F-1/A

As filed with the Securities and Exchange Commission on November 8, 2013

Registration No. 333-191314

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  AMENDMENT NO. 1 TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 BLUEPHOENIX SOLUTIONS LTD.

(Exact name of Registrant as Specified in Its Charter)

Israel	7371	Not Applicable
(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S. employer
incorporation or organization)	Classification Code Number)	Identification no.)

 601 Union Street, Suite 4616

Seattle, Washington 98101

(206) 395-4152

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Rick Rinaldo

BluePhoenix Solutions USA Inc.

 601 Union Street, Suite 4616

Seattle, Washington 98101

(206) 395-4152

 (Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

  Marc Recht Stephane Levy Cooley LLP 500 Boylston Street, 14th Floor Boston, MA  02116 (617) 937-2300 Yair Geva Yael Bar-Shai Herzog, Fox & Neeman Asia House 4 Weizman Street Tel Aviv 64239, Israel 972-3-692-2020

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

CALCULATION OF REGISTRATION FEE

	Amount to be Registered (1)		Aggregate Offering Price	Amount of Registration Fee(2)
Title of Each Class of Securities to be Registered
Ordinary shares, par value NIS 0.04 per share	2,142,459	$	2,500,000	$	322
Total	2,142,459	$	2,500,000	$	322

1) Includes an estimated additional 1,517,459 shares, pursuant to Rule 416 of the Securities Act that may be issued to prevent dilution as described in the prospectus included within this Registration Statement under the section captioned “Plan of Distribution.”

2) Calculated pursuant to Rule 457(a) under the Securities Act. The registrant previously paid $818.40 in connection with the initial filing of this registration statement.

625,000 Ordinary Shares

BluePhoenix Solutions Ltd.

Ordinary Shares

We are offering 625,000 of our ordinary shares.  Our ordinary shares are listed on the NASDAQ Global Market under the symbol “BPHX.”  On November 4, 2013, the closing sale price of our ordinary shares on the NASDAQ Global Market was $4.28 per share.

Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 4 of this prospectus.

	Per Share		Total
Public offering price	$	4.00	$	2,500,000
Proceeds to BluePhoenix Solutions, before expenses	$	4.00	$	2,500,000

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

We expect to deliver the ordinary shares on or about November 14, 2013.

We have also agreed to issue up to an additional 1,517,459 of our ordinary shares pursuant to the anti-dilution rights of our investor as described in the “Plan of Distribution” section of this prospectus.

The date of this Prospectus is November 8, 2013

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	1
RISK FACTORS	4
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION	16
USE OF PROCEEDS	17
DIVIDEND POLICY	17
PRICE RANGE OF OUR ORDINARY SHARES	18
CAPITALIZATION AND INDEBTEDNESS	19
DILUTION	20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
BUSINESS	31
MANAGEMENT	39
PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	53
DESCRIPTION OF SHARE CAPITAL	57
PLAN OF DISTRIBUTION	66
EXPENSES	67
LEGAL MATTERS	67
EXPERTS	67
ENFORCEABILITY OF CIVIL LIABILITIES	67
DISCLOSURE OF COMMISSION POSITION  ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES	68
WHERE YOU CAN FIND ADDITIONAL INFORMATION	68
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE	69

We urge you to read carefully this prospectus and any related free writing prospectus, together with the information incorporated herein by reference as described under the heading “Where You Can Find Additional Information” and “Incorporation of Certain Information by Reference,” before buying any of the securities being offered. We have not authorized anyone to provide information or represent anything other than that contained in, or incorporated by reference in, this prospectus.  If you receive any other information, you should not rely on it.  You should rely only on the information included or incorporated by reference in this prospectus or any free writing prospectus prepared by us.  We are not making an offer in any state or jurisdiction or under any circumstances where the offer is not permitted.  You should assume that the information in this prospectus or free writing prospectus prepared by us is accurate only as of the date on their cover pages and that any information we have incorporated by reference is accurate only as of the date of the document incorporated by reference.

