |
| ITEM 16E.                    | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 100 |
| ITEM 16F.                    | CHANGE IN REGISTRANT CERTIFYING ACCOUNTANT                                   | 101 |
| ITEM 16G.                    | CORPORATE GOVERNANCE                                                         | 101 |
| P A R T   III |                                                                         | 102 |
| ITEM 17.                     | FINANCIAL STATEMENTS                                                         | 102 |
| ITEM 18.                     | FINANCIAL STATEMENTS                                                         | 102 |
| ITEM 19.                     | EXHIBITS                                                                     | 102 |

----

----

----

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS

----

|                                                            |   | Year Ended December 31,               |    |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                            |   | 2009                                  |    |   | 2008 |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                            |   | $                                     |    |
| Consolidated Statements of Operations Data:                     |   | (in thousands, except per share data) |    |
| Revenues                                                        |   | $                                     | 77,778  |   |   | $ | 91,745 |   |   | $ | 81,222 |   |   | $ | 61,375 |   |   | $ | 50,642 |   |
| Cost of revenues                                                |   |                                  | 44,885  |   |   |   | 46,032 |   |   |   | 36,529 |   |   |   | 26,066 |   |   |   | 22,782 |   |
| Gross profit                                                    |   |                                  | 32,893  |   |   |   | 45,713 |   |   |   | 44,693 |   |   |   | 35,309 |   |   |   | 27,860 |   |
| Research and development costs                                  |   |                                  | 11,420  |   |   |   | 18,378 |   |   |   | 12,653 |   |   |   | 8,595 |   |   |   | 7,214 |   |
| Selling, general, and administrative expenses                   |   |                                  | 30,406  |   |   |   | 32,359 |   |   |   | 28,370 |   |   |   | 19,338 |   |   |   | 16,938 |   |
| Goodwill impairment                                             |   |                                  | 5,670   |   |   |   | 13,328 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Restructuring costs                                             |   |                                  | -       |   |   |   | - |   |   |   | 694 |   |   |   | - |   |   |   | - |   |
| Total operating expenses                                        |   |                                  | 47,496  |   |   |   | 64,065 |   |   |   | 41,717 |   |   |   | 27,933 |   |   |   | 24,152 |   |
| Operating income (loss)                                         |   |                                  | (14,603 | ) |   |   | (18,352 | ) |   |   | 2,976 |   |   |   | 7,376 |   |   |   | 3,708 |   |
| Financial expenses, net                                         |   |                                  | (779    | ) |   |   | (2,237 | ) |   |   | (4,343 | ) |   |   | (3,553 | ) |   |   | (2,092 | ) |
| Other income, net                                               |   |                                  | -       |   |   |   | 398 |   |   |   | 892 |   |   |   | 282 |   |   |   | 104 |   |
| Income (loss) before taxes on income                            |   |                                  | (15,382 | ) |   |   | (20,191 | ) |   |   | (475 | ) |   |   | 4,105 |   |   |   | 1,720 |   |
| Income tax (expense) benefit                                    |   |                                  | 117     |   |   |   | 330 |   |   |   | (68 | ) |   |   | 407 |   |   |   | (112 | ) |
|                                                            |   |                                  | (15,265 | )  |   |   | (19,861 | )  |   |   | (543 | )  |   |   | 4,512 |   |   |   | 1,608 |   |
| Equity in earnings (losses) of affiliated companies, net        |   |                                  | (10     | ) |   |   | (49 | ) |   |   | 35 |   |   |   | - |   |   |   | - |   |
| Net profit (loss) from continued operation                      |   |                                  | (15,275 | ) |   |   | (19,910 | ) |   |   | (508 | ) |   |   | 4,512 |   |   |   | 1,608 |   |
| Discontinued operation                                          |   |                                  | -       |   |   |   | (8,512 | ) |   |   | (7,489 | ) |   |   | 273 |   |   |   | 186 |   |
| Net income (loss)                                               |   |                                  | (15,275 | ) |   |   | (28,422 | ) |   |   | (7,997 | ) |   |   | 4,785 |   |   |   | 1,794 |   |
| Net income attributed to non-controlling interests              |   |                                  | (295    | ) |   |   | (179 | ) |   |   | (199 | ) |   |   | (113 | ) |   |   | (5 | ) |
| Net income (loss) attributed to BluePhoenix’ shareholders |   | $                                     | (15,570 | ) |   | $ | (28,601 | ) |   | $ | (8,196 | ) |   | $ | 4,672 |   |   | $ | 1,789 |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total earning (loss) per share:                                 |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                           |   | $                                     | (0.72   | ) |   | $ | (1.35 | ) |   | $ | (0.48 | ) |   | $ | 0.34 |   |   | $ | 0.13 |   |
| Diluted                                                         |   | $                                     | (0.72   | ) |   | $ | (1.35 | ) |   | $ | (0.48 | ) |   | $ | 0.33 |   |   | $ | 0.13 |   |
|                                                            |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding                   |   |                                  | 21,500  |   |   |   | 21,196 |   |   |   | 17,145 |   |   |   | 13,889 |   |   |   | 13,557 |   |
| Weighted average number of shares outstanding assuming dilution |   |                                  | 21,500  |   |   |   | 21,196 |   |   |   | 17,145 |   |   |   | 14,371 |   |   |   | 13,973 |   |

|                             |   | December 31,   |    |
|----------------------------------|--------|----------------|---------|
|                             |   | 2009           |    |   | 2008 |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                             |   |  $        |    |
| Consolidated Balance Sheet Data: |   | (in thousands) |    |
| Working capital                  |   | $              | 27,638  |   |   | $ | 32,360 |   |   | $ | 32,008 |   |   | $ | 31,401 |   |   | $ | 17,954 |   |
| Total assets                     |   | $              | 122,554 |   |   | $ | 139,987 |   |   | $ | 146,858 |   |   | $ | 127,466 |   |   | $ | 99,691 |   |
| Total liabilities                |   | $              | 39,880  |   |   | $ | 46,665 |   |   | $ | 34,388 |   |   | $ | 66,961 |   |   | $ | 47,482 |   |
| Equity                           |   | $              | 82,674  |   |   | $ | 93,322 |   |   | $ | 112,470 |   |   | $ | 60,512 |   |   | $ | 52,324 |   |

----

----

|   | · | problems combining the acquired operations, technologies, or products; |
|--------|--------|------------------------------------------------------------------------|

|   | · | unanticipated costs or liabilities; |
|--------|--------|-------------------------------------|

|   | · | diversion of management’s attention; |
|--------|--------|--------------------------------------------|

|   | · | adverse effects on existing business relationships with suppliers and customers; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | risks associated with entering markets in which we have no or limited prior experience; |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | · | potential loss of key employees, particularly those of the acquired organizations; and |
|--------|--------|----------------------------------------------------------------------------------------|

|   | · | impairment of intangible assets related to acquisitions. |
|--------|--------|----------------------------------------------------------|

----

----

|   | · | global economic trends, such as the recent global economic crisis; |
|--------|--------|--------------------------------------------------------------------|

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

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

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

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

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

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

|   | · | currency fluctuations and financial expenses related to our financial instruments. |
|--------|--------|------------------------------------------------------------------------------------|

----

|   | · | goodwill is not amortized, but rather is subject to an annual impairment test. We perform an annual impairment test, as well as periodic impairment tests if impairment indicators are present. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over their estimated useful lives. The carrying amount of these assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value (usually discounted cash flow) of the impaired asset; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | acquired technology and development costs of software that is intended for sale that were incurred after the establishment of technological feasibility of the relevant product, be capitalized and tested for impairment on a regular basis, and written down when capitalized costs exceed net realizable value. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | small vendors who may provide a single solution for a particular area of modernization, such as Cast, Ateras, Anubex, Migrationware, Alchemy solutions, HTWC, Speedware and Softmaint; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | large system integrators such as IBM, HP, SUN, Accenture, Cap Gemini and EDS, some of whom we also partner with; |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

----

|   | · | software houses such as Micro Focus and Metaware; and |
|--------|--------|-------------------------------------------------------|

|   | · | Indian system integrators such as Tata, WIPRO, Infosys and Patni. |
|--------|--------|-------------------------------------------------------------------|

----

----

|   | · | currency exchange fluctuations; |
|--------|--------|---------------------------------|

|   | · | unexpected changes in regulatory requirements; |
|--------|--------|------------------------------------------------|

|   | · | tariffs and other trade barriers; |
|--------|--------|-----------------------------------|

|   | · | costs of localizing products for foreign countries; |
|--------|--------|-----------------------------------------------------|

|   | · | lack of acceptance of localized products; |
|--------|--------|-------------------------------------------|

|   | · | 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 local legislation. |
|--------|--------|--------------------------------------------------------------------|

----

----

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

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

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

|   |   | NASDAQ Global Market |   |   | TASE   |   |
|--------|--------|----------------------|--------|--------|--------|--------|
|   |   | In $                 |   |   | In NIS |   |
|   |   | High                 |   |   | Low    |   |   | High |   |   | Low |   |
| 2009   |   |                 | 3.85   |   |   |   | 1.62 |   |   |   | 14.24 |   |   |   | 7.07 |   |
| 2008   |   |                 | 20.66  |   |   |   | 1.40 |   |   |   | 74.83 |   |   |   | 5.25 |   |
| 2007   |   |                 | 21.49  |   |   |   | 5.94 |   |   |   | 85.51 |   |   |   | 25.69 |   |

|   | · | 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; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | potential impairments of our intangible assets; |
|--------|--------|-------------------------------------------------|

|   | · | adverse consequences of litigation; |
|--------|--------|-------------------------------------|

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

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

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

|   | · | changes in security analysts’ financial estimates; |
|--------|--------|----------------------------------------------------------|

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

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

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

----

|   | · | 200,000 ordinary shares issuable upon exercise of warrants issued to institutional investors in connection with the $3 million private placement, completed in March 2006; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 800,000 ordinary shares issuable upon exercise of warrants issued by us to institutional investors in connection with the $35 million private placement completed in November 2007; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 3,002,063 ordinary shares issuable upon exercise of warrants issued by us to institutional investors in connection with the private placement consummated in October 2009. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

ITEM 4. INFORMATION ON THE COMPANY

----

|   | · | lack of agility and responsiveness to changing business needs; |
|--------|--------|----------------------------------------------------------------|

|   | · | difficulty in recruiting and retaining mainframe professionals; |
|--------|--------|-----------------------------------------------------------------|

|   | · | growing cost of infrastructure software licenses, maintenance and operations; |
|--------|--------|-------------------------------------------------------------------------------|

|   | · | difficulties in complying with new regulations; and |
|--------|--------|-----------------------------------------------------|

|   | · | use of old technologies which prevent access to modern tools and inhibit the ability to meet business expectations. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | · | better understand and manage their IT systems and resources; |
|--------|--------|--------------------------------------------------------------|

|   | · | effectively plan and carry out strategic projects that provide real business value; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | transformation to modern technology enables enterprises to recruit professional resources; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | significantly decrease maintenance, human resource, and technology costs; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | easily integrate packaged applications and build customized applications; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | substantially transform applications and databases in order to address regulatory and business changes; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

|   | · | directly gain access to cutting edge technology and new business channels. |
|--------|--------|----------------------------------------------------------------------------|

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

|   | · | addressing changing business needs; |
|--------|--------|-------------------------------------|

|   | · | complying with new regulations; |
|--------|--------|---------------------------------|

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

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

----

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

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

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

|   | · | consolidating servers and applications; |
|--------|--------|-----------------------------------------|

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

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

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

----

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

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

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

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

----

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

|   | · | preserving corporate business knowledge; |
|--------|--------|------------------------------------------|

|   | · | substantially reducing dependency on scarce legacy technology skill sets; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | solving problematic maintenance issues; |
|--------|--------|-----------------------------------------|

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

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

|   | · | minimizing system freeze time with a unique “refresh” feature; and |
|--------|--------|--------------------------------------------------------------------------------|

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

----

|   | · | an alliance with Clerity for assisting companies to rehost mainframe applications on more cost-efficient, open platforms; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|

|   | · | a collaboration with Fujitsu for assisting companies to migrate COBOL/CICS applications into Fujitsu NetCOBOL and the Fujitsu NeoKicks and NeoBatch environments for handing CICS and batch/JCL; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a Gold level partnership with Microsoft for collaboration in migrating customers’ applications to the .NET platform; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | · | a partnership with Oracle for assisting companies to migrate their legacy databases to the Oracle database; |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

|   | · | advanced membership in IBM’s Partnerworld program to work together with IBM to modernize customers’ databases and applications on the mainframe platform; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | ongoing cooperation with SUN/Oracle that focuses on rehosting customers off of the mainframe and onto SUN’s UNIX platform. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

----

|                        |   | Year ended December 31, |   |
|-----------------------------|--------|-------------------------|--------|
|                        |   | 2009                    | 2008   | 2007 |   |
|                        |   | (in thousands)          |   |
|                        |   |                    |   |   |   |   |   |   |   |
| North America               |   | $                       | 27,897 |   |   | $ | 22,660 |   |   | $ | 17,840 |   |
| Europe (other than Denmark) |   |                    | 26,091 |   |   |   | 40,044 |   |   |   | 31,725 |   |
| Denmark                     |   |                    | 9,975  |   |   |   | 11,096 |   |   |   | 15,750 |   |
| Israel                      |   |                    | 10,320 |   |   |   | 10,679 |   |   |   | 7,820 |   |
| Other                       |   |                    | 3,495  |   |   |   | 7,266 |   |   |   | 8,087 |   |
|                        |   | $                       | 77,778 |   |   | $ | 91,745 |   |   | $ | 81,222 |   |

----

----

----

|   | · | Lowest risk – existing tried and tested information technology is leveraged directly and translated into a version of itself based on a newer technology platform; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Least cost and time; and |
|--------|--------|--------------------------|

|   | · | Least impact on the business and professional skill set. |
|--------|--------|----------------------------------------------------------|

----

|   | · | the ability to offer automated solutions for legacy IT modernization; |
|--------|--------|-----------------------------------------------------------------------|

|   | · | the range and number of languages, operating systems and databases supported by said tools; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | tool functionality, performance, and reliability; |
|--------|--------|---------------------------------------------------|

|   | · | the extent and range of ancillary professional services that can be offered in conjunction with the actual modernization services; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | · | availability of experienced personnel and with appropriate modernization subject matter expertise; |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | · | solution pricing; |
|--------|--------|-------------------|

|   | · | local geographic presence in customer’s territory; |
|--------|--------|----------------------------------------------------------|

|   | · | credibility in the market place, customer references and perceived financial stability; |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | · | the ability to respond in a timely manner to changing customer needs; and |
|--------|--------|---------------------------------------------------------------------------|

|   | · | the quality of operational support and maintenance for any delivered solution. |
|--------|--------|--------------------------------------------------------------------------------|

----

| Name of Subsidiary                        | Country of Incorporation |
|-------------------------------------------|--------------------------|
| BluePhoenix Solutions USA Inc.            | United States            |
| Amalgamated Software NA Inc. (ASNA)       | United States            |
| BridgeQuest Inc.                          | United States            |
| BluePhoenix Solutions Nordic, AS          | Denmark                  |
| BluePhoenix Solutions U.K. Limited        | United Kingdom           |
| BluePhoenix Solutions Italia Srl.         | Italy                    |
| Blue Phoenix I-Ter S.p.A.                 | Italy                    |
| BluePhoenix Solutions GmbH                | Germany                  |
| BluePhoenix Solutions B.V.                | The Netherlands          |
| BluePhoenix Solutions Ltd.                | Cyprus                   |
| BluePhoenix Solutions Srl.                | Romania                  |
| BluePhoenix Solutions Co., Ltd.           | Korea                    |
| Liacom Systems Ltd.                       | Israel                   |
| Zulu Software Inc.                        | United States            |
| TIS Consultants Ltd.                      | Cyprus                   |
| BluePhoenix Technologies Ltd.             | Israel                   |
| TISA Software Consultants Private Limited | India                    |

----

| Country and State   | City            |   | Sq. Meters |   | Expiration |          | Annual anticipated rental fees in 2010(*)in thousands $ |   |
|---------------------|-----------------|--------|------------|--------|------------|---------------|---------------------------------------------------------|--------|
| Israel              | Herzliya        |   |       | 1,540  |       | December 2010 |                                                    |   | 352 |   |
| Israel              | Holon           |   |       | 253    |       | December 2010 |                                                    |   | 43 |   |
| USA, North Carolina | Cary            |   |       | 604    |       | April 2012    |                                                    |   | 134 |   |
| USA, Texas          | San Antonio     |   |       | 650    |       | July 2011     |                                                    |   | 142 |   |
| USA                 | Virginia        |   |       | 235    |       | November 2012 |                                                    |   | 45 |   |
| Denmark             | Ballerup        |   |       | 177    |       | November 2010 |                                                    |   | 26 |   |
| Romania             | Bucharest       |   |       | 930    |       | May 2013      |                                                    |   | 225 |   |
| United Kingdom      | Milton Keynes   |   |       | 180    |       | December 2012 |                                                    |   | 88 |   |
| Cyprus              | Nicosia         |   |       | 100    |       | April 2011    |                                                    |   | 22 |   |
| Italy               | Milan           |   |       | 110    |       | April 2012    |                                                    |   | 12 |   |
| Italy               | Riccione        |   |       | 200    |       | December 2013 |                                                    |   | 28 |   |
| Italy               | Milan           |   |       | 115    |       | November 2014 |                                                    |   | 19 |   |
| Russia              | St. Petersburg  |   |       | 836    |       | December 2010 |                                                    |   | 290 |   |
| Russia              | Irkutsk         |   |       | 136    |       | December 2010 |                                                    |   | 32 |   |
| Russia              | Nizhny Novgorod |   |       | 160    |       | December 2010 |                                                    |   | 44 |   |
| India               | Mysore          |   |       | 130    |       | December 2010 |                                                    |   | 8 |   |
| Total               |            |   |       | 6,356  |       |          |                                                    |   | 1,510 |   |

UNRESOLVED STAFF COMMENTS

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|                                               |   | 2009   |    |   | 2008   |   |    | 2007   |   |
|----------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
| Net income (loss)                                  |   |   | (15,570 | )      |   |   | (28,601 | )      |   |   | (8,196 | ) |
| Amortization of intangible assets                  |   |   | 7,908   |   |   |   | 9,110   |   |   |   | 9,512 |   |
| Goodwill impairment                                |   |   | 5,670   |   |   |   | 13,328  |   |   |   | - |   |
| Capitalization of software development costs       |   |   | -       |   |   |   | -       |   |   |   | (3,944 | ) |
| Stock-based and non-cash compensation              |   |   | 2,031   |   |   |   | 2,825   |   |   |   | 2,794 |   |
| Cost saving expenses and one-time charges          |   |   | 6,167   |   |   |   | 2,338   |   |   |   | 2,664 |   |
| Net loss from discontinued operation               |   |   | -       |   |   |   | 8,512   |   |   |   | 7,489 |   |
| Net income attributed to non-controlling interests |   |   | 295     |   |   |   | 228     |   |   |   | 164 |   |
| Income tax expenses (benefit)                      |   |   | (117    | )      |   |   | (330    | )      |   |   | 68 |   |
| Financial expenses, net                            |   |   | 779     |   |   |   | 1,839   |   |   |   | 3,451 |   |
| Adjusted EBITDA                                    |   |   | 7,163   |   |   |   | 9,249   |   |   |   | 14,002 |   |

| Name of Subsidiary/purchased activit          | Beginning Consolidatio |
|-----------------------------------------------|------------------------|
| BridgeQuest Inc.                              | Second quarter of 2007 |
| Amalgamated Software North America Inc.(ASNA) | Third quarter of 2007  |
| TIS Consultants Ltd.                          | First quarter of 2008  |
| JLC Group business                            | Second quarter of 2008 |
| Knowledge Management business                 | Fourth quarter of 2009 |

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|   Level 1:    | Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
|------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  Level 2:    | Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. |
|----------------------------------|-----------------------------------------------------------------------------------------------------------|

|   Level 3:    | Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

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| For the year ended December 31, | Inflation rate in Israel | Devaluation of NIS against the US$ | Devaluation of euro against the US$ |
|---------------------------------|--------------------------|------------------------------------|-------------------------------------|
|                            | %                        | %                                  | %                                   |
| 2007                            | 3.4                      | (8.7)                              | (11.7)                              |
| 2008                            | 3.8                      | (1.1)                              | 5.6                                 |
| 2009                            | 3.9                      | (0.7)                              | (3.3)                               |