We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required other than the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ordinary shares and the distribution of this prospectus outside of the United States.

Unless the context otherwise requires, all references in this prospectus to “we,” “our,” “our company,” “us” and the “Company” refer to BluePhoenix Solutions Ltd. and its subsidiaries. References to “BluePhoenix” refer to BluePhoenix Solutions Ltd.

All references in this prospectus to “dollars” or “$” are to United States dollars.

All references in this prospectus to “shekels” or “NIS” are to New Israeli Shekels.

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus that we consider important. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read the following summary together with the more detailed information regarding us and the securities being sold in this offering, including the risks discussed under the heading “Risk Factors,” contained in this prospectus. You should also read carefully the consolidated financial statements and notes thereto and the other information about us that is incorporated by reference into this prospectus, including our annual report on Form 20-F for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission on April 30, 2013, referred to as “our Form 20-F for 2012,” and our Form 6-K regarding our financial results for the period ended June 30, 2013 and recent material transactions, all incorporated by reference into this prospectus.

Our Company

BluePhoenix solves enterprise problems specific to legacy technology and mainframe modernization.  Our technology helps customers reduce cost around existing mainframe applications, integrate legacy data with modern platforms and reduce risk around migrating to new target states.

Our solution portfolio includes software and professional services that address information technology (“IT”) challenges that organizations and companies face today, including:

· 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 technology and inhibit the ability to meet business expectations.

Our solutions enable companies to:

· better understand and manage their IT systems and resources;

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

· transform to modern technology, which we believe enables enterprises to recruit professional resources easily;

· 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;

· directly gain access to cutting edge technology and new business channels; and

· leverage off mainframe computing in either a public or private cloud.

We provide our modernization solutions directly to our customers or through our strategic partners, such as IBM, CSC, Oracle, Microsoft, HP, NCS, T-Systems, Cognizant, Capgemini and Dell. Additionally, from time to time, other IT services companies license our technologies for use in modernization projects in various markets. Our partners include system integrators, as well as other software vendors who assist us in increasing our penetration and exposure in the market. We provide solutions to our partners’ customers in collaboration with the system integrator’s team. In most cases, the partners provide related services to the customers. Our arrangements with our partners vary. We may enter into distribution agreements under which we grant license rights to our partners or to the partners’ customers or provide related services, or a combination of both. Alternatively, we may enter into subcontractor relationships with our strategic partners.

Recent Developments

Transition from “Foreign Private Issuer” status to “Domestic Issuer” status. As of January 1, 2014, we will lose our “foreign private issuer” status, and accordingly, we will be required to comply with the disclosure and reporting requirements of domestic U.S. filers. As a result, the benefits currently available to us as a “foreign private issuer” will no longer be available to us. We anticipate that the transition to the status of a “domestic issuer” would result in additional costs and expenses to us. For additional information see “Risk Factors — Risks Related to Our Trading Securities.”

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Comerica Loan.  As of October 2, 2013, we have entered into a loan agreement with Comerica Bank with the following basic terms:

● non-formula revolving line in the amount up to $500,000 backed by a guarantee;

● borrowing base (accounts receivable based) loan in the amount up to $500,000;

● both the non-formula revolving line and borrowing base loan are at market based interest rates based on Prime + a margin;

● one year commitment; and

● no financial covenants.

We paid off our prior credit facility with Leumi bank on October 28, 2013.

2009 Warrants. On August 31, 2013, one of the institutional investors holding warrants issued in 2009 exercised such warrants for 25,585 ordinary shares at an exercise price of $1.5634 per ordinary share.

Liolios Warrants. On August 31, 2013, a portion of the warrants issued to Liolios Group, Inc., exercisable for 1,500 ordinary shares, expired.  On September 30, 2013, the remaining warrants issued to Liolios Group, Inc. exercisable for an additional 1,500 ordinary shares expired.

Other Material Changes

We have also undergone other changes since the filing of our most recent Annual Report on Form 20-F, which are described in our Reports of Foreign Private Issuer on Form 6-K that are incorporated by reference herein (as described under “Where You Can Find More Information” and “Incorporation of Certain Information by Reference” below).

Risk Factors

Our business is subject to a number of risks that you should understand before deciding to invest in our ordinary shares, including those discussed under the heading “Risk Factors” below.

Corporate Information

The legal and commercial name of our company is BluePhoenix Solutions Ltd.  We were incorporated in Israel in 1987. Our registered office is located at 8 Maskit Street, Herzliya 46733, Israel and our telephone number is 972-9-952-6110. Our headquarters are located at 601 Union Street, Suite 4616, Seattle, Washington, 98101 and our telephone number is (206) 395-4152.  Our website address is www.bphx.com.  The information on our website is not incorporated by reference in this prospectus and should not be considered to be a part of this prospectus.

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The Offering

Ordinary shares offered by us	625,000 ordinary shares plus up to 1,517,459 additional ordinary shares that may be issuable to prevent dilution as described in the purchase agreement for such shares.
Ordinary shares to be outstanding immediately after this offering	11,391,126  ordinary shares
Offering price	$4.00   per ordinary share
Use of proceeds	We are conducting the offering for general capital raising purposes, and we intend to use the net proceeds received from the sale of the ordinary shares we offer by this prospectus for general corporate purposes.
Risk factors	See “Risk Factors” beginning on page 4 for a discussion of factors you should consider carefully when making an investment decision.
The NASDAQ Global Market symbol	BPHX

The number of ordinary shares to be outstanding immediately after this offering as shown above assumes the sale of the number of ordinary shares is as shown on the cover page of this prospectus and is based on 10,766,126 ordinary shares outstanding as of September 30, 2013, but does not include the following:

● 444,839 ordinary shares issuable upon exercise of share options outstanding as of September 30, 2013 under our share option plan, at a weighted average exercise price of $4.30 per share;

● 237,222 ordinary shares available for future grant or issuance as of September 30, 2013 pursuant to our RSU plan;

● 69,404 ordinary shares held as treasury stock; and

● 102,343 ordinary shares issuable upon the exercise of warrants outstanding as of September 30, 2013, at an exercise price of $1.5634 per share.

Except as otherwise noted, all information contained in this prospectus assumes no issuance of the up to additional 1,517,459 of our ordinary shares that may be issued pursuant to the anti-dilution rights of our investor as described in the “Plan of Distribution” section of this prospectus.

For additional information regarding our Selected Financial Data, see the discussion under “Item 3.E. Key Information — Selected Financial Data” of our Form 20-F for 2012.

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RISK FACTORS

You should carefully consider the risks described below and in the other sections of, and the documents we have incorporated by reference into, this prospectus, when deciding whether to purchase our ordinary shares. The risks and uncertainties described below and in the documents we have incorporated by reference into this prospectus are not the only ones we face. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial condition, results of operations, and our liquidity. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

In the past few years, we have experienced significant losses and negative cash flows from operations. If these trends continue, and we are not able to obtain adequate financing, our business, financial condition and results of operations would be materially adversely affected.

We have incurred significant losses and negative cash flows from operations in the recent past. We have had net losses of $38.2 million, $32.4 million and $11.4 million, in each of the years 2010, 2011, and 2012, respectively, and a net loss of $1.4 million in the six months ended June 30, 2013. Our negative cash flows from operations have gone from $7.6 million in 2010 to $8.4 million in 2011 to $4.3 million in 2012 and $1.3 million in the six months ended June 30, 2013. As of June 30, 2013, we had cash and cash equivalents of $1.9 million compared to cash and cash equivalents of $2.6 million as of December 31, 2012 and $2.2 million as of June 30, 2012. These results have had a negative impact on our financial condition. There can be no assurance that our business will become profitable in the future, that additional losses and negative cash flows from operations will not be incurred, that we will be able to improve our liquidity or that we will be able to find alternative financing if necessary. If these trends continue, we would encounter difficulties in funding our operations, which would have a material adverse effect on our business, financial condition and results of operations.