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|   | Statement of Operations Data as a Percentage of Revenues: |
|--------|-----------------------------------------------------------|

|                                                     |   |   Year ended December 31, |   |
|----------------------------------------------------------|--------|--------------------------------|--------|
|                                                     |   | 2009                           |   |   | 2008 |   |   | 2007 |   |
|                                                     |   | %                              |   |   | % |   |   | % |   |
|                                                     |   |                           |   |   |   |   |   |   |   |
| Revenues                                                 |   |                           | 100.0  |   |   |   | 100.0 |   |   |   | 100.0 |   |
| Cost of revenues                                         |   |                           | 57.7   |   |   |   | 50.2 |   |   |   | 45.0 |   |
| Gross profit                                             |   |                           | 42.3   |   |   |   | 49.8 |   |   |   | 55.0 |   |
| Research and development costs                           |   |                           | 14.7   |   |   |   | 20.0 |   |   |   | 15.6 |   |
| Selling, general, and administrative expenses            |   |                           | 39.1   |   |   |   | 35.3 |   |   |   | 34.9 |   |
| Goodwill impairment                                      |   |                           | 7.3    |   |   |   | 14.5 |   |   |   |   |   |
| Restructuring costs                                      |   |                           | -      |   |   |   | - |   |   |   | 0.8 |   |
| Operating income (loss)                                  |   |                           | (18.8  | ) |   |   | (20.0 | ) |   |   | 3.7 |   |
| Financial expenses, net                                  |   |                           | (1.0   | ) |   |   | (2.4 | ) |   |   | (5.3 | ) |
| Other income, net                                        |   |                           | -      |   |   |   | 0.4 |   |   |   | 1.0 |   |
| Loss before taxes on income                              |   |                           | (19.8  | ) |   |   | (22.0 | ) |   |   | (0.6 | ) |
| Income tax (expense) benefit                             |   |                           | 0.2    |   |   |   | 0.4 |   |   |   | (0.1 | ) |
|                                                     |   |                           | (19.6  | ) |   |   | (21.6 | ) |   |   | (0.7 | ) |
| Equity in earnings of affiliated companies, net          |   |                           | -      |   |   |   | (0.1 | ) |   |   | - |   |
| Net loss from continued operation                        |   |                           | (19.6  | ) |   |   | (21.7 | ) |   |   | (0.7 | ) |
| Loss from discontinued operation                         |   |                           | -      |   |   |   | (9.2 | ) |   |   | (9.2 | ) |
| Net loss                                                 |   |                           | (19.6  | ) |   |   | (30.9 | ) |   |   | (9.9 | ) |
| Net results attributable to non-controlling interests    |   |                           | (0.4   | ) |   |   | (0.2 | ) |   |   | (0.2 | ) |
| Net loss attributable to BluePhoenix’ shareholders |   |                           | (20.0  | ) |   |   | (31.1 | ) |   |   | (10.1 | ) |

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|                        |   | 2009   |   |   | 2008   |   |   | 2007   |   |
|-----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                        |   | %      |   |   | %      |   |   | %      |   |
| North America               |   |   | 36     |   |   |   | 25     |   |   |   | 22 |   |
| Europe (other than Denmark) |   |   | 34     |   |   |   | 44     |   |   |   | 39 |   |
| Denmark                     |   |   | 13     |   |   |   | 12     |   |   |   | 19 |   |
| Israel                      |   |   | 13     |   |   |   | 12     |   |   |   | 10 |   |
| Other                       |   |   | 4      |   |   |   | 7      |   |   |   | 10 |   |
| Total                       |   |   | 100    |   |   |   | 100    |   |   |   | 100 |   |

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|                        |   | 2008   |   |   | 2007   |   |   | 2006   |   |
|-----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                        |   | %      |   |   | %      |   |   | %      |   |
| United States               |   |   | 25     |   |   |   | 22     |   |   |   | 15 |   |
| Europe (other than Denmark) |   |   | 44     |   |   |   | 39     |   |   |   | 44 |   |
| Denmark                     |   |   | 12     |   |   |   | 19     |   |   |   | 17 |   |
| Israel                      |   |   | 12     |   |   |   | 10     |   |   |   | 17 |   |
| Other                       |   |   | 7      |   |   |   | 10     |   |   |   | 7 |   |
| Total                       |   |   | 100    |   |   |   | 100    |   |   |   | 100 |   |

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|   | · | maintaining a minimum level of shareholders’ equity of no less than 40% of our total assets and no less than $50 million; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | maintaining a minimum level of tangible shareholders’ equity not to exceed a deficit of $30 million; |
|--------|--------|------------------------------------------------------------------------------------------------------------|

|   | · | maintaining a cash balance of $10 million; |
|--------|--------|--------------------------------------------|

|   | · | maintaining a level of EBITDA net of one time expenses in four sequential quarters of no less than $5 million; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | · | maintaining a ratio of our bank liabilities to current assets, excluding other current assets, of no more than 40%. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

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|                        |   | Payment due by period |   |
|-----------------------------|--------|-----------------------|--------|
| Contractual Obligations     |   | Total                 |   |   | Less than 1 year |   |   | 1–2 years |   |   | 3-5 years |   |   | More than 5 years |   |
|                        |   | In thousands $        |   |
|                        |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contingent Consideration    |   |                  | 3,396  |   |   |   | 3,396 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Operating Lease Obligations |   |                  | 4,618  |   |   |   | 2,619 |   |   |   | 1,940 |   |   |   | 59 |   |   |   | - |   |
| Loans from Banks            |   |                  | 15,377 |   |   |   | 2,490 |   |   |   | 6,997 |   |   |   | 5,770 |   |   |   | 120 |   |
| Total                       |   |                  | 23,391 |   |   |   | 8,505 |   |   |   | 8,937 |   |   |   | 5,829 |   |   |   | 120 |   |

DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

| Name                           |   | Age    |   | Position |
|--------------------------------|--------|--------|--------|----------|
|                           |   |   |   |     |
| Arie Kilman(3)                 |   |   | 57     |     | Chairman of the Board |
| Yaron Tchwella                 |   |   | 49     |     | Chief Executive Officer |
| Michael Chill (1)(2)(3)        |   |   | 43     |     | Director |
| Amira Berkovitz-Amir (1)(2)(3) |   |   | 43     |     | Director |
| Sam Somech (1)(2)              |   |   | 57     |     | Director |
| Gur Shomron(1)                 |   |   | 57     |     | Director |
| Varda Sagiv                    |   |   | 49     |     | Chief Financial Officer |
| Yael Peretz                    |   |   | 36     |     | General Counsel |
| Len Erlikh                     |   |   | 52     |     | Chief Technology Officer |
| Steven Dmiszewicki             |   |   | 48     |     | Vice President & General Manager, Professional Services |

|   | (1) | Member of the audit committee and independent director under The NASDAQ Global Market listing requirements. |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

|   | (2) | An outside director. |
|--------|-----|----------------------|

|   | (3) | Member of the option committee. |
|--------|-----|---------------------------------|

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|   | (i) | On target bonus of up to $150,000 per annum, payable in quarterly installments, if the quarterly targets (based on our quarterly results as defined by the board) are achieved; |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Quarterly grants, each of which of 7,500 RSUs, during 2009, and such other amount of RSUs in each of the following years of service as to be determined by our board of directors, if the quarterly targets (based on our quarterly results as defined by the board) are achieved. The RSUs will be granted under the terms and conditions set forth in our 2007 Award Plan. The RSUs shall vest in three equal installments on the date of grant and on the first day of each of two additional years of service; and |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         (iii) | Bonus for exceeding targets of up to US$150,000 per annum, if certain targets exceeding the targets mentioned in sub-section (i) above, as to be defined by the board for each fiscal year of employment beginning in 2009, are achieved. For 2009 no bonus was granted. |
|-------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | (i) | 40,000 RSUs on the day of the first year of service, but not earlier than January 1, 2009; and |
|--------|-----|------------------------------------------------------------------------------------------------|

|   | (ii) | 30,000 RSUs on the first day of each following year of service as a director. |
|--------|------|-------------------------------------------------------------------------------|

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|   | (i) | an annual cash payment in an amount which is the higher of (x) the minimum amount payable to outside directors in accordance with the Israeli Companies Regulations (Rules for the Payment of Remuneration and Expenses of Outside Directors) 2002, referred to as the Outside Directors Regulations, as to be updated from time to time; and (y) NIS 45,000 (the equivalent of approximately $12,000 as of the date hereof), payable in four equal quarterly installments; and |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | a participation fee in an amount which is the higher of (x) the minimum amount payable to outside directors in accordance with the Outside Directors Regulations, as to be updated from time to time; and (y) NIS1,900 (the equivalent of approximately $500 as of the date hereof), for every meeting of the board of directors or its committees in which the director participates. In accordance with the Outside Directors Regulations, the payment for telephone meetings (or a meeting held by other similar means) shall be equal to 60% of the abovementioned amount, and payment for written resolutions shall be equal to 50% of the abovementioned amount. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | (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. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | the audit committee confirms that he or she meets the qualifications for being appointed as an outside director, except for the requirement for financial and accounting expertise or professional qualifications; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of up to two years in the service shall not be deemed to interrupt the continuation of the service. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | the securities issued represent at least 20% of the company’s actual voting power prior to the issuance of such securities, and such issuance increases the relative holdings of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at a fair market value; or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a person would become, as a result of such transaction, a controlling shareholder of the company. |
|--------|--------|---------------------------------------------------------------------------------------------------|

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|   |   |
|--------|--------|

| Exculpation, Insurance and Indemnification of Directors and Officers |
|----------------------------------------------------------------------|

|   | · | a breach of his duty of care to us or to another person; |
|--------|--------|----------------------------------------------------------|

|   | · | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that such act would not prejudice our interests; or |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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|   | · | a breach by the office holder of his duty of loyalty, except that the company may indemnify or provide insurance coverage to the office holder if the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly, except for a breach that was made in negligence; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | any act or omission done with the intent to derive an illegal personal benefit; or |
|--------|--------|------------------------------------------------------------------------------------|

|   | · | any fine levied against the office holder. |
|--------|--------|--------------------------------------------|

|                              |   | 2009   |   |   | 2008   |   |   | 2007   |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Technical Experts                 |   |   | 427    |   |   |   | 477    |   |   |   | 454 |   |
| Research and Development          |   |   | 191    |   |   |   | 207    |   |   |   | 161 |   |
| Sales, General and Administrative |   |   | 114    |   |   |   | 120    |   |   |   | 147 |   |
| Total                             |   |   | 732    |   |   |   | 804    |   |   |   | 762 |   |
|                              |   |   |   |   |   |   |   |   |   |   |   |   |
| In Israel                         |   |   | 213    |   |   |   | 191    |   |   |   | 189 |   |
| In Europe                         |   |   | 440    |   |   |   | 502    |   |   |   | 464 |   |
| In the United States              |   |   | 79     |   |   |   | 111    |   |   |   | 109 |   |

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| Name                                              |   | Number of shares beneficially owned(1) |    |   | Percentage of outstanding ordinary shares |   |   | Number of Restricted Share Units (RSUs) |   |   | Number of options to purchase ordinary shares |   |
|---------------------------------------------------|--------|----------------------------------------|---------|--------|-------------------------------------------|--------|--------|-----------------------------------------|--------|--------|-----------------------------------------------|--------|
| Arie Kilman                                       |   |                                   | 488,836 | (2)    |                                      |   | 5.1    | %                                       |   |   | 61,250                                        |   |   |   | 725,000 |   |
| Yaron Tchwella(3)                                 |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 268,334                                       |   |   |   | - |   |
| Gur Shomron (7)                                   |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 20,000                                        |   |   |   |   |   |
| Michael Chill(4)                                  |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 33,334                                        |   |   |   | - |   |
| Amira Berkovitz-Amir (5)                          |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 33,334                                        |   |   |   | - |   |
| Sam Somech(6)                                     |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 33,334                                        |   |   |   | - |   |
| Varda Sagiv (8)                                   |   |                                   | *       |   |                                      |   | *      |                                    |   |   | 6,667                                         |   |   |   | 50,000 |   |
| Yael Peretz (9)                                   |   |                                   | *       |   |                                      |   | *      |                                    |   | 5,000  |                                          |   |   | 27,500 |   |
| All directors and officers as a group (8 persons) |   |                                   | 735,000 |   |                                      |   | 6.1    | %                                       |   |   | 461,253                                       |   |   |   | 802,500 |   |

|   | (1) | Each of the directors and executive officers whose holdings are not separately specified in the above table beneficially owns less than one percent of our outstanding ordinary shares. Options to purchase ordinary shares that are currently exercisable or exercisable within 60 days after the date of this report are deemed outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Mr. Kilman was granted options to purchase 725,000 ordinary shares, exercisable under the following terms: (i) options to purchase 375,000 ordinary shares at $2.25 per share, which expire in April 2013; (ii) options to purchase 200,000 ordinary shares exercisable at $4.00 per share, which expire in October 2013; and (iii) options to purchase 150,000 ordinary shares at $6.00 per share, which expire in September 2015. In addition, Mr. Kilman was granted RSUs, of which: (i) 8,750 RSUs are convertible into ordinary shares in April 2010; (ii) 7,500 RSUs are convertible into ordinary shares in July 2010; (iii) 7,500 RSUs are convertible into ordinary shares in October 2010; (iv) 7,500 RSUs are convertible into ordinary shares in January 2011; (v) 7,500 RSUs are convertible into ordinary shares in April 2011; (vi) 7,500 RSUs are convertible into ordinary shares in July 2011; (vii) 7,500 RSUs are convertible into ordinary shares in October 2011; and (viii) 7,500 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Mr. Tchwella was granted RSUs, of which: (i) 7,500 RSUs are convertible into ordinary shares in April 2010; (ii) 7,500 RSUs are convertible into ordinary shares in July 2010; (iii) 100,000 RSUs are convertible into ordinary shares in August 2010; (iv) 9,167 RSUs are convertible into ordinary shares in October 2010; (v) 10,000 RSUs are convertible into ordinary shares in January 2011; (vi) 7,500 RSUs are convertible into ordinary shares in April 2011; (vii) 7,500 RSUs are convertible into ordinary shares in July 2011; (viii) 100,000 RSUs are convertible into ordinary shares in August 2011; (ix) 9,167 RSUs are convertible into ordinary shares in October 2011; and (x) 10,000 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Mr. Chill was granted RSUs, of which: (i) 23,334 RSUs are convertible into ordinary shares in January 2011; and (ii) 10,000 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Ms. Berkovitz-Amir was granted RSUs, of which: (i) 23,334 RSUs are convertible into ordinary shares in January 2011; and (ii) 10,000 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Mr. Somech was granted RSUs, of which: 23,334 RSUs are convertible into ordinary shares in January 2011; and (ii) 10,000 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | Mr. Shomron was granted RSUs, of which: (i) 10,000 RSUs are convertible into ordinary shares in January 2011; and (ii) 10,000 RSUs are convertible into ordinary shares in January 2012. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | Ms. Sagiv was granted currently exercisable options to purchase 50,000 ordinary shares at $2.01 per share of which: (i) 16,333 are options to purchase ordinary shares in May 2010; (iii) 16,334 are options to purchase ordinary shares in May 2011; (iv) 16,334 are options to purchase ordinary shares in May 2012.  In addition, Ms. Sagiv was granted RSUs, of which: (i) 3,333 RSUs are convertible into ordinary shares in April 2010; and (ii) 3,334 RSUs are convertible into ordinary shares in April 2011. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | Ms. Peretz was granted currently exercisable options to purchase 27,500 ordinary shares, exercisable under the following terms: (i) options to purchase 2,500 ordinary shares at $5.00 per share, which expire in December 2015; (ii) options exercisable at $2.54 per share to purchase 8,333 ordinary shares in August 2010; (iii) options exercisable at $2.54 per share to purchase 8,333 ordinary shares in August 2011; (iv) options exercisable at $2.54 per share to purchase 8,334 ordinary shares in August 2012. In addition, Ms. Peretz was granted RSUs, of which: (i) 21,500 RSUs are convertible into ordinary shares; and (ii) 5,000 RSUs are convertible into ordinary shares in August 2010; |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

| Name and Address                                           | Number of Ordinary SharesOwned | Percent of TotalShares(1) |
|------------------------------------------------------------|--------------------------------|---------------------------|
|  Prescott Group Capital Management, L.L.C. (2)   |  7,033,390(2)             |  28.3%               |
|  Arie Kilman(3)                                       |  1,212,586           |  5.1%                |
|  All directors and officers as a group (8 persons)(4) |  1,476,250                |  6.1%                |

| (1) | Percentages in the above table are based on 23,376,779 ordinary shares outstanding as of March 22, 2010 and do not include 2,217,573 held by BluePhoenix. Pursuant to Israeli law, these shares do not confer upon their holder any rights. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Based on a Schedule 13G filed by Prescott Group Capital Management, L.L.C. on February 12, 2010, Prescott Group Capital Management LLC, referred to as Prescott Capital, is the beneficial owner of 7,033,390 ordinary shares and Mr. Phil Frohlich is the beneficial owner of 7,033,390 ordinary shares. Such shares consist of 5,532,359 ordinary shares, Series A warrants exercisable to purchase 409,372 ordinary shares, Series B warrants exercisable to purchase 682,287 ordinary shares and Series C warrants to purchase 409,372 ordinary shares. Accordingly, Prescott Capital and Mr. Phil Frohlich are the beneficial owners of 28.3% of the outstanding Ordinary Shares. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Number of shares owned includes an aggregate of 733,750 ordinary shares underlying options exercisable within 60 days of the date hereof and restricted share units vested within 60 days of the date hereof. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Includes options to purchase ordinary shares exercisable within 60 days of the date hereof and restricted share units vested within 60 days of the date hereof. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | any financial obligation imposed on the office holder in favor of another person by a court judgment, including a settlement or an arbitrator’s award approved by court, |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | all reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder and either (a) concluded without the imposition of any financial liability in lieu of criminal proceedings; or (b) concluded with the imposition of a financial liability in lieu of criminal proceeding but relates to a criminal offense that does not require proof of mens rea (criminal intent); and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | all reasonable litigation expenses, including attorney’s fees, expended by the office holder or charged to him or her by a court in a proceeding instituted against the office holder by us or on our behalf or by another person, or in any criminal proceedings in which the office holder is acquitted, or in any criminal proceedings of a crime that does not require proof of mens rea (criminal intent) in which the office holder is convicted. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | a breach by the office holder of his or her duty of loyalty, unless, to the extent permitted by law, the office holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of our company; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a willful breach by the office holder of his or her duty of care, unless such breach was solely due to negligence; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | · | an action taken or not taken with the intent of unlawfully realizing personal gain; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | a fine or penalty imposed on the office holder for an offense; and |
|--------|--------|--------------------------------------------------------------------|

|   | · | a counterclaim made by us in connection with a claim against us filed by the office holder. |
|--------|--------|---------------------------------------------------------------------------------------------|

FINANCIAL INFORMATION

----

----

THE OFFER AND LISTING

|   Calendar Period                      |   | Closing Price Per ShareIn US$ |   |
|---------------------------------------------|--------|-------------------------------|--------|
|                                        |   | High                          |   |   | Low |   |
| Annual                                      |   |                          |   |   |   |   |
| 2005                                        |   |                          | 4.75   |   |   |   | 3.81 |   |
| 2006                                        |   |                          | 6.45   |   |   |   | 3.85 |   |
| 2007                                        |   |                          | 21.49  |   |   |   | 5.94 |   |
| 2008                                        |   |                          | 20.66  |   |   |   | 1.40 |   |
| 2009                                        |   |                          | 3.85   |   |   |   | 1.62 |   |
| Fiscal Quarters                             |   |                          |   |   |   |   |   |   |
| 2008                                        |   |                          |   |   |   |   |   |   |
|   First Quarter                   |   |                          | 20.66  |   |   |   | 7.25 |   |
|   Second Quarter                  |   |                          | 12.07  |   |   |   | 4.61 |   |
|   Third Quarter                   |   |                          | 5.80   |   |   |   | 3.45 |   |
|   Fourth Quarter                  |   |                          | 3.73   |   |   |   | 1.40 |   |
| 2009                                        |   |                          |   |   |   |   |   |   |
|   First Quarter                   |   |                          | 2.65   |   |   |   | 1.62 |   |
|   Second Quarter                  |   |                          | 2.49   |   |   |   | 1.79 |   |
|   Third Quarter                   |   |                          | 3.85   |   |   |   | 2.11 |   |
|   Fourth Quarter                  |   |                          | 3.74   |   |   |   | 2.46 |   |
| Most Recent Six Months                      |   |                          |   |   |   |   |   |   |
|   September 2009                  |   |                          | 3.85   |   |   |   | 2.89 |   |
|   October 2009                    |   |                          | 3.74   |   |   |   | 2.62 |   |
|   November 2009                   |   |                          | 2.91   |   |   |   | 2.51 |   |
|   December 2009                   |   |                          | 2.65   |   |   |   | 2.46 |   |
| 2010                                        |   |                          |   |   |   |   |   |   |
|   January 2010                    |   |                          | 2.94   |   |   |   | 2.67 |   |
|   February 2010                   |   |                          | 2.93   |   |   |   | 2.30 |   |
|   March 2010 (through March 22nd) |   |                          | 2.62   |   |   |   | 2.39 |   |

----

| Calendar Period                                           |   |   | Closing Price Per ShareIn NIS |   |
|-----------------------------------------------------------|--------|--------|-------------------------------|--------|
| Annual                                                    |   |   | High                          |   |   |   | Low |   |
| 2005                                                      |   |   | 20.99                         |   |   |   | 16.01 |   |
| 2006                                                      |   |   | 26.88                         |   |   |   | 17.41 |   |
| 2007                                                      |   |   | 85.51                         |   |   |   | 25.69 |   |
| 2008                                                      |   |   | 74.83                         |   |   |   | 5.25 |   |
| 2009                                                      |   |   | 14.24                         |   |   |   | 7.07 |   |
|        Fiscal Quarters |   |   |                          |   |   |   |   |   |
| 2008                                                      |   |   |                          |   |   |   |   |   |
|   First Quarter                                 |   |   | 74.83                         |   |   |   | 24.68 |   |
|   Second Quarter                                |   |   | 40.56                         |   |   |   | 15.95 |   |
|   Third Quarter                                 |   |   | 20.55                         |   |   |   | 12.22 |   |
|   Fourth Quarter                                |   |   | 13.01                         |   |   |   | 5.25 |   |
| 2009                                                      |   |   |                          |   |   |   |   |   |
|   First Quarter                                 |   |   | 10.84                         |   |   |   | 7.07 |   |
|   Second Quarter                                |   |   | 9.69                          |   |   |   | 7.71 |   |
|   Third Quarter                                 |   |   | 14.24                         |   |   |   | 8.62 |   |
|   Fourth Quarter                                |   |   | 14.06                         |   |   |   | 9.08 |   |
| Most Recent Six Months                                    |   |   |                          |   |   |
|   September 2009                                |   |   | 14.24                         |   |   |   | 10.56 |   |
|   October 2009                                  |   |   | 14.06                         |   |   |   | 10.42 |   |
|   November 2009                                 |   |   | 11.36                         |   |   |   | 9.61 |   |
|   December 2009                                 |   |   | 9.97                          |   |   |   | 9.08 |   |
| 2010                                                      |   |   |                          |   |   |   |   |   |
|   January 2010                                  |   |   | 10.95                         |   |   |   | 10.00 |   |
|   February 2010                                 |   |   | 10.99                         |   |   |   | 9.02 |   |
|   March 2010 (through March 22nd)               |   |   | 9.72                          |   |   |   | 9.15 |   |

----

ADDITIONAL INFORMATION

|   | · | operating within the field of informational and computer systems; |
|--------|--------|-------------------------------------------------------------------|

|   | · | providing management, consulting and sale services for computers, computer equipment, software for computers and for information systems; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the business of systems analysis, systems programming and computer programming; and |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | establishing facilities for instruction and training for computers and digital systems. |
|--------|--------|-----------------------------------------------------------------------------------------|

----

----

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

|   | · | an increase of the company’s authorized share capital; |
|--------|--------|--------------------------------------------------------------|

|   | · | a merger; or |
|--------|--------|--------------|

|   | · | approval of some of the acts and transactions that require shareholder approval. |
|--------|--------|----------------------------------------------------------------------------------|

----

----

----

----

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

|   | · | 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, or the District of Columbia; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
|--------|--------|---------------------------------------------------------------------------------------------------|

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

----

----

----

|   | • | 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. Under current law, a QEF election cannot be made with respect to warrants or options to acquire our ordinary shares. If the QEF regime applies, then, for each year that we are a PFIC, such U.S. holder will include in its gross income a proportionate share of 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 recognized on the disposition of his ordinary shares as capital gain. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Once made, the QEF election applies to all subsequent taxable years of the U.S. holder in which it holds our ordinary shares and for which we are a PFIC, and can be revoked only with the consent of the United States Internal Revenue Service (“IRS”). The QEF election is made by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed U.S. federal income tax return. Even if a QEF election is not made, a U.S. holder who is a shareholder in a PFIC must file a completed IRS Form 8621 every year. If we believe we are or will become a PFIC, we will determine whether we will comply with the reporting requirements that would enable U.S. holders to make a QEF election. 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 “marketable stock” (e.g., “regularly traded” on the NASDAQ Global Market). Pursuant to this regime, an electing U.S. holder’s ordinary shares are marked-to-market each taxable year that we are a PFIC 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, in a taxable year in which we are a PFIC, 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. Under current law, a mark-to-market election cannot be made with respect to warrants or options to acquire our ordinary shares. The mark-to-market election applies to the taxable year for which the election is made and all subsequent tax years, unless the ordinary shares cease to be marketable stock or the IRS 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 (including gain deemed recognized if the ordinary shares are used as security for a loan). |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary shares. A U.S. holder must include amounts allocated to the current taxable year and to any period prior to the first day of the first taxable year for which we are a PFIC in its gross income as ordinary income for the current taxable year. All amounts allocated to other taxable years of the U.S. holder would be taxed at the highest tax rate for each such other year applicable to ordinary income and would be subject to an interest charge on the deferred tax liability for each such other year calculated as if such liability had been due with respect to each such other year. The portions of distributions that are not characterized as “excess distributions” are subject to tax in the current taxable year under the normal tax rules of the Code. A U.S. holder who inherits shares in a foreign corporation that was a PFIC in the hands of the decedent is denied the otherwise available step-up in the tax basis of such shares to fair market value at the date of death. Such U.S. holder’s basis in such shares is equal to the lower of the decedent’s basis or the fair market value of such shares on the decedent’s date of death. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

----

|                 |   | Euro   |   |   | British Pound |   |   | New Israeli Shekel |   |   | Danish Kroner |   |   | USD    |   |   | Other  |   |   | Total  |   |
|----------------------|--------|--------|--------|--------|---------------|--------|--------|--------------------|--------|--------|---------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                 |   |   |   |   |          |   |   |               |   |   |          |   |   |   |   |   |   |   |   |   |   |
| Accounts Receivables |   |   | 20     | %      |          |   | 13     | %                  |   |   | 17            | %      |   |   | 3      | %      |   |   | 47     | %      |   |   | * |   |   |   | 100 | % |
| Accounts Payables    |   |   | 12     | %      |          |   | 9      | %                  |   |   | 16            | %      |   |   | 5      | %      |   |   | 58     | %      |   |   | * |   |   |   | 100 | % |

|                                    | Buy    | Cross currency (Sell) |   | Notional amount |   |   | Weighted average settlement ratio |   |
|-----------------------------------------|--------|-----------------------|--------|-----------------|--------|--------|-----------------------------------|--------|
| Forward:                                |   |                  |   |            |   |   |                              |   |
|                                    | DKK    | NIS                   |   |            | 456    |   |                              |   | 0.75 |   |
|                                    | USD    | GBP                   |   |            | 2,254  |   |                              |   | 1.60 |   |
|                                    | USD    | DKK                   |   |            | 1,029  |   |                              |   | 5.17 |   |
|                                    | NIS    | USD                   |   |            | 1,256  |   |                              |   | 3.78 |   |
| Options:                                |   |                  |   |            |   |   |                              |   |   |   |
|      Buy Put   | NIS    | USD                   |   |            | 1,609  |   |                              |   | 3.78 |   |
|      Sell Call | GBP    | NIS                   |   |            | 1,743  |   |                              |   | 44.28 |   |

----

|                                             |   | Total amount      |   |   | Interest rate |          |   | 2010   |   |   | 2011   |   |   | 2012   |   |   | 2013 and thereafter |   |
|--------------------------------------------------|--------|-------------------|--------|--------|---------------|---------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------------------|--------|
|                                             |   | US $ in thousands |   |
| Long-term debt:  Variable rate (US $): |   |              |   |   |          |          |   |   |   |   |   |   |   |   |   |   |                |   |
|  Loan from bank                             |   |              | 2,000  |   |          | Libor + 2.5%  |   |   |   | 1,000  |   |   |   | 1,000  |   |   |                | -      |   |   |   | - |   |
|  Loan from bank                             |   |              | 3,000  |   |          | Libor + 3.25% |   |   |   | -      |   |   |   | 3,000  |   |   |                | -      |   |   |   | - |   |
|  Loan from bank                             |   |              | 8,000  |   |          | Libor + 2.8%  |   |   |   | 1,230  |   |   |   | 2,462  |   |   |                | 2,462  |   |   |   | 1,846 |   |
|  Loan from bank                             |   |              | 2,008  |   |          | Libor + 3.8%  |   |   |   | 235    |   |   |   | 471    |   |   |                | 471    |   |   |   | 831 |   |
|   Fixed Rate (Euro):                   |   |              |   |   |          |          |   |   |   |   |   |   |   |   |   |   |                |   |   |   |   |   |   |
|  Loan from bank                             |   |              | 49     |   |          |          | 6.30   | %      |   |   | 25     |   |   |   | 24     |   |                |   |   |   |   |   |   |   |
|  Other                                      |   |              | 320    |   |          |          | 0.87   | %      |   |   | -      |   |   |   | 38     |   |                |   | 38 |   |   |   | 244 |   |
|                                             |   |              |   |   |          |          |   |   |   |   |   |   |   |   |   |   |                |   |   |   |   |   |   |   |
|                                             |   |              | 15,377 |   |          |          |   |   |   |   | 2,490  |   |   |   | 6,995  |   |                |   | 2,971 |   |   |   | 2,921 |   |

SECURITIES OTHER THAN EQUITY SECURITIES

----

----

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

----

RESERVED]

----

|               |   | 2009             |   | 2008   |   |
|--------------------|--------|------------------|--------|--------|--------|
|               |   | ($ in thousands) |   |
| Audit Fees         |   | $                | 185    |   |   | $ | 279 |   |
| Audit-Related Fees |   |             | 20     |   |   |   | - |   |
| Tax Fees           |   |             | 85     |   |   |   | 100 |   |
| Total              |   | $                | 290    |   |   | $ | 379 |   |

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

|     Period |   | (a) Total Number of Ordinary Shares Purchased |   |   | (b) Average Price Paid Per Ordinary Share |   |   | (c)Total Dollar amount Purchased as Part of Publicly Announced Program (1) |   |   | (d) Maximum Dollar amount available for repurchase Under the Programs(1) |   |
|--------------------------------|--------|----------------------------------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------|--------|
| March 1 to March 31, 2009      |   |                                               | 44,994 |   |                                           | $      | 1.85   |                                                                       |   | $      | 83,111                                                                        |   |   | $ | 3,492,000 |   |
| Total                          |   |                                               | 44,994 |   |                                           |   |   |                                                                       |   | $      | 83,111                                                                        |   |   |   |   |   |

|   | (1) | All these treasury transactions were made under our buy-back program in accordance with the resolution of our board of directors adopted in March 2008 authorizing the repurchase of our shares, subject to market conditions, under our existing buy-back programs. During 2007 and 2006, we did not repurchase any shares under our buy-back program. In January 2006, we sold an aggregate of 136,000 of the shares to Israeli institutional investors in Israel, for aggregate consideration of approximately $534,000. In February 2006, we sold 86,971 shares held by one of our subsidiaries to Outlook Systems Ltd. In 2008, we purchased an aggregate of 44,994 of the shares for consideration of $83,111. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | In 2009, treasury shares were used for the issuance of 153,667 shares pursuant to the exercise of options and vested RSUs. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------|

----

CHANGE IN REGISTRANT CERTIFYING ACCOUNTANT

| · | specified in NASDAQ Listing Rule IM-5605-2 requiring that independent directors have regularly scheduled meetings at which only independent directors are present; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | specified in NASDAQ Listing Rules 5635(c) and IM-5635-1, which require a shareholder approval for establishment of stock options or purchase plans and for material amendments therein; and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | specified in NASDAQ Listing Rule 5635(b) requiring shareholder approval prior to the issuance of securities when the issuance or potential issuance results in a change of control of the company. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

FINANCIAL STATEMENTS

| Exhibit No.  |   |                                                                                                                                                                                                                                                                         |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1          |   | English translation of the Memorandum of Association as amended on July 23, 2003 and on December 30, 2009*                                                                                                                                                              |
| 1.2               |   | Articles of Association as amended on December 30, 2009*                                                                                                                                                                                                                |
| 4.1               |   | Form of Ordinary Shares Purchase Warrant dated as of November 21, 2007(1)                                                                                                                                                                                               |
| 4.2               |   | Securities Purchase Agreement dated as of October 14, 2009, among the Registrant and the purchasers identified therein (2)                                                                                                                                              |
| 4.3               |   | Form of Ordinary Shares Purchase Warrant dated as of October 14, 2009 (2)                                                                                                                                                                                               |
| 4.4               |   | Registration Rights Agreement dated as of October 14, 2009, among the Registrant  and the purchasers signatory thereto (2)                                                                                                                                    |
| 4.5               |   | Share Exchange Agreement dated October 13, 2002 among the Registrant, Formula Systems (1985), Arie Kilman and other shareholder of Liraz Systems Ltd. (3)                                                                                                               |
| 4.6               |   | Form of Indemnification Letter dated December 27, 2005 between the Registrant and certain office holders (4)                                                                                                                                                            |
| 4.7               |   |  BluePhoenix 2003 Employee Share Option Plan (previously known as the Crystal 1996 Employee Share Option Plan), as amended on January 28, 1997, December 5, 1999, December 18, 2000, December 26, 2000, August 6, 2003, December 30, 2004 and February 21, 2010 *  |
| 4.8               |   | The 2007 Award Plan adopted by the Registrant on July 8, 2007 (5)                                                                                                                                                                                                       |

----

| 8.1  |   | List of Subsidiaries*                                                                                                                       |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1 |   | Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act*                                               |
| 12.2 |   | Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act*                                               |
| 13.1 |   | Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*  |   |
| 13.2 |   | Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*  |   |
| 15   |   | Consent of Ziv Haft registered certified public accountants (Isr.) BDO member firm*                                                         |   |

----

|   | BLUEPHOENIX SOLUTIONS LTD.(Registrant) |                    |
|--------|----------------------------------------|-------------------------|
|   |                                   |                    |   |
|   | By:                                    | /s/  Varda Sagiv   |   |
|   |                                   | Varda Sagiv             |   |
|   |                                   | Chief Financial Officer |   |
|   |                                   |                    |   |

----

| Exhibit No.  |   |                                                                                                                                                                                                                                                                   |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1          |   | English translation of the Memorandum of Association as amended on July 23, 2003 and on December 30, 2009*                                                                                                                                                        |
| 1.2               |   | Articles of Association as amended on December 30, 2009*                                                                                                                                                                                                          |
| 4.1               |   | Form of Ordinary Shares Purchase Warrant dated as of November 21, 2007(1)                                                                                                                                                                                         |
| 4.2               |   | Securities Purchase Agreement dated as of October 14, 2009, among the Registrant and the purchasers identified therein (2)                                                                                                                                        |
| 4.3               |   | Form of Ordinary Shares Purchase Warrant dated as of October 14, 2009 (2)                                                                                                                                                                                         |
| 4.4               |   | Registration Rights Agreement dated as of October 14, 2009, among the Registrant and the purchasers signatory thereto (2)                                                                                                                                         |
| 4.5               |   | Share Exchange Agreement dated October 13, 2002 among the Registrant, Formula Systems (1985), Arie Kilman and other shareholder of Liraz Systems Ltd. (3)                                                                                                         |
| 4.6               |   | Form of Indemnification Letter dated December 27, 2005 between the Registrant and certain office holders (4)                                                                                                                                                      |
| 4.7               |   | BluePhoenix 2003 Employee Share Option Plan (previously known as the Crystal 1996 Employee Share Option Plan), as amended on January 28, 1997, December 5, 1999, December 18, 2000, December 26, 2000, August 6, 2003, December 30, 2004 and February 21, 2010 *  |
| 4.8               |   | The 2007 Award Plan adopted by the Registrant on July 8, 2007 (5)                                                                                                                                                                                                 |
| 8.1               |   | List of Subsidiaries*                                                                                                                                                                                                                                             |
| 12.1              |   | Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                     |
| 12.2              |   | Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                     |
| 13.1              |   | Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*                                                                                                                        |   |
| 13.2              |   | Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*                                                                                                                             |   |

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| 15 |   | Consent of Ziv Haft registered certified public accountants (Isr.) BDO member firm*  |   |
|----|--------|-------------------------------------------------------------------------------------------|--------|

----

----

|                                                    | Page             |
|---------------------------------------------------------|------------------|
|                                                    |             |
| Report of Independent Registered Public Accounting Firm | F-1              |
| Consolidated Financial Statements:                      |             |
| Balance Sheets                                          | F-2              |
| Statements of Operations                                | F-3              |
| Statements of Changes in Equity                         | F-4              |
| Statements of Cash Flows                                | F-5 - F-6        |
| Notes to Consolidated Financial Statements              |  F-7 - F-56 |

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

----

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                                                                   |   | December 31,         |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|
|                                                                                                                                                                                                                                                                                                   |   | 2009                 |    |   | 2008 |   |
|                                                                                                                                                                                                                                                                                                   |   |  (in thousands) |    |
| ASSETS                                                                                                                                                                                                                                                                                                 |   |                 |    |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                        |   |                 |    |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                              |   | $                    | 22,328  |   |   | $ | 30,308 |   |
| Marketable securities                                                                                                                                                                                                                                                                                  |   |                 | 129     |   |   |   | 423 |   |
| Trade accounts receivable (Note 13A1)                                                                                                                                                                                                                                                                  |   |                 | 25,578  |   |   |   | 28,232 |   |
| Other current assets (Note 13A2)                                                                                                                                                                                                                                                                       |   |                 | 2,873   |   |   |   | 3,217 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total current assets                                                                                                                                                                                                                                                                                   |   |                 | 50,908  |   |   |   | 62,180 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| LONG TERM ASSETS:                                                                                                                                                                                                                                                                                      |   |                 |    |   |   |   |   |   |
| Investment in affiliated company                                                                                                                                                                                                                                                                       |   |                 | 147     |   |   |   | 157 |   |
| Property and equipment, net (Note 4)                                                                                                                                                                                                                                                                   |   |                 | 1,890   |   |   |   | 2,493 |   |
| Goodwill (Note 5)                                                                                                                                                                                                                                                                                      |   |                 | 51,990  |   |   |   | 52,006 |   |
| Intangible assets and other, net (Note 6)                                                                                                                                                                                                                                                              |   |                 | 17,619  |   |   |   | 23,151 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total long term assets                                                                                                                                                                                                                                                                                 |   |                 | 71,646  |   |   |   | 77,807 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total assets                                                                                                                                                                                                                                                                                           |   | $                    | 122,554 |   |   | $ | 139,987 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                                             |   |                 |    |   |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Short-term bank credit and others                                                                                                                                                                                                                                                                      |   | $                    | 2,490   |   |   | $ | 1,021 |   |
| Accounts payable and accruals:                                                                                                                                                                                                                                                                         |   |                 |    |   |   |   |   |   |
| Trade                                                                                                                                                                                                                                                                                                  |   |                 | 6,093   |   |   |   | 5,133 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                       |   |                 | 4,424   |   |   |   | 5,541 |   |
| Other (Note 13A3)                                                                                                                                                                                                                                                                                      |   |                 | 10,263  |   |   |   | 18,125 |   |
| Total current liabilities                                                                                                                                                                                                                                                                              |   |                 | 23,270  |   |   |   | 29,820 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                 |   |                 |    |   |   |   |   |   |
| Accrued severance pay, net (Note 7)                                                                                                                                                                                                                                                                    |   |                 | 1,309   |   |   |   | 1,797 |   |
| Loans from banks and others (Note 9)                                                                                                                                                                                                                                                                   |   |                 | 12,887  |   |   |   | 15,048 |   |
| Derivatives liabilities - warrants                                                                                                                                                                                                                                                                     |   |                 | 2,414   |   |   |   | - |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total long-term liabilities                                                                                                                                                                                                                                                                            |   |                 | 16,610  |   |   |   | 16,845 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                      |   |                 | 39,880  |   |   |   | 46,665 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                                                                                                                                                                                                |   |                 |    |   |   |   |   |   |
| Equity (Note 11):                                                                                                                                                                                                                                                                                      |   |                 |    |   |   |   |   |   |
| Share capital - ordinary shares of NIS 0.01 par value (authorized: December 31, 2009     40,000,000 shares ; December 31, 2008 - 30,000,000 shares; issued: December 31,     2009 – 25,594,252 shares; December 31, 2008 – 23,161,904 shares) |   |                 | 52      |   |   |   | 46 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                             |   |                 | 128,591 |   |   |   | 129,827 |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                   |   |                 | (1,641  | ) |   |   | (1,616 | ) |
| Accumulated deficit                                                                                                                                                                                                                                                                                    |   |                 | (30,184 | ) |   |   | (20,605 | ) |
| Treasury shares - December 31, 2009 -2,371,140 shares  (December 31, 2008 - 2,326,146 shares)                                                                                                                                                                                                |   |                 | (15,240 | ) |   |   | (15,157 | ) |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| BluePhoenix Shareholders’ Equity                                                                                                                                                                                                                                                                 |   |                 | 81,578  |   |   |   | 92,495 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Noncontrolling interest                                                                                                                                                                                                                                                                                |   |                 | 1,096   |   |   |   | 827 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total equity                                                                                                                                                                                                                                                                                           |   |                 | 82,674  |   |   |   | 93,322 |   |
|                                                                                                                                                                                                                                                                                                   |   |                 |    |   |   |   |   |   |
| Total liabilities and equity                                                                                                                                                                                                                                                                           |   | $                    | 122,554 |   |   | $ | 139,987 |   |