We have a credit facility with one bank. There is no assurance that this credit facility will be available in the future or that we will be able to obtain financing from other entities.

In the past, we had several credit facilities with multiple banks. Following the repayment of substantially all of our loans to these institutions, we currently maintain only one credit facility. If we continue incurring significant losses and negative cash flows, as we have in the recent past, we may be required to raise funds or obtain alternative financing in order to finance our operations. We cannot assure you that such financing would be available, either from our shareholders or financing institutions. Banks usually require as a condition to providing financing, compliance with covenants regarding our maintenance of certain financial ratios. In addition, those covenants may include restrictions on the operation of our business, including, among other things, our ability to pledge our assets, dispose of assets, issue certain securities, make loans or give guarantees, make certain acquisitions, and engage in mergers or consolidations. As of June 30, 2013, we were in breach of a covenant under our credit facility. On October 28, 2013, we paid the entire outstanding balance.

Our ability to obtain financing, when required, depends in part on the future performance of our business and the condition of the capital markets. We cannot assure you that we will be able to maintain our outstanding credit facility or negotiate new credit facilities on favorable terms to us.

If we do not reach agreements with financing institutions, when required, we would encounter difficulties in funding our operations. In addition, we cannot assure you that we would be able to raise cash or obtain financing from other third parties, including our shareholders. Moreover, even if we succeed in negotiating financing arrangements with third parties, we cannot assure you that the terms of such arrangements would be favorable to us or advantageous to our existing shareholders.

Raising money to finance our operations involves, from time to time, issuance of equity securities which may dilute your holdings in our company.

In order to finance our operations, we may raise capital from time to time from our shareholders or other third parties. Our arrangements with any such parties may include the issuance of equity or debt securities or conversion options of loans and interest accrued thereon into equity securities. For example, in 2012, we entered into a series of transactions with our three major shareholders, which included conversion options of the loans extended to us by such shareholders, into ordinary shares. The issuance of equity securities to lenders, in such case, would dilute your holdings in our company.

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Unfavorable changes in economic conditions and decreases in capital expenditures by our customers have had, and could continue to have, a material adverse effect on our business and results of operations.

Our revenue is dependent upon the strength of the worldwide economy. In particular, we depend upon our customers making continuing capital investments in information technology products, such as those marketed and sold by us. These spending levels are impacted by the worldwide level of demand for enterprise legacy IT modernization solutions and services. Demand is normally a function of prevailing global or regional economic conditions and is negatively affected by a general economic slow-down as consumers reduce discretionary spending on information technology upgrades.

Our results of operations were also affected by the declines in the financial services industry. In 2011, 2012, and the six months ended June 30, 2013, approximately 42%, 16% and 20% of our revenues, respectively, were derived from the financial services industry. We believe that the financial services industry continues to be adversely affected by difficult economic conditions.

Although there have been indications that the economy may be improving in many areas, this has not resulted in an increase in purchases by our customers. Our revenues decreased significantly from $42.0 million in 2010 to $21.5 million in 2011 and to $10.6 million in 2012. During the six months ended June 30, 2013 our revenues were $4.6 million.

We have identified and continue to experience, from time to time, delays in purchase order placement by our customers and longer sales cycles. The negotiation process with our customers has developed into a lengthy and expensive process. Customers with excess IT resources have chosen and may continue to choose to develop in-house software solutions rather than obtain those solutions from us. Moreover, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers. In addition, we anticipate that our low liquidity and financial condition may negatively impact the willingness of customers to place purchase orders with us.

We cannot predict the timing, strength or duration of any economic slowdown or any subsequent recovery. If the conditions in the markets in which we operate remain the same or worsen from present levels, or if customers are dissuaded to contract us due to our financial condition, our business, financial condition and results of operations would be materially and adversely affected.

We had negative cash flows from operations in 2010, 2011, 2012 and the six months ended June 30, 2013 which may continue if we are not successful at increasing our revenues or reducing our expense level.