----

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                             |   | Year ended December 31,               |    |
|----------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                             |   | 2009                                  |    |   | 2008 |   |   | 2007 |   |
|                                                                             |   | (in thousands, except per share data) |    |
| Revenues (Note 13B1):                                                            |   |                                  |    |   |   |   |   |   |   |
| Services                                                                         |   | $                                     | 70,942  |   |   | $ | 84,854 |   |   | $ | 61,664 |   |
| Products                                                                         |   |                                  | 6,836   |   |   |   | 6,891 |   |   |   | 19,558 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Total revenues                                                                   |   |                                  | 77,778  |   |   |   | 91,745 |   |   |   | 81,222 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Cost of revenues:                                                                |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Services                                                                         |   |                                  | 44,486  |   |   |   | 45,610 |   |   |   | 35,330 |   |
| Products                                                                         |   |                                  | 399     |   |   |   | 422 |   |   |   | 1,199 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Total cost of revenues                                                           |   |                                  | 44,885  |   |   |   | 46,032 |   |   |   | 36,529 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                     |   |                                  | 32,893  |   |   |   | 45,713 |   |   |   | 44,693 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Research and development costs                                                   |   |                                  | 11,420  |   |   |   | 18,378 |   |   |   | 12,653 |   |
| Selling, general, and administrative expenses                                    |   |                                  | 30,406  |   |   |   | 32,359 |   |   |   | 28,370 |   |
| Goodwill impairment                                                              |   |                                  | 5,670   |   |   |   | 13,328 |   |   |   | - |   |
| Restructuring (Note 13B3)                                                        |   |                                  | -       |   |   |   | - |   |   |   | 694 |   |
| Operating income (loss)                                                          |   |                                  | (14,603 | ) |   |   | (18,352 | ) |   |   | 2,976 |   |
| Financial expenses, net (Note 13B4)                                              |   |                                  | 779     |   |   |   | 2,237 |   |   |   | 4,343 |   |
| Other income, net (Note 13B5)                                                    |   |                                  | -       |   |   |   | 398 |   |   |   | 892 |   |
| Loss before taxes on income                                                      |   |                                  | (15,382 | ) |   |   | (20,191 | ) |   |   | (475 | ) |
| Taxes on income (benefit) (Note 12)                                              |   |                                  | (117    | ) |   |   | (330 | ) |   |   | 68 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
|                                                                             |   |                                  | (15,265 | ) |   |   | (19,861 | ) |   |   | (543 | ) |
| Share in earnings (loss) of affiliated company                                   |   |                                  | (10     | ) |   |   | (49 | ) |   |   | 35 |   |
| Loss from continued operation                                                    |   |                                  | (15,275 | ) |   |   | (19,910 | ) |   |   | (508 | ) |
| Loss from discontinued operation (Note 15)                                       |   |                                  | -       |   |   |   | (8,512 | ) |   |   | (7,489 | ) |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Net loss                                                                         |   |                                  | (15,275 | ) |   |   | (28,422 | ) |   |   | (7,997 | ) |
| Net income attributable to noncontrolling interests                              |   |                                  | (295    | ) |   |   | (179 | ) |   |   | (199 | ) |
| Loss attributed to BluePhoenix Shareholders                                      |   | $                                     | (15,570 | ) |   | $ | (28,601 | ) |   | $ | (8,196 | ) |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Loss per share - basic and diluted:                                              |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Loss from continued operations attributed to BluePhoenix  shareholders |   | $                                     | (0.72   | ) |   | $ | (1.12 | ) |   | $ | (0.23 | ) |
| Discontinued operation attributable to BluePhoenix  shareholders       |   |                                  | -       |   |   |   | (0.23 | ) |   |   | (0.25 | ) |
| Net loss attributable to BluePhoenix shareholders                                |   | $                                     | (0.72   | ) |   | $ | (1.35 | ) |   | $ | (0.48 | ) |
| Weighted average shares outstanding, basic and diluted                           |   |                                  | 21,500  |   |   |   | 21,196 |   |   |   | 17,145 |   |
|                                                                             |   |                                  |    |   |   |   |   |   |   |   |   |   |
| Amounts attributable to BluePhoenix common shareholders:                         |   |                                  |    |   |   |   |   |   |   |   |   |   |
|   Loss from continued operation                                        |   | $                                     | (15,570 | ) |   | $ | (23,664 | ) |   | $ | (3,852 | ) |
|   Loss from discontinued operation                                     |   |                                  | -       |   |   |   | (4,937 | ) |   |   | (4,344 | ) |
| Net loss                                                                         |   | $                                     | (15,570 | ) |   | $ | (28,601 | ) |   | $ | (8,196 | ) |

----

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

|                                                                                |   | Share capital                 |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------|------------|--------|-----------|--------|--------|----------------------------|--------|--------|--------------------------------------|--------|--------|--------------------------------------------|--------|--------|-----------------------------------------|--------|
|                                                                                |   | Number of shares              |       |   | Par value |   |   | Additional paid-in capital |   |   | Accumulated other comprehensive loss |   |   | Cost ofCompany shares held by subsidiaries |   |   | Retained earnings (Accumulated deficit) |   |   | Noncontrollinginterest |   |   | Total |   |
|                                                                                |   | (in thousands, except shares) |       |
| Balance at January 1, 2007                                                          |   |                          | 14,298,358 |   |      |   | 31     |                       |   |   | 58,556                               |   |   |                                       | (1,537 | )      |                                    |   | (13,548 | ) |   |   | 16,447 |   |   |   | 563 |   |   |   | 60,512 |   |
| Changes during 2007:                                                                |   |                          |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                            |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | (8,196 | ) |   |   | 199 |   |   |   | (7,997 | ) |
| Unrealized gain on available-for-sale marketable securities                         |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | 178    |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 178 |   |
| Total comprehensive income                                                          |   |                          |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | (7,819 | ) |
| Stock-based compensation                                                            |   |                          | -          |   |      |   | -      |                       |   |   | 1,025                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,025 |   |
| Compensation by former shareholder                                                  |   |                          | -          |   |      |   | -      |                       |   |   | 1,769                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,769 |   |
| Conversion of convertible debentures                                                |   |                          | 1,363,656  |   |      |   | 2      |                       |   |   | 6,822                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,824 |   |
| Conversion of convertible notes series A                                            |   |                          | 2,062,297  |   |      |   | 5      |                       |   |   | 11,911                               |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 11,916 |   |
| Exercise of warrants                                                                |   |                          | 210,000    |   |      |   | *      |                       |   |   | 840                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 840 |   |
| Issuance of shares with respect of minority interests acquisition                   |   |                          | 100,719    |   |      |   | *      |                       |   |   | 515                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 515 |   |
| Issuance of shares, net                                                             |   |                          | 1,999,998  |   |      |   | 5      |                       |   |   | 32,918                               |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 32,923 |   |
| Implementation of FSP EITF 00-19-2                                                  |   |                          | -          |   |      |   | -      |                       |   |   | 706                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | (255 | ) |   |   | - |   |   |   | 451 |   |
| Tax benefit related to exercise of stock options                                    |   |                          | -          |   |      |   | -      |                       |   |   | 594                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 594 |   |
| Exercise of employee stock options and RSUs                                         |   |                          | 591,599    |   |      |   | 1      |                       |   |   | 2,919                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,920 |   |
| Balance at December 31, 2007                                                        |   |                          | 20,626,627 |   |      |   | 44     |                       |   |   | 118,575                              |   |   |                                       | (1,359 | )      |                                    |   | (13,548 | ) |   |   | 7,996 |   |   |   | 762 |   |   |   | 112,470 |   |
| Changes during 2008:                                                                |   |                          |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                            |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | (28,601 | ) |   |   | 65 |   |   |   | (28,536 | ) |
| Unrealized loss on available for-sale marketable securities                         |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | (257   | )      |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | (257 | ) |
| Total comprehensive loss                                                            |   |                          |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | (28,793 | ) |
| Stock-based compensation                                                            |   |                          | -          |   |      |   | -      |                       |   |   | 2,825                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,825 |   |
| Exercise of warrants                                                                |   |                          | 200,000    |   |      |   | *      |                       |   |   | 1,347                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,347 |   |
| Exercise of employees stock options and RSUs                                        |   |                          | 274,191    |   |      |   | *      |                       |   |   | 660                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 660 |   |
| Purchase of treasury stocks                                                         |   |                          | (677,302   | )      |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | (1,609 | ) |   |   | - |   |   |   | - |   |   |   | (1,609 | ) |
| Conversion of convertible notes series A                                            |   |                          | 12,242     |   |      |   | *      |                       |   |   | 67                                   |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 67 |   |
| Issuance of shares and warrants in connection with previously acquired subsidiaries |   |                          | 400,000    |   |      |   | 2      |                       |   |   | 6,353                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,355 |   |
| Balance at December 31, 2008                                                        |   |                          | 20,835,758 |   |      |   | 46     |                       |   | $      | 129,827                              |   |   |                                       | (1,616 | )      |                                    |   | (15,157 | ) |   |   | (20,605 | ) |   |   | 827 |   |   |   | 93,322 |   |
|                                                                                |   |                          |       |   |      |   |   |                       |   |   |                                 |   |   |                                       |   |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of derivatives liabilities related to adoption of FASB ASC 815-40-15    |   |                          | -          |   |      |   | -      |                       |   |   | (6,152                               | )      |   |                                       | -      |   |                                    |   | - |   |   |   | 5,991 |   |   |   | - |   |   |   | (161 | ) |
| Net loss                                                                            |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | (15,570 | ) |   |   | 295 |   |   |   | (15,275 | ) |
| Unrealized  loss on marketable securities                                 |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | (103   | )      |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | (103 | ) |
| Reclassification adjustment to income on marketable securities                      |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | 78     |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 78 |   |
| Total comprehensive loss                                                            |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | (15,300 | ) |
| Stock-based compensation                                                            |   |                          | -          |   |      |   | -      |                       |   |   | 2,031                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,031 |   |
| Dividend to noncontrolling interest                                                 |   |                          | -          |   |      |   | -      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | (26 | )  |   |   | (26 | )  |
| Purchase of treasury stocks                                                         |   |                          | (44,994    | )      |      |   | *      |                       |   |   | -                                    |   |   |                                       | -      |   |                                    |   | (83 | ) |   |   | - |   |   |   | - |   |   |   | (83 | ) |
| Exercise of employees stock options and RSUs                                        |   |                          | 254,312    |   |      |   | *      |                       |   |   | 6                                    |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 6 |   |
| Issuance of shares in connection with previously acquired subsidiaries              |   |                          | 813,461    |   |      |   | 2      |                       |   |   | 2,503                                |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,505 |   |
| Issuance of shares, net                                                             |   |                          | 1,364,575  |   |      |   | 4      |                       |   |   | 376                                  |   |   |                                       | -      |   |                                    |   | - |   |   |   | - |   |   |   | - |   |   |   | 380 |   |
| Balance at December 31, 2009                                                        |   |                          | 23,223,112 |   |      | $      | 52     |                       |   | $      | 128,591                              |   |   | $                                          | (1,641 | )      |                                    | $      | (15,240 | ) |   | $ | (30,184 | ) |   | $ | 1,096 |   |   | $ | 82,674 |   |

----

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                         |   | Year ended December 31, |    |
|----------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                         |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
|                                                                                         |   | (in thousands)          |    |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                    |    |   |   |   |   |   |   |
| Net loss                                                                                     |   | $                       | (15,275 | ) |   | $ | (28,422 | ) |   | $ | (7,997 | ) |
|    Adjustments to reconcile net loss to net cash provided by operating activities: |   |                    |    |   |   |   |   |   |   |   |   |   |
| Loss from discontinued operation                                                             |   |                    | -       |   |   |   | 8,512 |   |   |   | 7,489 |   |
| Share in earnings of affiliated companies, net dividend received                             |   |                    | 10      |   |   |   | 49 |   |   |   | (2 | ) |
| Depreciation and amortization                                                                |   |                    | 8,894   |   |   |   | 10,107 |   |   |   | 10,407 |   |
| Goodwill impairment                                                                          |   |                    | 5,670   |   |   |   | 13,328 |   |   |   | - |   |
| Increase (decrease) in accrued severance pay, net                                            |   |                    | (572    | ) |   |   | 248 |   |   |   | (132 | ) |
| Loss (gain) on sale of property and equipment                                                |   |                    | -       |   |   |   | 10 |   |   |   | 4 |   |
| Change in value of  long term-loans and liabilities                                |   |                    | -       |   |   |   | - |   |   |   | 2,311 |   |
|     Stock - based compensation                                                     |   |                    | 2,031   |   |   |   | 2,825 |   |   |   | 2,794 |   |
| Change in fair value of warrants                                                             |   |                    | (1,514  | ) |   |   | - |   |   |   | - |   |
|     Decreases in provision for losses in formerly consolidated subsidiary     |   |                    | -       |   |   |   | - |   |   |   | (300 | ) |
| Deferred income taxes, net                                                                   |   |                    | (493    | ) |   |   | (894 | ) |   |   | (1,025 | ) |
| Tax benefit related to exercise of stock options                                             |   |                    | -       |   |   |   | - |   |   |   | 594 |   |
| Changes in operating assets and liabilities:                                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Reclassification adjustment to income on marketable securities                               |   |                    | 78      |   |   |   | - |   |   |   | 560 |   |
| Decrease (increase) in trade receivables                                                     |   |                    | 3,017   |   |   |   | (4,702 | ) |   |   | 4,213 |   |
| Decrease (increase) in other current assets                                                  |   |                    | 568     |   |   |   | (407 | ) |   |   | 936 |   |
| Increase (decrease) in trade payables                                                        |   |                    | 981     |   |   |   | 992 |   |   |   | (601 | ) |
| Decrease in other accounts payable                                                           |   |                    | (2,429  | ) |   |   | (744 | ) |   |   | (3,155 | ) |
| Net cash provided by operating activities                                                    |   |                    | 966     |   |   |   | 902 |   |   |   | 16,096 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Purchase of property and equipment                                                           |   |                    | (589    | ) |   |   | (1,200 | ) |   |   | (1,029 | ) |
| Proceeds from sale of property and equipment                                                 |   |                    | -       |   |   |   | 6 |   |   |   | 10 |   |
| Proceeds from sale of marketable securities                                                  |   |                    | 192     |   |   |   | - |   |   |   | - |   |
| Capitalization of research and development costs                                             |   |                    | -       |   |   |   | - |   |   |   | (3,944 | ) |
| Additional consideration for  previously acquired subsidiaries and activities      |   |                    | (8,908  | ) |   |   | (7,869 | ) |   |   | (1,310 | ) |
| Advance in investment of new activity                                                        |   |                    | (93)    |   |   |   | - |   |   |   | - |   |
| Investment in newly-consolidated subsidiaries and purchase of newly-activity (Appendix A)    |   |                    | (2,454  | ) |   |   | (2,269 | ) |   |   | (9,077 | ) |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                                                        |   |                    | (11,852 | ) |   |   | (11,332 | ) |   |   | (15,350 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Short-term bank credit, net                                                                  |   |                    | -       |   |   |   | - |   |   |   | (936 | ) |
| Repayment of long-term loans                                                                 |   |                    | (3,057  | ) |   |   | - |   |   |   | (20,609 | ) |
| Receipt of long-term loans                                                                   |   |                    | 2,000   |   |   |   | 16,069 |   |   |   | - |   |
| Dividend paid to noncontrolling interest                                                     |   |                    | (26     | ) |   |   | - |   |   |   | - |   |
| Repayment of provision for losses in formerly consolidated subsidiary                        |   |                    | -       |   |   |   | - |   |   |   | (1,671 | ) |
| Purchase of treasury shares                                                                  |   |                    | (83     | ) |   |   | (1,609 | ) |   |   | - |   |
| Issuance of shares  and warrants, net                                              |   |                    | 4,066   |   |   |   | - |   |   |   | 33,213 |   |
| Exercise of employee share options and warrants                                              |   |                    | 6       |   |   |   | 2,007 |   |   |   | 3,761 |   |
| Net cash provided by financing activities                                                    |   |                    | 2,906   |   |   |   | 16,467 |   |   |   | 13,758 |   |
| Cash Flows Provided By (used in) Discontinued Operation:                                     |   |                    |    |   |   |   |   |   |   |   |   |   |
| Net cash used in operating activity                                                          |   |                    | -       |   |   |   | - |   |   |   | (367 | ) |
| Net cash provided by investing activity                                                      |   |                    | -       |   |   |   | 1,700 |   |   |   | 25 |   |
| Total net increase (decrease) in cash and cash equivalents                                   |   |                    | (7,980  | ) |   |   | 7,737 |   |   |   | 14,162 |   |
| Changes in cash and cash equivalents from discontinued operation                             |   |                    | -       |   |   |   | - |   |   |   | 342 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS FROM CONTINUED OPERATION     |   |                    | (7,980  | ) |   |   | 7,737 |   |   |   | 14,504 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                               |   |                    | 30,308  |   |   |   | 22,571 |   |   |   | 8,067 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                                     |   | $                       | 22,328  |   |   | $ | 30,308 |   |   | $ | 22,571 |   |

----

|                           |   | Year ended December 31, |   |
|--------------------------------|--------|-------------------------|--------|
|                           |   | 2009                    | 2008   |   | 2007 |   |
|                           |   | (in thousands)          |   |
| Cash paid during the year for: |   |                    |   |   |   |   |   |   |   |
| Income taxes                   |   | $                       | 347    |   |   | $ | 859 |   |   | $ | 841 |   |
| Interest                       |   | $                       | 802    |   |   | $ | 194 |   |   | $ | 2,142 |   |

|                                       |   | Year ended December 31, |   |
|--------------------------------------------|--------|-------------------------|--------|
|                                       |   | 2009                    | 2008   | 2007 |   |
|                                       |   | (in thousands)          |   |
|                                       |   |                    |   |   |   |   |   |   |   |
| Working capital, other than cash           |   | $                       | 431    |   |   | $ | 777 |   |   | $ | 2,785 |   |
| Investment and loans to affiliated Company |   |                    | -      |   |   |   | - |   |   |   | (205 | ) |
| Property and equipment                     |   |                    | -      |   |   |   | (67 | ) |   |   | (303 | ) |
| Other intangible assets                    |   |                    | (172   | ) |   |   | (91 | ) |   |   | (1,317 | ) |
| Goodwill                                   |   |                    | (907   | ) |   |   | (710 | ) |   |   | (5,975 | ) |
| Technology                                 |   |                    | (1,633 | ) |   |   | (1,088 | ) |   |   | (2,423 | ) |
| Customer relations intangible asset        |   |                    | (257   | ) |   |   | (1,090 | ) |   |   | (1,824 | ) |
| Non-current liabilities                    |   |                    | 84     |   |   |   | - |   |   |   | 185 |   |
| Net cash used in acquisition               |   | $                       | (2,454 | ) |   | $ | (2,269 | ) |   | $ | (9,077 | ) |

|                                 |   | Year ended December 31, |   |
|--------------------------------------|--------|-------------------------|--------|
|                                 |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                 |   | (in thousands)          |   |
|                                 |   |                    |   |   |   |   |   |   |   |
| Investment in subsidiaries           |   | $                       | 4,746  |   |   | $ | 14,848 |   |   | $ | 246 |   |
| Conversion of convertible debentures |   | $                       | -      |   |   | $ | 67 |   |   | $ | 18,740 |   |
| Issuance costs                       |   | $                       | -      |   |   | $ | - |   |   | $ | 290 |   |

----

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

| A. | General:  |
|----|----------------|

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

|   | 1. | The Company:  |
|--------|----|--------------------|

|   | BluePhoenix Solutions Ltd. (“BluePhoenix”) (together with its subsidiaries, the “Company” or "we") is an Israeli corporation, which operates in one operating segment of 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 through several entities, including its wholly-owned subsidiaries located in: USA, Russia, UK, Denmark, Germany, Italy, Netherlands, Cyprus, Romania, and Israel. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Accounting Principles:  |
|--------|----|------------------------------|

|   | The consolidated financial statements are prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Functional Currency:  |
|--------|----|----------------------------|

|   | The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar (“dollar”). In addition, a substantial portion of the Company’s revenues and costs are incurred in dollars. Thus, the functional and reporting currency of the Company is considered to be the dollar.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company follows FASB ASC Topic 830 “Foreign Currency Matters" ("ASC 830") and accordingly non monetary transactions denominated in currencies other than the dollar are measured and recorded in dollar at the exchange rates prevailing at transaction date. Monetary assets and liabilities denominated in currencies other than the dollar are translated at the exchange rate on the balance sheet date. Exchange gain or losses on foreign currency translation are recorded in income. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| B. | Principles of Consolidation:  |
|----|------------------------------------|

|   | The consolidated financial statements include the accounts of BluePhoenix and its subsidiaries in which it has a controlling interest. Acquisition of subsidiaries is accounted for under the acquisition method. All intercompany balances and transactions have been eliminated upon consolidation. Noncontrolling interests are included in equity. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  C. | Cash and Cash Equivalents:  |
|----------|----------------------------------|

|   | Cash equivalents are considered by the Company to be highly-liquid investments, including inter-alia, short-term deposits with banks, 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 based on specific receivables, which their collection, in the opinion of Company’s management, is in doubt. Trade receivables are charged off in the period in which they are deemed to be uncollectible. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| E. | Investee companies:  |
|----|---------------------------|

|   | Investments in affiliates over which the Company exercises significant influence but are not subsidiaries (affiliated companies) are accounted for under the equity method. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| F. | Investments in Marketable Securities:  |
|----|---------------------------------------------|

|   | Management determines the appropriate classification of its investments at the time of purchase all marketable securities are reported at fair value based on quoted market and classified as available for-sale. Available for sale securities are carried at fair value, with the unrealized gains and losses, reported in "accumulated other comprehensive income (loss)" in equity. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| G. | Property and Equipment, Net:  |
|----|------------------------------------|

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

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

| H. | Impairment of Long-Lived Assets:  |
|----|----------------------------------------|

|   | The Company’s long-lived assets are reviewed for impairment in accordance with FASB ASC Topic 360 "Property Plant and Equipment" 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. During the years ended December 31, 2009, 2008 and 2007, no impairment losses have been identified. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| I. | Goodwill and other purchased intangible assets:  |
|----|-------------------------------------------------------|

|   | Goodwill and certain other purchased intangible assets have been recorded as a result of acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Goodwill is not amortized, but rather is subject to an annual impairment test. The Company performs an annually impairment test, or more frequently if impairment indicators are present. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over their estimated useful lives of between 5 to 12 years. The carrying amount of these assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the assets is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset (see also Note 1H). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| I. | Goodwill and other purchased intangible assets(Cont.):  |
|----|--------------------------------------------------------------|

|   | The Company performed impairment tests in 2009 and 2008. The goodwill impairment tests are conducted in two steps. In the first step, the Company determines the fair value of the reporting unit using expected future discounted cash flows and estimated terminal values. If the net book value of the reporting unit exceeds the fair value, the Company would then perform the second step of the impairment test which requires allocation of the reporting unit's fair value of all of its assets and liabilities in a manner similar to a acquisition cost allocation, with any residual fair value being allocated to goodwill. The implied fair value of the goodwill is then compared to the carrying value to determine impairment, if any. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company determines the fair value of a reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that this approach best approximates its fair value at this time. The Company has corroborated the fair values using the Market Approach. Judgments and assumptions related to revenue, gross profit, operating expenses, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. Additionally, the Company evaluated the reasonableness of the estimated fair value of its reporting units by reconciling to its market capitalization. This reconciliation allowed the Company to consider market expectations in corroborating the reasonableness of the fair value of the reporting unit. The ability to reconcile the gap between the market capitalization and the aggregate fair value depends on various factors, some of which are quantitative, such as an estimated control premium that an investor would be willing to pay for a controlling interest in the Company, and some of which are qualitative and involve management judgment, including stable relatively high backlog and growing pipe line. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In such reconciliation, as part of the 2009 impairment test  the Company considered  a 30% effective control premium rate which reflects the weighted average control premium rate implied from 6 published transactions involving controlling interests in comparable companies in Israel and abroad, that took place during the six months ended December 31, 2009. These 6 transactions were selected because they involved companies in the software and the IT service industries. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| I. | Goodwill and other purchased intangible assets (Cont.):  |
|----|---------------------------------------------------------------|

|   | The Company is one operating segment and therefore one reporting unit related to its overall IT modernization. In 2008 and 2009, step one of the assessment resulted that the carrying value of the IT modernization reporting unit exceeds its fair value. As described in the preceding paragraphs, the second step was performed by allocating the reporting unit's fair value to all of its assets and liabilities, with any residual fair value being allocated to goodwill. The Company determined that the carrying value of goodwill should be impaired. As a result, the Company recorded a non-cash goodwill impairment charge of $13.3 million in 2008 and $5.7 million in 2009. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| J. | Research and Development Costs:  |
|----|---------------------------------------|

|   | Research and development costs of software and products enhancement that are intended for sale and acquired technology which were incurred after the establishment of technological feasibility of the relevant product, are capitalized. Technological feasibility is determined when detailed program design is completed and verified in accordance with the provisions of FASB ASC Topic 985 "Software". Research and development costs before technological feasibility is established are charged to the statement of operations as incurred.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Amortization of capitalized research 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, capitalized research and development costs are amortized over a period of 5 years.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During the years ended December 31, 2009 and 2008, the Company did not capitalized research and development costs since all costs incurred between the completion of detailed program design and the point in which the products were ready for general release have been insignificant and amortized capitalized research and development costs aggregating $6.6 million (in 2008: $8.2 million and in 2007: $8.9 million) included in cost of revenues. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In the Company's management estimate, total capitalized costs do not exceed the net realizable value of the software product. In the event that unamortized research and development costs exceed the net realizable value of the product, they would be written down to net realizable value. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| J. | Research and Development Costs (Cont.):  |
|----|-----------------------------------------------|

|   | In the second quarter of 2008, the Company impaired $7.1 million with respect to capitalized software development costs which was presented as discontinued operation related to Mainsoft (see Note 15). The impairment was charged in order to reflect the fair value of Mainsoft based upon the consideration assigned to Mainsoft in a LOI dated July 7, 2008. Management did not identify any additional impairment during the years ended 2008, 2007 and 2006. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| K. | Stock-based Compensation:  |
|----|---------------------------------|

|   | The Company accounts for stock based compensation to employees in accordance with SFAS ASC Topic 718 "Compensation – Stock Compensation" which was adopted effective January 2006. In the past three years majority of the awards were  of restricted stock units (“RSUs”).RSU's are valued based on the market value of the underlying stock at the date of grant.  The Company measures and recognizes compensation expense with respect to share options based on estimated fair values on the date of grant using the Black-Scholes option-pricing model. This option pricing model requires that the Company makes several estimates, including the option’s expected life and the price volatility of the underlying stock.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For the year ended December 31, 2009, 2008 and 2007 the Company recorded stock-based and RSUs compensation costs in the amount of $2,031, $2,825 and $1,025 thousand, respectively. On December 31, 2009, the total unrecognized stock-based and RSUs compensation costs amounted to $1,107 thousand, and are expected to be recognized over of the next 3 years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| L. | Revenue Recognition:  |
|----|----------------------------|

|   | Revenues derived from direct software license agreements are recognized in accordance with FASB ASC Topic 985 "Software" ("ASC 985"), upon delivery of the software, when collection is probable, the license fee is otherwise fixed or determinable and persuasive evidence of an arrangement exists. The arrangements that include multiple elements are usually arrangements where the Company sells software products and Post Contract Support (PCS). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For multiple elements arrangements, ASC 985 requires that the fair value of each component in a multiple element arrangement will be determined based on the vendor’s specific objective evidence (VSOE) for that element, and revenue is allocated to each component based on its fair value. ASC 985 requires that revenue be recognized under the “residual method” when VSOE does not exist for all the delivered elements, VSOE of fair value exists for all undelivered elements, and all other accounting standards criteria are met. The specific objective evidence for the PCS is established by the price charged on PCS renewed. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| L. | Revenue Recognition (Cont.):  |
|----|------------------------------------|

|   | The Company recognizes revenues from consulting fees based on the number of hours performed.  |
|--------|----------------------------------------------------------------------------------------------------|

|   | In some of the agreements with the Company’s customers, the customers have the right to receive unspecified upgrades on an if-and-when available basis (the Company does not provide specific upgrades). These upgrades are considered Post-Contract Support (PCS). Revenues allocated to the PCS are recognized ratably over the term of the PCS.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | When a project involves significant production, modification or customization of software, revenue is recognized according to the percentage of completion method in accordance with the provisions of FASB ASC Topic 605-35-25 (prior authoritative literature: SOP 81-1 “Accounting for Performance of Construction-Type Contracts”). Under this method, estimated revenue is generally accrued based on costs incurred to date, as a percentage of total updated estimated costs. The Company recognizes contract losses, if any, in the period in which they first become evident.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Some of the Company’s contracts include client acceptance clauses. In these contracts, the Company follows the guidance of ASC 985-605-55 (formerly TPA 5100.67) and SAB 104. In determining whether revenue can be recognized, when an acceptance clause exists, the Company considers its history with similar arrangements, the customer’s involvement in the progress, and the existence of other service providers and the payments terms. There are no rights of return, price protection or similar contingencies in the Company’s contracts.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On December 31, 2009 approximately $19.3 million (on December 31, 2008: $13.3 million) of the accounts receivable balance was unbilled due to the customers payment terms.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company presents revenues from products and revenues from services in separate line items.  |
|--------|------------------------------------------------------------------------------------------------------|

|   | The product revenues line item includes revenues generated from (i) standalone software products and (ii) software products that were included in multiple-element arrangements and were separated pursuant to ASC 985 as aforementioned.  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In the services revenue line item, the Company included (i) revenues generated from standalone consulting services, (ii) revenues generated from stand alone post contract support ("PCS"), (iii) revenues accounted for pursuant to ASC 605-35-25 and (iv) revenues generated from PCS included in multiple-element arrangement and were separated pursuant to ASC 985 as aforementioned.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Tax collected from customers and remitted to governments authorities (including VAT) are presented in income statement on a net basis. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|

----

| M. | Advertising Costs:  |
|----|--------------------------|

|   | The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2009, 2008 and 2007 were $291, $318 and $90 thousand, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| N. | Income Taxes:  |
|----|---------------------|

|   | Effective January 1, 2007, upon the adoption of a new pronouncement which clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, the Company should record accruals for uncertain tax positions. Those accruals should record to the extent that the Company concludes that a tax position is not sustainable under a “more-likely-than-not” standard. In addition, the Company should classify interest and penalties recognized in the financial statements relating to uncertain tax positions under the provision for income taxes.  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The adoption of the new pronouncement did not result in a change of the Company's retained earnings .As of December 31, 2009, there are no unrecognized tax benefits.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Deferred taxes are determined utilizing the “asset and liability” method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, when it’s more likely than not that deferred tax assets will not be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based on the expected reversal dates of the specific temporary differences. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| O. | Earnings (loss) Per Share:  |
|----|----------------------------------|

|   | Earnings (loss) per share (“EPS”) were computed in accordance with FASB ASC Topic 260, "Earnings Per Share" (ASC 260). ASC 260 requires the presentation of both basic and diluted EPS.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Basic net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted earnings per share is computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares considered outstanding during the year (see also Note 13C). Since the Company incurred net loss during the periods presented, no diluted EPS was presented as all the dilutive potential ordinary shares were anti-dilutive. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| P. | Financial Instruments:  |
|----|------------------------------|

|   | 1. | Concentration of credit risks: Financial instruments that have the potential to expose the Company to credit risks are mainly cash and cash equivalents, marketable securities, bank deposit accounts, and trade receivables.  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company holds cash and cash equivalents, marketable securities, and deposit accounts at large banks in Israel, the United States, and Europe, thereby substantially reducing the risk of loss.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | With respect to trade receivables, the risk is limited due to the geographically spreading, nature and size of the entities that constitute the Company’s customer base. The Company assesses the financial position of its customers prior to the engagement with them, and has not encountered material credit difficulties therewith. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Fair value measurement:  |
|--------|----|-------------------------------|

|   | The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. On January 1, 2009, the Company adopted a newly issued accounting standard for fair value measurement of all non-financial assets and liabilities as well. The adoption did not have a significant effect on the Company’s financial statements (refer to note 3). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Q. | Comprehensive Income:  |
|----|-----------------------------|

|   | Comprehensive income, net of related taxes where applicable, includes, in addition to net income unrealized holding gains and losses on available-for-sale securities. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| R. | Derivative Instruments:  |
|----|-------------------------------|

|   | The Company uses foreign currency options, forward exchange contracts to assist in managing financial risks in order to minimize the currency exposure on identifiable assets and liabilities in currencies other than the functional currency. The Company does not use derivative financial instruments for speculative purposes. These instruments are recognized at fair value, with all changes in fair value recorded in current period earnings, as these transactions have not been designated by management as hedging instruments. The net loss recognized in earnings during 2009, representing the derivative instruments was $894 thousand (in 2008: gain of $55 thousand). As of December 31, 2009 the Company has open forward and option exchange contracts (notional amounts) of $8.3 million (December 31, 2008:  $6.6 million). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| S. | Treasury Shares:  |
|----|------------------------|

|   | The Company repurchases its Ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| T. | Transfers of Financial Assets:  |
|----|--------------------------------------|

|   | FASB ASC Topic 860 "Transfers and Servicing" ("ASC 860"), establishes a standard for determining when a transfer of financial assets should be accounted for as a sale. The underlying conditions are met for the transfer of financial assets to qualify for accounting as a sale. The transfers of financial assets are typically performed by the sell of receivables to on financial institution.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In 2009 and 2008, the Company sold trade receivables to financial institution in a total amount of $30 and $24.2 million respectively, at an average annual rate of Libor plus 2.4%-2.5% (in 2008- Libor plus 1.75%-2%.). Control and risk of those trade receivables were fully transferred and accounted for as a sale in accordance with ASC 860. The agreements, pursuant to which the Company sells its trade receivables, are structured such that the Company (i) transfers the proprietary rights in the receivable from the Company to the financial institution; (ii) legally isolates the receivable from the Company’s other assets, and presumptively puts the receivable beyond the legal reach of the Company and its creditors, even in bankruptcy or other receivership; (iii) confers on the financial institution the right to pledge or exchange the receivable; and (vi) eliminates the Company’s effective control over the receivable, in the sense that the Company is not entitled and shall not be obligated to repurchase the receivable other than in case of failure by the Company to fulfill its commercial obligation. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| U. | Reclassifications:  |
|----|--------------------------|

|   | Certain comparative figures have been reclassified to conform to the current year presentation. |
|--------|-------------------------------------------------------------------------------------------------|

| V. | Derivative Liabilities - Warrants:  |
|----|------------------------------------------|

|   | In connection with the adoption of EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF 07-05”) on January 1, 2009 (ASC 815-40-15), the Company determined that the warrants issued at several occasions in 2007 ,2006 and 2004 (ratchet down of exercise price based upon lower exercise price in future offerings) are not indexed to the Company’s own stock and therefore should be recorded as a  derivative financial liability for pursuant FASB ASC Topic 815 "Derivative and Hedging" (ASC 815-40-25). The fair value of these warrants as of January 1, 2009 was $161 thousand and was recorded as a derivative liability in a way of  cumulative adjustment to beginning of the year equity.(see also Note 11A5).  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Adoption of New Accounting Standards  |
|--------|--------------------------------------------|

|   | Accounting Standards Codification  |
|--------|-----------------------------------------|

|   | In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB ASC has become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Participating Securities Granted in Share-Based Transactions  |
|--------|--------------------------------------------------------------------|

|   | Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 260, Earnings Per Share (formerly FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities). The new guidance clarifies that non-vested share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities and included in basic earnings per share. The Company’s adoption of the new accounting standard did not have a material effect on previously issued or current earnings per share.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Business Combinations and Noncontrolling Interests  |
|--------|----------------------------------------------------------|

|   | Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 805, Business Combinations (formerly SFAS No. 141(R), Business Combinations). The new standard applies to all transactions or other events in which an entity obtains control of one or more businesses. Additionally, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement date for all assets acquired and liabilities assumed; and requires the acquirer to disclose additional information needed to evaluate and understand the nature and financial effect of the business combination. The Company’s adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Adoption of New Accounting Standards (cont.):  |
|--------|----------------------------------------------------------|

|   | Business Combinations and Noncontrolling Interests (cont.):  |
|--------|-------------------------------------------------------------------|

|   | Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 810, Consolidations (formerly SFAS 160, Noncontrolling Interests in Consolidated Financial Statements). The new accounting standard establishes accounting and reporting standards for the noncontrolling interest (or minority interests) in a subsidiary and for the deconsolidation of a subsidiary by requiring all noncontrolling interests in subsidiaries be reported in the same way, as equity in the consolidated financial statements. As such, this guidance has eliminated the diversity in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. The Company’s adoption of the new accounting standard resulted in recording noncontrolling interests in equity at  the current year and in comparative numbers. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Fair Value Measurement and Disclosure               |
|--------|----------------------------------------------------------------------------------------------------------------------|

|   | Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) (formerly FASB FSP No 157-2, Effective Date of FASB Statement No. 157), which delayed the effective date for disclosing all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually). This standard did not have a material impact on the Company’s consolidated financial statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2009, the FASB issued new guidance for determining when a transaction is not orderly and for estimating fair value when there has been a significant decrease in the volume and level of activity for an asset or liability. The new guidance, which is now part of ASC 820 (formerly FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), requires disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value in interim and annual periods. In addition, the presentation of the fair value hierarchy is required to be presented by major security type as described in ASC 320, Investments — Debt and Equity Securities. The provisions of the new standard were effective for interim periods ending after June 15, 2009. The adoption of the new standard on April 1, 2009 did not have a material impact on the Company’s consolidated financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Adoption of New Accounting Standards (cont.):  |
|--------|----------------------------------------------------------|

|   | Fair Value Measurement and Disclosure (cont.):             |
|--------|------------------------------------------------------------------------------------------------------------------------|

|   | In April 2009, the Company adopted a new accounting standard included in ASC 820, (formerly FSP 107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments). The new standard requires disclosures of the fair value of financial instruments for interim reporting periods of publicly traded companies in addition to the annual disclosure required at year-end. The provisions of the new standard were effective for the interim periods ending after June 15, 2009. The Company’s adoption of this new accounting standard did not have a material effect on the Company’s consolidated financial statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In August 2009, the FASB issued new guidance relating to the accounting for the fair value measurement of liabilities. The new guidance, which is now part of ASC 820, provides clarification that in certain circumstances in which a quoted price in an active market for the identical liability is not available, a company is required to measure fair value using one or more of the following valuation techniques: the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique that is consistent with the principles of fair value measurements. The new guidance clarifies that a company is not required to include an adjustment for restrictions that prevent the transfer of the liability and if an adjustment is applied to the quoted price used in a valuation technique, the result is a Level 2 or 3 fair value measurement. The new guidance is effective for interim and annual periods beginning after August 27, 2009. The Company’s adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Derivative Instruments and Hedging Activities  |
|--------|-----------------------------------------------------|

|   | Effective January 1, 2009, the Company adopted a new accounting standard included in ASC 815, Derivatives and Hedging (SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133). The new accounting standard requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. Since the new accounting standard only required additional disclosure, the adoption did not impact the Company’s consolidated financial statements. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Adoption of New Accounting Standards (cont.):  |
|--------|----------------------------------------------------------|

|   | Other-Than-Temporary Impairments  |
|--------|----------------------------------------|

|   | In April 2009, the FASB issued new guidance for the accounting for other-than-temporary impairments. Under the new guidance, which is part of ASC 320, Investments — Debt and Equity Securities (formerly FSP 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments), an other-than-temporary impairment is recognized when an entity has the intent to sell a debt security or when it is more likely than not that an entity will be required to sell the debt security before its anticipated recovery in value. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The new guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities and is effective for interim and annual reporting periods ending after June 15, 2009. The Company’s adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Subsequent Events  |
|--------|-------------------------|

|   | In May 2009, the FASB issued new guidance for subsequent events. The new guidance, which is part of ASC 855, Subsequent Events (formerly SFAS No. 165, Subsequent Events) is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The new guidance is effective for fiscal years and interim periods ended after June 15, 2009 and will be applied prospectively. The Company’s adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Accounting Standards Not Yet Effective  |
|--------|----------------------------------------------|

|   | Accounting for the Transfers of Financial Assets  |
|--------|--------------------------------------------------------|

|   | In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Updated (“ASU”) 2009-16. The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The new guidance is effective for fiscal years beginning after November 15, 2009. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have to the Company’s consolidated financial statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Accounting for Variable Interest Entities  |
|--------|-------------------------------------------------|

|   | In June 2009, the FASB issued revised guidance on the accounting for variable interest entities. The revised guidance, which was issued as SFAS No. 167, Amending FASB Interpretation No. 46(R), was adopted into Codification in December 2009 through the issuance of ASU 2009-17. The revised guidance amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. The revised guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. The Company does not expect that the provisions of the new guidance will have a material effect on its consolidated financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| W. | Recently Issued Accounting Pronouncements:  |
|----|--------------------------------------------------|

|   | Accounting Standards Not Yet Effective (cont.):  |
|--------|-------------------------------------------------------|

|   | Revenue Recognition  |
|--------|---------------------------|

|   | In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into or matrially modified in fiscal years beginning on or after June 15, 2010. The Company does not expect that the provisions of the new guidance will have a material effect on its consolidated financial statements. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In October 2009, the FASB issued Accounting Standards Update 2009-14, Revenue Recognition (Topic 605)-Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition. ASU 2009-14 shall be applied on a prospective basis to revenue arrangements entered into or materially modified in our first quarter of 2012. Early adoption is permitted. The Company does not expect that the provisions of the new guidance will have a material effect on its consolidated financial statements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | DSK:  |
|----|------------|

|   | DSKnowledge Ltd. (DSK). In December 2009, the Company purchased the product business of DSKnowledge Ltd., referred to as DSK, a provider of knowledge management software for enterprises. DSK’s product modernizes and transforms legacy data, information and content elements in enterprises into one knowledge management repository. Pursuant to the terms of the purchase agreement, the Company acquired DSK's product business for approximately $3 million.  According to the purchase agreement, the Company committed to pay additional consideration calculated based upon future millstones based revenues in 2010, 2011 and 2012. Acquisition costs amounted to approximately $ 120 thousand and were charged to income as general and administrative expenses..  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  The acquisition was accounted for by the acquisition method. The results of operations were included in the consolidated financial statements of the company commencing December 8, 2009. The consideration for the acquisition was attributed to net assets on the basis of fair value of assets acquired and liabilities assumed, based upon an appraisal study. The allocation of the acquisition costs to the net assets acquired and liabilities assumed in this acquisition is preliminary, as the business combination was consummated on December 8, 2009, and has not been finalized. The final allocation could differ from this preliminary allocation. An  amount of $1,633 thousand was allocated to core technology and to be amortized over a 5 years period , an amount of $257 thousand was allocated to estimated fair value of the customers related intangible assets, which is being amortized  over 5 years and $172 thousand of Backlog which is being amortized over 1 year. The excess cost of the acquisition over the fair value of net tangible and intangible assets amounted to $907 thousand and was allocated to goodwill .Goodwill  is deductible for tax purposes over 10 years period. Based upon this preliminary allocation no fair value was attributed to the future contingent payments as the company estimates at this stage that DSK will not reach the agreed milestones.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | DSK (Cont.): The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of purchase: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------|

|                                          |   | (in thousands) |   |
|-----------------------------------------------|--------|----------------|--------|
|                                          |   |           |   |
| Current assets                                |   | $              | 385    |   |
| Goodwill                                      |   |           | 907    |   |
| Technology                                    |   |           | 1,633  |   |
| Customer related intangible asset             |   |           | 257    |   |
| Backlog                                       |   |           | 172    |   |
|                                          |   |           |   |   |
| Total tangible and intangible assets acquired |   |           | 3,354  |   |
| Current liabilities                           |   |           | 250    |   |
| Non Current liabilities                       |   |           | 84     |   |
|                                          |   |           |   |   |
| Total liabilities assumed                     |   |           | 334    |   |
|                                          |   |           |   |   |
| Net assets acquired                           |   | $              | 3,020  |   |

|                |   | (in thousands) |   |
|---------------------|--------|----------------|--------|
|                |   |           |   |
| Cost of investment: |   |           |   |
| Cost paid           |   | $              | 2,511  |   |
| Current liability   |   |           | 509    |   |
|                |   |           |   |   |
|                |   | $              | 3,020  |   |