We had negative operating cash flows of $7.6 million in 2010, $8.4 million in 2011, $4.3 million in 2012 and $1.3 million in the six months ended June 30, 2013. Based on the continuing decline in revenues in 2010, 2011, 2012 and the first six months of 2013, we continue to assess our infrastructure costs and reduce workforce and labor costs as they constitute a substantial portion of our costs of revenues, selling and administrative expenses and research and development expenses.

In the second quarter of 2012, we completed the sale of our knowledge management business and we sold our 51% shareholdings in Liacom Systems Ltd. In February 2013, we sold the business of BridgeQuest. These dispositions, together with the cost saving plan initiated in 2010 and ongoing through the second quarter of 2013, were intended to set our expenses at a level commensurate with expected revenue levels. There can be no assurance, however, that such plans will result in reduced expense levels commensurate with our reduced level of revenues. As a result, our business, financial condition and results of operations could be materially and adversely affected.

The loss of customers, generally, and in particular the loss of a significant customer or several customers that, together, account for a significant portion of our revenues, could cause a reduction in our revenues and profitability, which in turn could materially adversely affect our business, financial condition and results of operations.

We do not know if, or for how much longer, our customers will continue to purchase the products and services that we offer. A small number of customers has accounted for a substantial portion of our current and historical net revenues. In 2012, NCS PTE Ltd. and CenterPoint Energy Service Company LLC accounted for 14.3% and 11.7% of our revenues, respectively.

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The loss of any major customer or a decrease or delay in orders or anticipated spending by such customer could materially reduce our revenues and profitability. The loss of several customers at once may impact our revenues and profitability significantly, even if each of those customers, separately, has not accounted for a significant amount of our revenues. The loss of customers may cause a significant decrease in revenues and profitability which may adversely affect our business, results of operations and financial condition. Our customers could also engage in business combinations, which could increase their size, reduce their demand for our products and solutions as they recognize synergies or rationalize assets and increase or decrease the portion of our total sales concentration to any single customer.

A substantial portion of our revenues is derived from one of our majority-owned subsidiaries. Therefore, a significant decrease in revenues of such subsidiary or any other material adverse events affecting such subsidiary, could materially adversely affect our business, financial condition and results of operations.

One of our majority-owned subsidiaries contributed a material portion of our revenues in 2012. We do not wholly own this subsidiary, although we control it. The minority shareholder also serves as the chief executive officer of the subsidiary and holds a valuable knowledge relating to this subsidiary’s technology. A material disagreement between us and the minority shareholder could adversely affect the operations of this subsidiary, which in turn may lead to a decrease in revenues of the subsidiary. A significant decrease in revenues of such subsidiary or any other material adverse events affecting such subsidiary, could materially adversely affect our business, financial condition and results of operations.

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

We derive a substantial portion of our revenues from engagements on a fixed-price basis. We price these commitments based upon estimates of future costs. We bear the risk of faulty estimates and cost overruns in connection with these commitments. Our failure to accurately estimate the resources required for a fixed-price project, to accurately anticipate potential wage increases, or to complete our contractual obligations in a manner consistent with the project plan could materially adversely affect our business, operating results, and financial condition.

If we are unable to effectively control our costs while maintaining our customer relationships, our business, results of operations and financial condition could be adversely affected.

It is critical for us to appropriately align our cost structure with prevailing market conditions to minimize the effect of economic downturns on our operations and, in particular, to continue to maintain our customer relationships while protecting profitability and cash flow. However, we are limited in our ability to reduce expenses due to the ongoing need to maintain our worldwide customer service and support operations and to invest in research and development. In circumstances of reduced overall demand for our products, or if orders received differ from our expectations with respect to the product, volume, price or other items, our fixed cost structure could have a material adverse effect on our business and results of operations. If we are unable to align our cost structure in response to economic downturns on a timely basis, or if such implementation has an adverse impact on our business or prospects, then our financial condition, results of operations and cash flows may be negatively affected.

Based on the continuing decline in revenues in 2010, 2011, 2012 and the first six months of 2013, we continue to assess our infrastructure costs and reduce workforce and labor costs as they constitute a substantial portion of our costs of revenues, selling and administrative expenses and research and development expenses.