----

| B. | TIS:  |
|----|------------|

|   | In January 2008, the Company entered into an agreement for the purchase of the entire outstanding share capital of TIS Consultants Ltd., or TIS, a company incorporated in Cyprus, that wholly owns a subsidiary incorporated in India, TISA Software Consultants Private Limited. TIS provides consulting services, solutions and value added products to the banking industry, specializing in the market for Temenos GLOBUS/T24TM. TIS’ acquisition expands the Company’s products offerings and services. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Under the agreement, the Company paid to the selling shareholders an amount of $500,000 and an additional amount of $700,000 as a nonrefundable advance payment on account of contingent consideration described below. As part of the transaction, the Company undertook to pay the selling shareholders contingent consideration. Following a dispute with regard to the contingent consideration, and as part of the negotiated terms, the Company paid in 2009 $3,070 thousand to the former shareholders of TIS that was already recorded as a liability in 2008, and entered into a settlement agreement for dismissal of legal proceedings between the Company and the former shareholders of TIS regarding the final amount of contingent consideration owed related to the Company’s purchase of TIS. As part of the settlement, the parties agreed on mutual release of their respective claims and the former shareholders of TIS waived the rights to any future contingent consideration. Under the settlement agreement dated September 13, 2009, the Company will pay the former shareholders of TIS contingent consideration of $1,057 thousand in January 2010 and $1,163 thousand in January 2011. In addition, the Company issued to the former shareholders of TIS 813,461 of its ordinary shares, NIS 0.01 par value per share, valued $2,505 thousand based on the closing settlement date. As a result, in 2008 and 2009 the Company assigned $3,070 thousand and $4,790 thousands respectively, to goodwill.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The acquisition was accounted for by the purchase method. The results of operations of TIS are included in the consolidated financial statement commencing January 1, 2008. The consideration of the acquisition which amounted to $1.2 million was attributed to net assets acquired and liabilities assumed based on their fair value. Upon a purchase price allocation, an amount of $1,088 thousand was allocated to core technology and to be amortized over a 5 years period and an amount of $795 thousand was allocated to estimated fair value of the customers related intangible assets, which is being amortized over its estimated useful life - currently 5 years.  The amount assigned to assets acquired and liabilities assumed exceeded the cost of the acquired entity by the amount of $988 thousand, and therefore recognized as liability in accordance with FASB ASC 805 Topic "Business Combinations" since the final consideration contains a contingent consideration payment.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| B. | TIS (cont.): The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of purchase: |
|----|-----------------------------------------------------------------------------------------------------------------------------------------|

|                                          |   | (in thousands) |   |
|-----------------------------------------------|--------|----------------|--------|
| Current assets                                |   | $              | 577    |   |
| Property and equipment                        |   |           | 67     |   |
| Technology                                    |   |           | 1,088  |   |
| Customer related intangible asset             |   |           | 795    |   |
|                                          |   |           |   |   |
| Total tangible and intangible assets acquired |   |           | 2,527  |   |
|                                          |   |           |   |   |
| Current liabilities                           |   |           | 330    |   |
|                                          |   |           |   |   |
| Total liabilities assumed                     |   |           | 330    |   |
|                                          |   |           |   |   |
| Net assets acquired                           |   | $              | 2,197  |   |
|                                          |   |           |   |   |
| Cost of investment                            |   |           |   |   |
| Cash paid                                     |   | $              | 1,209  |   |
| Contingent consideration                      |   |           | 988    |   |
|                                          |   | $              | 2,197  |   |

----

| C. | JLC Russia  |
|----|------------------|

|   | In May 2008, the Company purchased the activity of a professional outsourcing center in Nitzni (Russia), in order to expand the Company’s off-shore center in Russia, for a total consideration of $1.18 million. Under the terms of the transaction, the Company agreed to pay to the selling shareholders an additional consideration if certain criteria are met, based on the revenues growth of the JLC's activity in each of the years 2008 and 2009. Accordingly, the Company paid in 2009 to the selling shareholders additional consideration of $406 thousand that was recorded as a liability in 2008 based on the relevant criteria. No additional consideration was granted for 2009.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The acquisition was accounted for by the purchase method. The results of operations of JLC are included in the consolidated financial statement commencing May 1, 2008. The consideration of the acquisition was attributed to net assets acquired and liabilities assumed based on their fair value. Upon a purchase price allocation an amount of $295 thousand was allocated to estimated fair value of the customer related intangible assets, which is being amortized over its estimated useful life - currently 5 years, and an amount of $91 thousand was allocated to backlog and is being amortized over a 1 year period. The excess cost of the acquisition over the fair value of net tangible and intangible assets amounted to $710 thousand and was allocated to goodwill in 2008.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of purchase:  |
|--------|-----------------------------------------------------------------------------------------------------------------------------|

|                                          |   | (in thousands) |   |
|-----------------------------------------------|--------|----------------|--------|
| Current assets                                |   | $              | 424    |   |
| Goodwill                                      |   |           | 710    |   |
| Backlog                                       |   |           | 91     |   |
| Customer related intangible asset             |   |           | 295    |   |
| Total tangible and intangible assets acquired |   |           | 1,520  |   |
|                                          |   |           |   |   |
| Current liabilities                           |   |           | 335    |   |
| Total liabilities assumed                     |   |           | 335    |   |
| Net assets acquired                           |   | $              | 1,185  |   |

----

| D.     | Amalgamated Software North America (ASNA): In August 2007, the Company entered into an agreement to purchase the entire outstanding share capital of Amalgamated Software North America Inc. (ASNA), a private company based in San Antonio, Texas, for a total consideration of $7 million. Under the terms of the transaction, the Company agreed to pay to the selling shareholders an additional consideration if certain criteria are met, based on ASNA's operating profit in 2008 and 2009. Those criteria have not been met and no additional consideration was paid. |
|----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| E. | Bridge Quest Inc:  |
|----|-------------------------|

|   | Effective April 2007, the Company entered into an agreement to purchase the entire outstanding share capital of Bridge Quest Inc., a North Carolina corporation that manages and operates, through a wholly owned subsidiary, a professional outsourcing center in St. Petersburg, Russia. BridgeQuest is experienced in providing development services from the Russian Federation. The consideration amounted to $2 million. Under the terms of the transaction, the Company committed to pay the selling shareholders additional consideration computed based on BridgeQuest revenues and earnings before interest and taxes referred to as EBIT, during 2007-2009. Based on the above mentioned contingent consideration, the additional amount of goodwill recorded for fiscal 2007 amounted to $1.8 million. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Based on an amendment to the agreement effective January 2008, the Company granted to the selling shareholders warrants to purchase 200,000 BluePhoenix' ordinary shares valued at $2.5 million based on the Black-Scholes pricing model on the commitment date upon reaching the relevant milestone that was recorded as additional goodwill in 2008. These warrants were exercised in 2008. On December 31, 2008, the Company signed an additional amendment to the agreement, pursuant to which the Company committed to pay the selling shareholders an amount of $1.6 million as final consideration in connection with the transaction payable as follows: $750 thousand on January 31, 2009 which has already been paid; $310 thousand on October 1, 2009; and $560 thousand on February 15, 2010. The amount of $1.6 million was recorded as additional goodwill as of December 31, 2008. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| F. | CodeStream Software Ltd.:  |
|----|---------------------------------|

|   | In December 2006, the Company acquired from a company incorporated in the United Kingdom, CodeStream Software Ltd., certain business activities in the field of modernization of legacy databases, particularly IDMS and other mainframe platforms. Pursuant to the purchase agreement, the Company hired 18 persons previously employed by CodeStream and assumed all the obligations in respect of the purchased activities. In consideration thereof, the Company paid to CodeStream $10.2 million. Pursuant to the purchase agreement, as amended in December 2007, an amount of $2.5 million to be paid in 2008 was recorded as additional goodwill as of December 31, 2007. In addition, as a contingent consideration for the purchased activity, the Company issued the selling shareholders 400,000 BluePhoenix' ordinary shares in April 2008 valued at $3.8 million based on the share price on the commitment date, upon reaching certain milestone, and undertook to pay an additional amount of $3.5 million to be paid in 2009. The amounts were recorded as additional goodwill as of December 31, 2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| G. | BluePhoenix I-Ter S.p.A. (formerly: I-Ter/Informatica & Territorio S.p.A.):  |
|----|---------------------------------------------------------------------------------------|

|   | In the second quarter of 2005, the Company entered into an agreement to purchase the entire outstanding share capital of I-Ter/Informatica & Territorio S.p.A., referred to as I-Ter. Pursuant to the purchase agreement, the Company paid to the selling shareholders of I-Ter $1.4 million. In addition, under the terms of the agreement, the Company agreed to pay the selling shareholders an additional contingent consideration based on I-Ter’s average earnings before interest and taxes, for the years 2005 through 2007. Based on the above mentioned contingent consideration, the additional amount of goodwill recorded as of December 31, 2007 and 2008 amounted to $4.6 million and $1.6 million, respectively. The Company’s outstanding liability in this regard as of December 31, 2008 was $1.8 million that were paid in two installments in the first half of 2009. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| H. | Unaudited Pro Forma Information:  |
|----|----------------------------------------|

|   | The following unaudited pro forma summary presents information as if the acquisition of BridgeQuest, TIS, and Asna had occurred as of January 1, 2007, the acquisition of JLC’s activity had occurred as of January 1, 2008 and 2007, and the acquisition of DSK’s activity had occurred as of January 1, 2009 and 2008. The pro forma information, which is provided for informational purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, not is it necessarily indicative of future results of operations of the consolidated entity. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| H. | Unaudited Pro Forma Information (Cont.): |
|----|------------------------------------------|

|                                              |   | Year ended December 31,               |    |
|---------------------------------------------------|--------|---------------------------------------|---------|
|                                              |   | 2009                                  |    |   | 2008 |   |   | 2007 |   |
|                                              |   | (In thousands, except per share data) |    |
|                                              |   | (Unaudited)                           |    |
| Revenues                                          |   | $                                     | 78,797  |   |   | $ | 94,385 |   |   | $ | 90,213 |   |
| Net loss attributable to BluePhoenix Shareholders |   | $                                     | (15,425 | ) |   | $ | (28,245 | ) |   | $ | (10,610 | ) |
| Loss per share - basic and diluted                |   | $                                     | (0.72   | ) |   | $ | (1.33 | ) |   | $ | (0.62 | ) |

| Level 1: | Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.  |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Level 2: | Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.  |
|----------|-----------------------------------------------------------------------------------------------------------------|

| Level 3: | Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                               |   | Fair value measurements using input type |   |
|------------------------------------|--------|------------------------------------------|--------|
|                               |   | Level 1                                  |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
|                               |   |                                     |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents          |   | $                                        | 22,328 |   |   | $ | - |   |   | $ | - |   |   | $ | 22,328 |   |
| Marketable securities              |   |                                     | 129    |   |   |   | - |   |   |   | - |   |   |   | 129 |   |
| Foreign currency derivatives, net  |   |                                     | -      |   |   |   | 35 |   |   |   | - |   |   |   | 35 |   |
| Derivatives liabilities - warrants |   |                                     | -      |   |   |   | 2,414 |   |   |   | - |   |   |   | 2,414 |   |
| Goodwill *                         |   |                                     | -      |   |   |   | - |   |   |   | 51,990 |   |   |   | 51,990 |   |
|                               |   | $                                        | 22,457 |   |   | $ | 2,449 |   |   | $ | 51,990 |   |   | $ | 76,896 |   |

|                               |   | December 31,   |   |
|------------------------------------|--------|----------------|--------|
|                               |   | 2009           | 2008   |   |
|                               |   | (in thousands) |   |
| Cost:                              |   |           |   |   |   |   |
| Computers and peripheral equipment |   | $              | 9,537  |   |   | $ | 9,668 |   |
| Office furniture and equipment     |   |           | 963    |   |   |   | 992 |   |
| Leasehold improvements             |   |           | 518    |   |   |   | 519 |   |
| Motor vehicles                     |   |           | 444    |   |   |   | 488 |   |
|                               |   |           | 11,462 |   |   |   | 11,667 |   |
| Accumulated Depreciation:          |   |           |   |   |   |   |   |   |
| Computers and peripheral equipment |   |           | 8,281  |   |   |   | 7,979 |   |
| Office furniture and equipment     |   |           | 734    |   |   |   | 728 |   |
| Leasehold improvements             |   |           | 370    |   |   |   | 321 |   |
| Motor vehicles                     |   |           | 187    |   |   |   | 146 |   |
|                               |   |           | 9,572  |   |   |   | 9,174 |   |
|                               |   |           |   |   |   |   |   |   |
| Depreciated cost                   |   | $              | 1,890  |   |   | $ | 2,493 |   |

----

|                                            |   | December 31,   |   |
|-------------------------------------------------|--------|----------------|--------|
|                                            |   | 2009           |   |   | 2008 |   |
|                                            |   | (in thousands) |   |
|                                            |   |           |   |   |   |   |
| Carrying amount at beginning of year            |   | $              | 52,006 |   |   | $ | 49,683 |   |
| Acquired goodwill *                             |   |           | 5,654  |   |   |   | 15,651 |   |
| Goodwill impairment **                          |   |           | (5,670 | ) |   |   | (13,328 | ) |
| Carrying amount at the end of the year          |   | $              | 51,990 |   |   | $ | 52,006 |   |
|                                            |   |           |   |   |   |   |   |   |
| * Including contingent consideration resolving: |   |           |   |   |   |   |   |   |
|                                            |   |           |   |   |   |   |   |   |
| DSKnowledge business                            |   | $              | 907    |   |   | $ | - |   |
| TIS Consultants Ltd.                            |   |           | (273   | ) |   |   | (988 | ) |
| TIS Consultants Ltd.                            |   |           | 5,020  |   |   |   | 3,070 |   |
| JLC Russia                                      |   |           | -      |   |   |   | 710 |   |
| JLC Russia                                      |   |           | -      |   |   |   | 406 |   |
| Amalgamated Software North America Inc.         |   |           | -      |   |   |   | (746 | ) |
| BridgeQuest Inc.                                |   |           | -      |   |   |   | 2,557 |   |
| BridgeQuest Inc.                                |   |           | -      |   |   |   | 1,620 |   |
| CodeStream Software Ltd.                        |   |           | -      |   |   |   | 3,782 |   |
| CodeStream Software Ltd.                        |   |           | -      |   |   |   | 3,459 |   |
| BluePhoenix I-Ter S.p.A.                        |   |           | -      |   |   |   | 1,645 |   |
| Others                                          |   |           | -      |   |   |   | 136 |   |
|                                            |   | $              | 5,654  |   |   | $ | 15,651 |   |

----

| Composition: |
|--------------|

|                                             |   | Useful |   |   | December 31,   |   |
|--------------------------------------------------|--------|--------|--------|--------|----------------|--------|
|                                             |   | life   |   |   | 2009           |   |   | 2008 |   |
|                                             |   | years  |   |   | (in thousands) |   |
| Original amount:                                 |   |   |   |   |           |   |   |   |   |
| Technology                                       |   |   | 5      |   |           | $      | 47,581 |   |   | $ | 45,948 |   |
| Customer related intangible assets               |   |   | 5-8    |   |           |   | 4,916 |   |   |   | 4,659 |   |
| Distribution agreement related intangible assets |   |   | 11     |   |           |   | 359 |   |   |   | 359 |   |
| Brand name related intangible assets             |   |   | 12     |   |           |   | 958 |   |   |   | 958 |   |
| Deferred tax asset                               |   |   |   |   |           |   | 1,696 |   |   |   | 1,368 |   |
| Others                                           |   |   |   |   |           |   | 375 |   |   |   | 203 |   |
|                                             |   |   |   |   |           |   | 55,885 |   |   |   | 53,495 |   |
| Accumulated amortization:                        |   |   |   |   |           |   |   |   |   |   |   |   |
| Technology                                       |   |   |   |   |           |   | 35,440 |   |   |   | 28,301 |   |
| Customer related intangible assets               |   |   |   |   |           |   | 2,339 |   |   |   | 1,685 |   |
| Distribution agreement related intangible assets |   |   |   |   |           |   | 84 |   |   |   | 51 |   |
| Brand name related intangible assets             |   |   |   |   |           |   | 200 |   |   |   | 120 |   |
| Other                                            |   |   |   |   |           |   | 203 |   |   |   | 187 |   |
|                                             |   |   |   |   |           |   | 38,266 |   |   |   | 30,344 |   |
|                                             |   |   |   |   |           | $      | 17,619 |   |   | $ | 23,151 |   |

|                |   | (in thousands) |   |
|---------------------|--------|----------------|--------|
|                |   |           |   |
| 2010                |   | $              | 6,876  |   |
| 2011                |   |           | 4,255  |   |
| 2012                |   |           | 2,326  |   |
| 2013                |   |           | 1,203  |   |
| 2014                |   |           | 699    |   |
| 2015 and thereafter |   |           | 564    |   |
|                |   | $              | 15,923 |   |

| * | Amortization of intangible assets (excluding deferred tax) amounted to $7,926, $9,094 and $9,554 thousand for the years ended December 31, 2009, 2008 and 2007 respectively. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | Accrued Liability:  |
|----|--------------------------|

|   | The Company is liable for severance pay to its employees pursuant to the applicable local laws prevailing in the respective countries of employment and employment agreements. For Israeli employees, the liability is partially covered by individual managers’ insurance policies under the name of the employee, for which the Company makes monthly payments. The Company may make withdrawals from the managers’ insurance policies only for the purpose of paying severance pay. The amounts accrued and the amounts funded with managers’ insurance policies are as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                        |   | December 31,   |   |
|-----------------------------|--------|----------------|--------|
|                        |   | 2009           | 2008   |   |
|                        |   | (in thousands) |   |
|                        |   |           |   |   |   |   |
|  Accrued severance pay |   | $              | 4,761  |   |   | $ | 5,610 |   |
|  Less - amount funded  |   |           | 3,452  |   |   |   | 3,813 |   |
|                        |   | $              | 1,309  |   |   | $ | 1,797 |   |

| B. | Expenses:  |
|----|-----------------|

|   | The expenses related to severance pay for the years ended December 31, 2009, 2008 and 2007 were $799, $1,273 and $762 thousand, respectively. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | Composition: |
|----|--------------|

|                                          |   |    |   | December 31,                                      |   |
|-----------------------------------------------|--------|---------|--------|---------------------------------------------------|--------|
|                                          |   |    |   |                                              | *2009  |   |   |   | 2008 |   |
| Average Interest rate as of December 31, 2009 |   | Linkage |   | Total long-term liabilitiesnet of current portion |   |
| %                                             |   | Basis   |   | (in thousands)                                    |   |
|                                          |   |    |   |                                              |   |   |   |   |   |   |
| 6.30                                          |   | € |   | $                                                 | 49     |   |   | $ | 69 |   |
| 0.87                                          |   | € |   |                                              | 320    |   |   |   | - |   |
| Libor + an average rate of 3%                 |   | $       |   |                                              | 15,008 |   |   |   | 16,000 |   |
| Less - current portion                        |   |    |   |                                              | (2,490 | ) |   |   | (1,021 | ) |
|                                          |   |    |   |                                              | $      | 12,887 |   |   | $ | 15,048 |   |

----

| B. | Long-term Loans from Banks and Other are due as follows: |
|----|----------------------------------------------------------|

|                             |   | December 31,   |   |
|----------------------------------|--------|----------------|--------|
|                             |   | 2009           | 2008   |   |
|                             |   | (in thousands) |   |
|                             |   |           |   |   |   |   |
| First year (current portion)     |   | $              | 2,490  |   |   | $ | 1,021 |   |
| Second year                      |   |           | 6,972  |   |   |   | 4,252 |   |
| Third year                       |   |           | 2,972  |   |   |   | 6,483 |   |
|  Fourth year and thereafter |   |           | 2,943  |   |   |   | 4,313 |   |
|                             |   |           |   |   |   |   |   |   |
| Total                            |   | $              | 15,377 |   |   | $ | 16,069 |   |

| A. | Commitments:  |
|----|--------------------|

|   | 1. | Lease. The Company rents its offices, vehicles and, other equipment under various operating lease agreements. Rent expenses for the years ended December 31, 2009, 2008 and 2007 were $ 3.2 million, $3.1 million and $3.0 million. Aggregate minimum rental commitments under non-cancelable leases as of December 31, 2009 were as follows: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|              |   | Office Facilities |   |   | Vehicles, Equipment,and Other |   |
|-------------------|--------|-------------------|--------|--------|------------------------------------|--------|
|              |   |              |   |   |                               |   |
|  Fiscal 2010 |   | $                 | 1,510  |   |                               | $      | 1,109 |   |
|  Fiscal 2011 |   |              | 511    |   |                               |   | 754 |   |
|  Fiscal 2012 |   |              | 373    |   |                               |   | 302 |   |
|  Fiscal 2013 |   |              | 51     |   |                               |   | 8 |   |
|              |   |              |   |   |                               |   |   |   |
|              |   | $                 | 2,445  |   |                               | $      | 2,173 |   |

|   | 2. | Customers’ bank guarantees. Under agreements between the Company and certain of its customers, the Company undertook to provide such customers a bank guarantee for the assurance of performance of its obligations under its agreements with such customers. As of December 31, 2009, there are outstanding bank guarantees on behalf of customers in the aggregate amount of $192 thousand. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | Commitments (cont.):  |
|----|----------------------------|

|   | 3. | Chief Scientist. Three of the Company’s subsidiaries have entered into agreements with the OCS; these subsidiaries are obliged to pay royalties to the OCS at a rate of 3% on sales of the funded products, up to 100% of the dollar-linked grant received in respect of these products from the OCS. As of December 31, 2009, the contingent liability that was not recognized amounted to $900 thousand. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Ministry of Production in Italy. In July 2007, the Company’s subsidiary, I-Ter, received final approval from the Ministry of Production in Italy for its Easy4Plan product. Easy4Plan is a workflow management tool designed for ISO9000 companies. The total funds amounted €515,000. 36.5% of the funds received constitute a grant, and the remaining 63.5% is a 10-year loan to be repaid by annually by I-Ter until September 2018. The loan bears a minimal annual interest of 0.87% and linked to the Euro. As of December 31, 2009 the balance amount was € 247 thousand. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Credit lines from banks. In connection with the credit line from Bank Discount Le’Israel Ltd, Bank Ha’Poalim Ltd., The First International Bank Ltd., the Company committed to certain covenants related to its operation such as:  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | maintaining a minimum level of shareholders’ equity of no less than 40% of our total assets and no less than $50 million;  |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | maintaining a minimum level of tangible shareholders’ equity not to exceed a deficit of $30 million;  |
|--------|----|------------------------------------------------------------------------------------------------------------------|

|   | c) | maintaining a cash balance of $10 million;  |
|--------|----|--------------------------------------------------|

|   | d) | maintaining a level of EBITDA net of one time expenses in a four sequential quarters  of no less than $5 million; and  |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------|

|   | e) | Maintaining a ratio of our bank liabilities to current assets, excluding other current assets, of no more than 40%. |
|--------|----|---------------------------------------------------------------------------------------------------------------------|

|   | The Company has met all such financial covenants. |
|--------|---------------------------------------------------|

----

| Note 10 - Commitments and Contingencies (Cont.):  |
|--------------------------------------------------------|

| B. | Contingencies:  |
|----|----------------------|

|   | 1. | In June 2003, a former Liraz shareholder filed an application with the Tel-Aviv-Jaffa District Court to approve a claim filed by him against us, as a class action. The claim relates to the acquisition of Liraz shares, which the Company completed in March 2003. The shareholder alleges that the share price the Company paid to Liraz’s shareholders in the tender offer and in a subsequent mandatory purchase was lower than the fair price of Liraz shares. The maximum amount of the claim is approximately NIS 37.1 million ($9.9 million) in the aggregate. Under Israeli law, the court’s approval is required for the plaintiff to represent all of the shareholders of Liraz who sold their shares to us pursuant to the tender offer and the mandatory acquisition. The plaintiff has applied for such approval in the lawsuit. Since the critical issue in our case concerns the basis upon which the fair price of shares purchased within the context of a tender offer is to be determined, and due to the fact that this particular issue has come before the Supreme Court of Israel in an appeal concerning another separate case, the plaintiff in our claim has agreed to postpone the proceedings until the Supreme Court has given its decision in the appeal. In December 2009, the Supreme Court held that, as a general rule, the fair price of shares purchased within the context of a full tender offer shall be determined in accordance with the discounted cash flow method. The plaintiff in our case is expected to notify the court whether he wishes to renew the proceedings. As of the date of this annual report, the plaintiff has not yet applied to the court.  |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Based on our analysis of the statement of claim, including an evaluation of the fair value of the Liraz shares, and the price paid for Liraz in  a previous transaction immediately prior to the tender offer, the Company believes that the allegations against us in this proceeding are without merit and intends to vigorously defend the claim and contest the allegations made therein. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | In January 2010, the temporary liquidator of Danshir group, a group of companies affiliated to DSKnowledge Ltd., applied to the district court in Tel-Aviv-Jaffa for grant of instructions to initiate an investigation of the business of Danshir group and to cancel the assets purchase transaction, under which the Company purchased the business activity of DSKnowledge Ltd. In the application, the temporary liquidator claimed that DSKnowledge Ltd. was actually part of the Danshir group and its business was unlawfully sold to the Company. The court requested the response of the Principal Receiver (a government officer). The Principal Receiver supported the application to conduct an investigation of the business of Danshir group, but stated that the application to cancel the purchase of the business activity of DSKnowledge has no merit, and should be filed again if the investigation’s conclusion support that finding. The Company believes that the application to cancel the transaction has no merit, and intends to vigorously oppose the claim. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | The Company evaluates estimated losses for indemnifications due to product infringement under FASB Topic ASC 450 "Contingencies". At this time, it is not possible to determine the maximum potential amount under these indemnification clauses due to lack of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and has not accrued any liabilities related to such indemnification obligations in the Company’s financial statements. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | 1. | On January 31, 1997, the Company's ordinary shares were first offered in an initial public offering. Since this transaction, the Company’s shares have been traded in the United States on the NASDAQ Global Market. Their current symbol is “BPHX.”  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2001, the Company's ordinary shares were listed for trading on the Tel-Aviv stock Exchange under the "Dual Listing" arrangement. Ordinary share confers upon their holders the rights to receive notice to participate and vote in general meeting of the Company, and the right to receive dividends if declared. During 2009 the Company's beard of directors approved the increase of the authorized share capital to 40,000,000 shares from 30,000,000 shares 0.01 NIS par value. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | The Company holds a total of 2,371,140 of its shares in a total consideration of $15.2 million. All of the Company’s ordinary shares have equal voting rights. However, under applicable Israeli law, the shares held by the Company have no voting rights and, therefore, are excluded from the number of its outstanding shares. Commencing 2010, the Company will use these treasury share for the issuance of shares pursuant to the exercise of options and vested RSUs.  |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In March 2008 the board of directors approved two by-back programs. Under the buy-back programs, the Company may purchase its shares from time to time, subject to market conditions and other relevant factors affecting the Company. In 2009 and 2008 the Company repurchased 44,994 and 677,302, respectively, of its shares for an aggregate amount of $1.7 million under the buy-back programs. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | In October 2009, the Company completed a $4.2 million private placement of ordinary shares and warrants to institutional investors. Pursuant to the securities purchase agreement, the Company issued to the investors 1,364,575 ordinary shares. In addition, the Company issued to the investors series A warrants exercisable immediately into 818,744 ordinary shares during a five year term from the issuance date at an exercise price of $3.95 per share, series B warrants exercisable immediately into 1,364,575 ordinary shares until April 29, 2010 at an exercise price of $3.05 and series C warrants exercisable immediately upon the exercise of the Series B warrants into 818,744 ordinary shares during a five year period at an exercise price of $3.95. All warrants (Series A,B, and C) are subject to anti-dilution protection under which any future issuance of securities at a price lower than the current exercise price of the warrants will cause an adjustment of the applicable warrant exercise price to the price of the dilutive issuance. As a result of such anti-dilution protection the warrants are not indexed to the Company’s own stock and, and therefore recorded at issuance date as a derivative financial liability. The value assigned to the warrants at issuance date was approximately $3.8 million out of the total proceeds of $4.2 million - see also Note 11.A.5. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | Share Capital (cont.):  |
|----|------------------------------|

|   | 4. | In November 2007, the Company completed a $35 million private placement of ordinary shares and warrants issued to institutional investors. Under the Securities Purchase Agreement entered into with the institutional investors, the Company sold to the investors 1,999,998 ordinary shares at a purchase price of $17.50 per share. The investors were also granted warrants to purchase 800,000 ordinary exercisable during a 5-year term at an exercises price of $21.88. The exercise price was adjusted to $18.8 per share pursuant to anti dilution provision triggered by the private placement that took place in October 2009. As agreed with the investors, the Company registered the shares purchased by the investors and those underlying the warrants for resale under an effective registration statement. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | At issuance date, shares and warrants overcome all criteria set forth in SFAS 133 “Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock” (currently, FASB ASC Topic 815 "Derivative and Hedging"). In addition, the commitment to register the shares and to keep the filling in effect was analyzed pursuant to the FSP EITF 00-19-2 "Accounting for Registration Payment Arrangements" and was accordingly determined under the provision of SFAS 5 (currently, FASB ASC Topic 450 "Contingencies") therefore, as of December 31, 2008 the Company has not recorded a liability thereof. The proceeds amount net of issuance costs totaled $33 million and was recorded in equity. On January 1, 2009 the Company implemented EITF 07-05 (ASC 815-40-15) and as a result the warrants were accounted for as a derivative - see note 11.A.5. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Derivative liability- warrants:  |
|--------|----|---------------------------------------|

|   | In connection with the adoption of EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” (“EITF 07-05”) on January 1, 2009 (ASC 815-40-15), the Company determined warrants issued at several occasions throughout the years (ratchet down of exercise price based upon lower exercise price in future offerings) are not indexed to the Company’s own stock and are recorded as a derivative liability pursuant to FASB ASC Topic 815 " Derivative and Hedging" (ASC 815-40-25). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| A. | Share Capital (cont.):  |
|----|------------------------------|

|   | 5. | Derivative liability- warrants (Cont.):  |
|--------|----|-----------------------------------------------|

|   | The Company measured the fair value of the outstanding warrants at issuance and at the balance sheet date using a Black-Scholes valuation model (Binominal method was used for Series B and C since their expiration dates are co-dependent). As a result of the application of ASC 815-40-15, the fair value of the warrants as of December 31, 2009 amounted to $2,414 thousand as follows:  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 3,002,065 warrants issued in November 2009 divided into three series as follows: 818,744 of series A at fair value of $1,101 thousand, 1,364,575 of series B at fair value of $ 249 thousand, and 818,744 of series C at fair value of $ 768 thousand.  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | 800,000 warrants issued in November 2007- (see also Note 11A4)-Fair value of $222 thousand.  |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | · | 200,000 warrantsissued in 2006.- Fair value of  $74 thousand. |
|--------|--------|--------------------------------------------------------------------|

|   | The initial application of ASC 815-40-15 (EITF  07-05) on the warrants issued in November 2007, 2006 and 2004  resulted in a charge of $ 161 thousand which  was recorded as a derivative liability in a way of  cumulative adjustment to beginning of the year equity based on their fair value as of January 1, 2009.. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| B. | Share Options:  |
|----|----------------------|

|   | 1. | Employee Share Option Plans:  |
|--------|----|------------------------------------|

|   | Stock-based compensation plans comprise employee stock option plans and restricted stock units (“RSUs”) to employees, officers and directors. The purpose of the plans is to enable the Company to attract and retain qualified personnel and to motivate such persons by providing them with an equity participation in the Company.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On December 31, 2009, the Company had two share-based compensation plans: (a) the 1996 share option plan. (b) The 2007 Restricted Share Units plan. Both plans are described below. The compensation costs that were charged to income for those plans amounted to $2 million, $2.8 million and $ 1.8 million for 2009 and 2008 and 2007 respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In 1996, the Company adopted two option plans (the 1996 Share Option Plan). One of these option plans was terminated after all options granted under it were exercised. Pursuant to the other 1996 option plan, as amended, the Company reserved 3,700,000 ordinary shares for issuance to directors, officers, consultants and employees of the Company and its subsidiaries. The exercise price of the options granted under the 1996 option plan ranges from $2.25 to $10.50. As of December 31, 2009 532,326 stock options remain available for future awards.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Under the 1996 option plan, unless determined otherwise by the Board, options vest over a three to four years period from the date of grant and expire 10 years after grant date. Unvested options are forfeited 30-90 days following termination of employment. Any options that are forfeited before expiration become available for further grants. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | 1. | Employee Share Option Plans (Cont.):  |
|--------|----|--------------------------------------------|

|   | The following table summarizes information about share options outstanding and exercisable as of December 31, 2009: |
|--------|---------------------------------------------------------------------------------------------------------------------|

| Options Outstanding                     |      |   | Options Exercisable                         |   |
|-----------------------------------------|-----------|--------|---------------------------------------------|--------|
| Number Outstanding on December 31, 2009 |      |   | Weighted Average Remaining Contractual Life |   |   | Number Exercisable on December 31, 2009 |   |   | Exercise Price |   |
|                                    |      |   | Years                                       |   |   |   |   |   | $ |   |
|                                    |      |   |                                        |   |   |   |   |   |   |   |   |
|                                    | 100,000   |   |                                        |   | 9.40 |   |   |   | - |   |   |   | 2.01 |   |
|                                    | 375,000   |   |                                        |   | 3.25 |   |   |   | 375,000 |   |   |   | 2.25 |   |
|                                    | 25,000    |   |                                        |   | 9.40 |   |   |   | - |   |   |   | 2.49 |   |
|                                    | 25,000    |   |                                        |   | 9.60 |   |   |   | - |   |   |   | 2.54 |   |
|                                    | 25,000    |   |                                        |   | 9.40 |   |   |   | - |   |   |   | 2.74 |   |
|                                    | 75,000    |   |                                        |   | 8.87 |   |   |   | - |   |   |   | 2.80 |   |
|                                    | 60,910    |   |                                        |   | 3.50 |   |   |   | 60,910 |   |   |   | 3.00 |   |
|                                    | 39,300    |   |                                        |   | 2.50 |   |   |   | 39,300 |   |   |   | 3.00 |   |
|                                    | 200,000   |   |                                        |   | 3.76 |   |   |   | 200,000 |   |   |   | 4.00 |   |
|                                    | 15,750    |   |                                        |   | 1.50 |   |   |   | 15,750 |   |   |   | 4.50 |   |
|                                    | 113,285   |   |                                        |   | 6.00 |   |   |   | 113,285 |   |   |   | 5.00 |   |
|                                    | 14,491    |   |                                        |   | 0.38 |   |   |   | 11,008 |   |   |   | 5.50 |   |
|                                    | 57,596    |   |                                        |   | 4.42 |   |   |   | 57,596 |   |   |   | 6.00 |   |
|                                    | 150,000   |   |                                        |   | 5.67 |   |   |   | 150,000 |   |   |   | 6.00 |   |
|                                    | 2,000     |   |                                        |   | 0.58 |   |   |   | 2,000 |   |   |   | 9.63 |   |
|                                    | 59,300    |   |                                        |   | 0.32 |   |   |   | 59,300 |   |   |   | 10.50 |   |
|                                    | 1,337,632 |   |                                        |   |   |   |   |   | 1,084,149 |   |   |   |   |   |

----

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

|   | 1. | Employee Share Option Plans (Cont.): |
|--------|----|--------------------------------------|

|                                                            |   | 2009             |      |   | 2008                            |   |   | 2007             |   |
|-----------------------------------------------------------------|--------|------------------|-----------|--------|---------------------------------|--------|--------|------------------|--------|
|                                                            |   | Number ofOptions |      |   | Weighted Average Exercise Price |   |   | Number ofOptions |   |   | Weighted Average Exercise Price |   |   | Number ofOptions |   |   | Weighted Average Exercise Price |   |
|                                                            |   |             |      |   | $                               |   |   |             |   |   | $ |   |   |   |   |   | $ |   |
| Options outstandingat beginning of year                         |   |             | 1,283,523 |   |                            |   | 4.17   |             |   |   | 1,352,264 |   |   |   | 4.22 |   |   |   | 2,222,967 |   |   |   | 4.60 |   |
|                                                            |   |             |      |   |                            |   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Changes during the year:                                        |   |             |      |   |                            |   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                                         |   |             | 175,000   |   |                            |   | 2.26   |             |   |   | 100,000 |   |   |   | 2.80 |   |   |   | - |   |   |   | - |   |
| Exercised                                                       |   |             | (2,000    | )      |                            |   | 3.00   |             |   |   | (135,024 | ) |   |   | 4.24 |   |   |   | (575,766 | ) |   |   | 5.07 |   |
| Forfeited                                                       |   |             | (118,891  | )      |                            |   | 3.90   |             |   |   | (33,717 | ) |   |   | 5.67 |   |   |   | (294,937 | ) |   |   | 5.89 |   |
|                                        |   |             |      |   |                            |   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options outstandingat end of year                               |   |             | 1,337,632 |   |                            |   |   |             |   |   | 1,283,523 |   |   |   | 4.07 |   |   |   | 1,352,264 |   |   |   | 4.22 |   |
|                                                            |   |             |      |   |                            |   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year-end                                 |   |             | 1,084,149 |   |                            |   |   |             |   |   | 1,173,785 |   |   |   | 4.17 |   |   |   | 1,266,796 |   |   |   | 4.2 |   |
|                                                            |   |             |      |   |                            |   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average fair value of options granted during the year* |   |             | 1.67      |   |                            |   |   |             |   |   | 1.45 |   |   |   |   |   |   |   | - |   |   |   |   |   |

| *    | 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: 2009 – 45%; 2008 - 50%;, risk-free interest rate: 2009 – 2.74%; 2008 – 1.9%,  and expected life: 2009 – 6.5 years; 2008 - 6.5 years.  |
|---------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009 and 2008, there was no intrinsic value for outstanding and granted options since the exercise price was higher or the same as the market price. The interstice value of options exercised was $1 thousand and $572 thousand for the years ended December 31,2009 and 2008 respectively.  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company is required to assume a dividend yield as an input in the Black-Scholes model. The dividend yield assumption is based on the Company’s historical experience and expectation of future dividends payouts and may be subject to change in the future. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company uses historical volatility in accordance with FASB ASC Topic 718, "Compensation - stock compensation". The computation of volatility uses historical volatility derived from the Company’s exchange-traded shares.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|   | 1. | Employee Share Option Plans (Cont.):  |
|--------|----|--------------------------------------------|

|   | The risk-free interest assumption is the implied yield currently available on U.S. Treasury zero-coupon bonds, issued with a remaining term equal to the expected life term of the Company’s options.  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pre-vesting rates forfeitures between 5% and 9% were estimated based on pre-vesting for feature   experience.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company uses the simplified method to compute the expected option term for options granted.  |
|--------|-------------------------------------------------------------------------------------------------------|

|   | 2. | Restricted Share Units (RSU):  |
|--------|----|-------------------------------------|

|   | In 2007, the Company adopted a Restricted Share Units plan (RSU). Under the RSU plan, as amended, the Company granted in 2009 and 2008 319,500 and 447,500 RSUs, respectively. Under the RSU plan, unless determine otherwise by the board of directors, RSUs vest over a three years period from the date of the grant. 103,499 and 88,916 RSUs in 2009 and 2008 ,respectively , approved for immediate vesting on grant date.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Data related to the restricted share units as of December 31, 2009 and changed during the year are as follows: |
|--------|----------------------------------------------------------------------------------------------------------------|

|                                          |   | Year ended December 31, |     |
|-----------------------------------------------|--------|-------------------------|----------|
|                                          |   | 2009                    |     |   | 2008 |   |
|                                          |   |                    |     |   |   |   |
| RSUs outstanding at the beginning of the year |   |                    | 465,333  |   |   |   | 163,667 |   |
| Changes during the year:                      |   |                    |     |   |   |   |   |   |
| Granted *                                     |   |                    | 319,500  |   |   |   | 447,750 |   |
| Vested                                        |   |                    | (252,312 | ) |   |   | (140,417 | ) |
| Forfeited                                     |   |                    | (51,667  | ) |   |   | (5,667 | ) |
|                                          |   |                    |     |   |   |   |   |   |
| RSUs outstanding at the end of the year       |   |                    | 480,854  |   |   |   | 465,333 |   |
|                                          |   |                    |     |   |   |   |   |   |
| Weighted Average fair value at grant date     |   | $                       | 2.39     |   |   | $ | 6.71 |   |

|   | * | The fair value of RSUs is established based on the market value of the Company’s stock on the date of the award. The Company has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Note 11 - Equity (Cont.):  |
|---------------------------------|

| C. | Dividends:  |
|----|------------------|

|   | The Company has not paid any cash dividends on its ordinary shares in the past and does not expect to pay cash dividends on its ordinary shares in the foreseeable future. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | The Company qualifies as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement Law the Company is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as the right to deduct for tax purposes, over a period of 3 years, expenses relating to public issuance of shares.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| B. | Tax Benefits under the Law for the Encouragement of Capital Investments 1959 (the law"):  |
|----|------------------------------------------------------------------------------------------------|

|   | BluePhoenix is entitled to tax benefits under the Law. and has such   is considered to be “Privileged Enterprise” status pursuant to the Law, which provides certain tax benefits to its investment programs.  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A company that obtained an Approved Enterprise approval may elect to forego the entitlement to grants and apply for an alternative package of tax benefits (the “Alternative Package”). Under the Alternative Package, undistributed income from the Approved Enterprise operations is fully tax exempt (the “tax holiday”) for a defined period.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On April 1, 2005, an amendment to the Law came into effect (the “Amendment”) and has significantly changed the provisions of the Law (the “Old Law”). On the Alternative Package the Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companies are no longer required to obtain Investment Center approval in order to qualify for tax benefits. Such an enterprise is a “Privileged Enterprise”, rather than the previous terminology of Approved Enterprise. The period of tax benefits for a new Privileged Enterprise commences in the “Year of Commencement”. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| B. | Tax Benefits under the Law for the Encouragement of Capital Investments 1959 (the law") (Cont.):  |
|----|--------------------------------------------------------------------------------------------------------|

|   | This year is the later of: (1) the year in which taxable income is first generated by the company, or (2) the Year of Election. If a company requested the Alternative Package of benefits for an Approved Enterprise under the Law, it was precluded from filing a Privileged Enterprise status for three years after the year in which the Approved Enterprise was activated (“Cooling Period”). In November 2008 the law was amended to shorten the Cooling Period to two years. Following the amendment, the Year of Election for the Company’s first Privileged Enterprise is 2008.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The benefits available to a Privileged Enterprise relate only to taxable income attributable to the specific investment program and are conditioned upon terms stipulated in the Investment Law and the related regulations and the criteria set forth in the applicable certificate of approval (for an Approved Enterprise). If the Company does not fulfill these conditions, in whole or in part, the benefits can be cancelled and the Company may be required to refund the amount of the benefits, linked to the Israeli consumer price index plus interest.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company’s income attributed to the Approved Enterprise and Privileged Enterprise under the alternative package is tax exempt for a period of two years and is subject to a reduced corporate tax rate of eight years, as BluePhoenix considered to be "foreign investment company".  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In the event of distribution of dividends from the above mentioned tax-exempt income, the amount distributed will be subject to the same reduced corporate tax rate that would have been applied to the Privileged Enterprise’s income. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C. | Tax Rate Applicable to Income in Israel:  |
|----|------------------------------------------------|

|   | Until 2008, results for Israeli tax purposes were measured on a real basis as adjusted for the increase in the Israeli Consumer Price Index (“Israeli CPI”).The regular corporate tax rate in Israel in 2009 was 26%. The corporate tax rate is to be reduced in 2010 and onward to 25%. Deferred income tax balances have been adjusted accordingly; the effect of such adjustment was not material. On July 23, 2009, the Israel Economic Efficiency Law (Legislation Amendments for Applying the Economic Plan for 2009 and 2010), 2009 (hereinafter – the 2009 Amendment), became effective, stipulating, among other things, an additional gradual decrease in tax rates in 2011 and thereafter, as follows: 2011—24%, 2012—23%, 2013—22%, 2014—21%, 2015—20% and 2016 and thereafter—18%.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| C. | Tax Rate Applicable to Income in Israel (Cont.):  |
|----|--------------------------------------------------------|

|   | The Company elected to compute its taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the Company’s taxable income or loss is calculated in U.S. dollars. Applying these regulations would reduce the effect of foreign exchange rate (of NIS against other currencies) on the Company’s taxable income as well as the effects of Israeli inflation. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| D. | Deferred tax assets and liabilities:  |
|----|--------------------------------------------|

|   | Deferred tax reflect the net tax effects of temporary differences between the carrying amounts of assets or liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2009 and 2008 the Company’s deferred taxes were in respect of the following: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                           |   | December 31,   |    |
|----------------------------------------------------------------|--------|----------------|---------|
|                                                           |   | 2009           |    | 2008 |   |
|                                                           |   | (in thousands) |    |
|                                                           |   |           |    |   |   |
| Net operating losses carry forwards                            |   | $              | 17,816  |   | $ | 14,641 |   |
| Provisions for employee rights and other temporary differences |   |           | 362     |   |   | 507 |   |
| Deferred tax assets before valuation allowance                 |   |           | 18,158  |   |   | 15,148 |   |
| Valuation allowance                                            |   |           | (15,617 | )  |   | (13,102 | ) |
|      Deferred tax assets              |   |           | 2,541   |   |   | 2,046 |   |
| Deferred tax liability                                         |   |           | (265    | )  |   | (263 | ) |
|  Deferred tax assets, net                                 |   | $              | 2,276   |   | $ | 1,783 |   |

| E. | Non-Israeli Subsidiaries:  |
|----|---------------------------------|

|   | Non-Israeli subsidiaries are taxed based upon tax laws in the country of domicile of the respective subsidiary. |
|--------|-----------------------------------------------------------------------------------------------------------------|

| F. | Loss before Taxes on Income is composed as Follows: |
|----|-----------------------------------------------------|

|              |   | Year ended December 31, |    |
|-------------------|--------|-------------------------|---------|
|              |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
|              |   | (in thousands)          |    |
|              |   |                    |    |   |   |   |   |   |   |
| Domestic (Israel) |   | $                       | (18,010 | ) |   | $ | (31,372 | ) |   | $ | (3,443 | ) |
| Foreign           |   |                    | 2,628   |   |   |   | 11,181 |   |   |   | 2,968 |   |
|              |   |                    |    |   |   |   |   |   |   |   |   |   |
|              |   | $                       | (15,382 | ) |   | $ | (20,191 | ) |   | $ | (475 | ) |

----

| G. | Taxes on Income Included in the Statements of Income: |
|----|-------------------------------------------------------|

|                             |   | Year ended December 31, |   |
|----------------------------------|--------|-------------------------|--------|
|                             |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                             |   | (in thousands)          |   |
| For the reported year - current: |   |                    |   |   |   |   |   |   |   |
| Domestic (Israel)                |   | $                       | 136    |   |   | $ | 21 |   |   | $ | 276 |   |
| Foreign                          |   |                    | 286    |   |   |   | 536 |   |   |   | 609 |   |
|                             |   |                    | 422    |   |   |   | 557 |   |   |   | 885 |   |
| Taxes related to prior years     |   |                    | (46    | ) |   |   | 7 |   |   |   | 208 |   |
| Deferred taxes, net              |   |                    | (493   | ) |   |   | (894 | ) |   |   | (1,025 | ) |
|                             |   | $                       | (117   | ) |   | $ | (330 | ) |   | $ | 68 |   |

| H. | Uncertain Tax Position:  |
|----|-------------------------------|

|   | As stated in Note 1.N, effective January 1, 2007, the Company adopted a new pronouncement which clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | There was no cumulative effect adjustment for unrecognized tax benefits, which would have been accounted for as an adjustment to the January 1, 2007 balance of retained earnings. The Company has recorded no liability for income taxes associated with unrecognized tax benefits at the date of adoption and have not recorded any liability associated with unrecognized tax benefits during 2007, 2008 and 2009. Accordingly, the Company has not recorded any interest or penalty in regard to any unrecognized benefit.  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company's policy regarding interest and/or penalties related to income tax matters is to recognize such items as a component of income tax expense (benefit). The Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|                                                                                                 |   | December 31,   |    |
|------------------------------------------------------------------------------------------------------|--------|----------------|---------|
|                                                                                                 |   | 2009           |    |   | 2008 |   |   | 2007 |   |
|                                                                                                 |   | (in thousands) |    |
| Income (loss) before taxes on income,   per consolidated statements of income         |   | $              | (15,382 | ) |   | $ | (20,191 | ) |   | $ | (475 | ) |
|                                                                                                 |   |           |    |   |   |   |   |   |   |   |   |   |
| Theoretical tax income (expense )   (29% in 2007 and 27% in 2008 and 26% in 2009)     |   |           | 3,999   |   |   |   | 5,451 |   |   |   | (138 | ) |
|                                                                                                 |   |           |    |   |   |   |   |   |   |   |   |   |
| Decrease in taxes resulting from the following differences:                                          |   |           |    |   |   |   |   |   |   |   |   |   |
| Carry-forward losses for which the Company provided     valuation allowance |   |           | (2,515  | ) |   |   | (2,711 | ) |   |   | 992 |   |
| Goodwill impairment                                                                                  |   |           | (1,474  | ) |   |   | (3,598 | ) |   |   | - |   |
| Effect of different tax rates in foreign subsidiaries                                                |   |           | (112    | ) |   |   | 458 |   |   |   | (1,029 | ) |
| Taxes related to previous years                                                                      |   |           | (46     | ) |   |   | 7 |   |   |   | 208 |   |
| Non-deductible expenses                                                                              |   |           | 31      |   |   |   | 63 |   |   |   | 35 |   |
| Taxes on income in the consolidated statements   of income for the reported year      |   | $              | (117    | ) |   | $ | (330 | ) |   | $ | 68 |   |
|                                                                                                 |   |           |    |   |   |   |   |   |   |   |   |   |
| Effective tax rate                                                                                   |   |           | -       |   |   |   | - |   |   |   | - |   |

| J. | Tax Losses:  |
|----|-------------------|

|   | The Company and its subsidiaries have NOL carry forwards for income tax purposes as of December 31, 2009 of approximately $55 million with no expiration date. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| K. | Tax Assessments:  |
|----|------------------------|

|   | The Company received final tax assessments in Israel through tax year 2004. |
|--------|-----------------------------------------------------------------------------|

----

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

|   | 1. | Trade Accounts Receivables: |
|--------|----|-----------------------------|

|                                 |   | December 31,   |   |
|--------------------------------------|--------|----------------|--------|
|                                 |   | 2009           |   |   | 2008 |   |
|                                 |   | (in thousands) |   |
|                                 |   |           |   |   |   |   |
| Trade accounts receivable            |   | $              | 25,900 |   |   | $ | 28,545 |   |
| Less provision for doubtful accounts |   |           | (322   | ) |   |   | (313 | ) |
|                                 |   | $              | 25,578 |   |   | $ | 28,232 |   |

|   | For the years ended December 31, 2009, 2008 and 2007 the Company charged expenses for doubtfulaccounts amounted to $9,  $118 and $ 561 thousand , respectively.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For the years ended December 31, 2009, 2008 and 2007 the Company deducted from the provision (bad debts) $ 0, $795 and $561 thousand, respectively. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                 |   | December 31,   |   |
|--------------------------------------|--------|----------------|--------|
|                                 |   | 2009           |   |   | 2008 |   |
|                                 |   | (in thousands) |   |
|                                 |   |           |   |   |   |   |
| Prepaid expenses                     |   | $              | 896    |   |   | $ | 1,125 |   |
| Short-term lease deposits            |   |           | 274    |   |   |   | 434 |   |
| Government departments and agencies  |   |           | 592    |   |   |   | 778 |   |
| Interest and other income receivable |   |           | 266    |   |   |   | 202 |   |
| Deferred taxes                       |   |           | 845    |   |   |   | 678 |   |
|                                 |   | $              | 2,873  |   |   | $ | 3,217 |   |

|   | 3. |   Accounts Payable and Accruals - Other: |
|--------|----|----------------------------------------------------|

|                                                        |   | December 31,   |   |
|-------------------------------------------------------------|--------|----------------|--------|
|                                                        |   | 2009           |   |   | 2008 |   |
|                                                        |   | (in thousands) |   |
|                                                        |   |           |   |   |   |   |
| Government departments and agencies                         |   | $              | 759    |   |   | $ | 761 |   |
| Employees and wage-related liabilities                      |   |           | 5,700  |   |   |   | 6,921 |   |
| Liability with respect to previous contingent consideration |   |           | 3,396  |   |   |   | 9,389 |   |
| Accrued expenses and other current liabilities              |   |           | 408    |   |   |   | 1,054 |   |
|                                                        |   | $              | 10,263 |   |   | $ | 18,125 |   |

----

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

|   | 4. | The Company’s Long-lived Assets are as Follows:  |
|--------|----|-------------------------------------------------------------|

|             |   | December 31,   |   |
|------------------|--------|----------------|--------|
|             |   | 2009           |   |   | 2008 |   |
|             |   | (in thousands) |   |
|             |   |           |   |   |   |   |
| Israel           |   | $              | 6,552  |   |   | $ | 8,106 |   |
| U.S.A.           |   |           | 6,042  |   |   |   | 9,741 |   |
| Europe and other |   |           | 1,437  |   |   |   | 2,293 |   |
|             |   | $              | 14,031 |   |   | $ | 20,140 |   |

|   | Long-lived assets information is based on the physical location of the assets at the end of each of the fiscal years. It is comprised from the Company's property and equipment and Technology intangible asset. The Company does not identify or allocate goodwill by geographic areas. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | 1. | Geographic Areas Information:  |
|--------|----|-------------------------------------|

|   | Sales: Classified by Geographic Areas: The Company adopted FASB ASC Topic 280, "segment reporting". The Company operates in one operating segment (see Note 1 for a brief description of the Company's business). The total revenues are attributed to geographic areas based on the location of end customers. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

|   | The following present total revenues for the years ended December 31, 2009, 2008 and 2007: |
|--------|--------------------------------------------------------------------------------------------|

|                        |   | Year ended December 31, |   |
|-----------------------------|--------|-------------------------|--------|
|                        |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                        |   | (in thousands)          |   |
|                        |   |                    |   |   |   |   |   |   |   |
| Europe (other than Denmark) |   | $                       | 26,091 |   |   | $ | 40,044 |   |   | $ | 31,725 |   |
| North America               |   |                    | 27,897 |   |   |   | 22,660 |   |   |   | 17,840 |   |
| Denmark                     |   |                    | 9,975  |   |   |   | 11,096 |   |   |   | 15,750 |   |
| Israel                      |   |                    | 10,320 |   |   |   | 10,679 |   |   |   | 7,820 |   |
| Other                       |   |                    | 3,495  |   |   |   | 7,266 |   |   |   | 8,087 |   |
|                        |   | $                       | 77,778 |   |   | $ | 91,745 |   |   | $ | 81,222 |   |

----

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

|   | 2. | Principal Customers:  |
|--------|----|----------------------------|

|   | Major customer over 10% of the Company’s revenues: |
|--------|----------------------------------------------------------|

|       |   | 2009   |   |   | 2008   |   |   | 2007   |   |
|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|       |   |   |   |   |   |   |   |   |   |
| Customer A |   |   | -      |   |   |   | 10     | %      |   |   | - |   |
| Customer B |   |   | -      |   |   |   | -      |   |   |   | 12 | % |
| Customer C |   |   | -      |   |   |   | -      |   |   |   | 11 | % |

|   | 3. | Restructuring Expenses:  |
|--------|----|-------------------------------|

|   | During the second and third quarter of fiscal year 2007, the Company implemented a restructuring plan which included reductions in workforce in all functions of the organization worldwide and closures of redundant facilities in order to reduce the Company’s cost structure. The Company followed FASB ASC Topic 420, "Exit or Disposal Cost Obligations". A restructuring charge of $694 thousand was recorded during the year ended December 31, 2007, which was related to severance and benefits to terminated employees. All expenses, including adjustments, associated with the Company’s restructuring plans are included in “Restructuring” in the Consolidated Statements of Operations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Financial Expenses, Net: |
|--------|----|--------------------------|

|                                                                                               |   | Year ended December 31, |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                               |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                                                               |   | (in thousands)          |   |
|                                                                                               |   |                    |   |   |   |   |   |   |   |
| Interest income                                                                                    |   | $                       | 113    |   |   | $ | 254 |   |   | $ | 437 |   |
| Foreign currency translation adjustments (see Note 1A3)                                            |   |                    | 143    |   |   |   | (1,705 | ) |   |   | (767 | ) |
| Interest expense                                                                                   |   |                    | (1,576 | ) |   |   | (731 | ) |   |   | (1,800 | ) |
| Debentures and convertible debt financial expenses                                                 |   |                    | -      |   |   |   | - |   |   |   | (2,002 | ) |
| Derivative financial instruments and    realized gain on marketable securities |   |                    | (973   | ) |   |   | (55 | ) |   |   | (211 | ) |
| Change in fair value of warrants                                                                   |   |                    | 1,514  |   |   |   | - |   |   |   | - |   |
|                                                                                               |   | $                       | (779   | ) |   | $ | (2,237 | ) |   | $ | (4,343 | ) |

----

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

|   | 5. | Other Income, Net: |
|--------|----|--------------------|

|                                                                                           |   | Year ended December 31, |   |
|------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                           |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                                                           |   | (in thousands)          |   |
|                                                                                           |   |                    |   |   |   |   |   |   |   |
| Dividend income (*)                                                                            |   | $                       | -      |   |   | $ | 48 |   |   | $ | 134 |   |
| Decrease of provision for losses in formerly consolidated   subsidiary (Note 8) |   |                    | -      |   |   |   | - |   |   |   | 300 |   |
| Settlement with Cicero (Note 8)                                                                |   |                    | -      |   |   |   | 350 |   |   |   | 458 |   |
|                                                                                           |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                                                                           |   | $                       | -      |   |   | $ | 398 |   |   | $ | 892 |   |

|   | (*) | Dividend income from Steps Ventures, an Israeli venture capital investment group, in which the Company held 3.75% of their outstanding share capital. The Fund was liquidated in Q4 2008. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C. | Earnings per Share:  |
|----|---------------------------|

|   | Basic and diluted earnings per share (“EPS”) were computed based on the average number of shares outstanding during each year. No effect was given to potential instruments such as: share options, RSU's and warrants since their inclusion would be anti-dilutive.  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The following table sets forth the computation of basic and diluted net earnings per share attributable to Bluephoenix: |
|--------|-------------------------------------------------------------------------------------------------------------------------|

|                                                                                          |   | Year ended December 31, |       |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                          |   | 2009                    |       |   | 2008 |   |   | 2007 |   |
|                                                                                          |   | (in thousands)          |       |
| 1.  Numerator:                                                                      |   |                    |       |   |   |   |   |   |   |
| Amount for basic and diluted loss per share                                                   |   | $                       | (15,570    | ) |   | $ | (28,601 | ) |   | $ | (8,196 | ) |
|                                                                                          |   |                    |       |   |   |   |   |   |   |   |   |   |
| 2.  Denominator:                                                                    |   |                    |       |   |   |   |   |   |   |   |   |   |
| Denominator for basic net loss per share - weighted average of shares                    |   |                    | 21,500,323 |   |   |   | 21,196,102 |   |   |   | 17,144,902 |   |
|                                                                                          |   |                    |       |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                                                                 |   |                    | -          |   |   |   | - |   |   |   | - |   |
|                                                                                          |   |                    |       |   |   |   |   |   |   |   |   |   |
| Denominator for diluted net earnings per share -weighted average shares and assuming dilution |   |                    | 21,500,323 |   |   |   | 21,196,102 |   |   |   | 17,144,902 |   |
|                                                                                          |   |                    |       |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per share attributedto Bluephoenix Shareholders                        |   | $                       | (0.72      | ) |   | $ | (1.35 | ) |   | $ | (0.48 | ) |
|                                                                                          |   |                    |       |   |   |   |   |   |   |   |   |   |

----

|                                                                                                                |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                |   | (in thousands)          |   |
|                                                                                                                |   |                    |   |   |   |   |   |   |   |
| A.           Selling, general and administrative expenses:   |   |                    |   |   |   |   |   |   |   |
|    management fees to Formula                                                                        |   |                    | -      |   |   |   | - |   |   | $ | 45 |   |
|                                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |
| B.   Reimbursement related to services rendered to affiliated and other companies related to Formula |   |                    | -      |   |   |   | - |   |   | $ | 117 |   |

| C. | In connection with the sale by Formula of its controlling interest in BluePhoenix in June 2007, Formula paid a cash bonus of $1.8 million directly to Mr. Arie Kilman, the Company’s chief executive officer. The amount was included in the financial statements as a one-time non-cash expense under selling, general and administrative expenses with a corresponding credit to contributed (paid-up) capital, in accordance with SAB Topic 5T. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| D. | In January 2008, the Company entered into an agreement for the purchase of the entire outstanding share capital of TIS. Yossi Shemesh, the Company’s vice president, operations at that time was a holder of 25% of the outstanding share capital of TIS at the time of the transaction. See also Note 2B. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                |   | Year ended December 31, |    |
|-----------------------------------------------------|--------|-------------------------|---------|
|                                                |   | 2008                    |    |   | 2007 |   |
|                                                |   | (in thousands)          |    |
|                                                |   |                    |    |   |   |   |
| Revenues                                            |   | $                       | 4,778   |   |   | $ | 7,176 |   |
| Cost of revenues                                    |   |                    | 549     |   |   |   | 2,132 |   |
| Technology Impairment                               |   |                    | 7,142   |   |   |   | - |   |
| Gross profit (loss)                                 |   |                    | (2,913  | ) |   |   | 5,044 |   |
| Research and development expenses                   |   |                    | 2,488   |   |   |   | 1,456 |   |
| Selling, General and administrative expenses        |   |                    | 2,725   |   |   |   | 4,450 |   |
| Goodwill Impairment                                 |   |                    | 3,863   |   |   |   | 6,989 |   |
| Operating loss                                      |   |                    | (11,989 | ) |   |   | (7,851 | ) |
| Gain on realization of shareholdings                |   |                    | 509     |   |   |   | - |   |
| Loss before taxes on income                         |   |                    | (11,480 | ) |   |   | (7,851 | ) |
| Taxes on income                                     |   |                    | 266     |   |   |   | - |   |
|                                                |   |                    | (11,746 | ) |   |   | (7,851 | ) |
| Net income attributable to noncontrolling interests |   |                    | (3,234  | ) |   |   | (362 | ) |
| Net loss                                            |   | $                       | (8,512  | ) |   | $ | (7,489 | ) |

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