Conversely, adjusting our cost structure to fit economic downturn conditions may have a negative effect on us during an economic upturn or periods of increasing demand for our IT solutions. If we have to aggressively reduce our costs, we may not have sufficient resources to capture new IT projects, timely comply with project delivery schedules and meet customer demand. If we are unable to effectively manage our resources and capacity to capitalize on periods of economic upturn, there could be a material adverse effect on our business, financial condition, results of operations and cash flows.

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

The IT modernization business is characterized by rapidly evolving technology and methodologies. This makes it difficult to predict demand and market acceptance for our technology and services. In order to succeed, we need to adapt the solutions we offer in order to keep up with technological developments and changes in customer needs. We cannot guarantee that we will succeed in enhancing our technology and services, or developing or acquiring new technology that adequately addresses changing customer requirements. We also cannot assure you that the technology and services we offer will be accepted by customers. If our technology and services are not accepted by customers, our future revenues and profitability will be adversely affected. Changes in technologies, industry standards, the regulatory environment and customer requirements, and new product introductions by existing or future competitors, could render our existing solutions obsolete and unmarketable, or require us to enhance our current technology or develop new technology. This may require us to expend significant amounts of money, time, and other resources to meet the demand. This could strain our personnel and financial resources. Furthermore, modernization projects deal with customer mission critical applications, and therefore encapsulate risk for the customer. Therefore, customers are more cautious in entering into transactions with us, and accordingly, the process for approval and signing of deals may be a lengthy and expensive. We make efforts to mitigate such risks associated with legacy modernization projects but from time to time we encounter delays in the negotiation process.

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

Our quarterly and annual results of operations have fluctuated significantly in the past, and we expect them to continue to fluctuate significantly in the future. These fluctuations can occur as a result of any of the following events:

● global economic trends;

● global political trends, in particular, in the middle east and in countries in which we operate;

● adverse economic conditions in various geographic areas where our customers and potential customers operate;

● acquisitions and dispositions of companies and assets;

● timing of completion of specified milestones and delays in implementation;

● timing of product releases;

● timing of contracts;

● changes in selling and marketing expenses, as well as other operating expenses; and

● currency fluctuations and financial expenses related to our financial instruments. 

In 2012, our revenues decreased to $10.6 million compared to $21.5 million in 2011.  In the six months ended June 30, 2013, our revenues decreased by 6% compared to the six months ended June 30, 2012. The decrease in our revenues in recent years stems primarily from a decline in the number of our customers, mostly in our legacy modernization projects. In 2011 and 2012, the decline in the number of our customers resulted from the continuing effects of the worldwide economic downturn and uncertainty. As a result of market uncertainty, we identified delays in our customers’ placement of purchase orders and longer sales cycles.

As a result of the foregoing, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication for future performance. Also, it is possible that our quarterly and annual results of operations may be below the expectations of public market analysts and investors.

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

Typical modernization projects which deploy our solutions are long-term projects. Therefore, payment for these projects or a substantial portion of our fees may be delayed until the successful completion of specified milestones. In addition, the payment of our fees is dependent upon customer acceptance of the completed work and our ability to collect the fees. In light of the global economy downturn, collecting our fees from customers has become increasingly difficult. Although the timing of receipt of our fees varies, we incur the majority of our expenses on a current basis. As a result, a delay in the collection of our fees could result in cash flow shortages.

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If we are unable to invest in new products and markets or to manage the effects of changes in our offering portfolio, our results will be materially adversely affected.

Due to a decline in our revenues, we have had to reduce our research and development expenditures. In 2012, our research and development costs decreased to $691,000 from $3.1 million in 2011 and $5.2 million in 2010. In the six months ended June 30, 2013, we spent $696,000 for research and development costs. The decrease in research and development spending over the past few years, results primarily from a decrease in head count in research and development, as well as the shifting of employees who were engaged in research and development activities to delivery.

These reductions, and any future reductions we may be required to make in research and development, may result in our being unable to maintain or increase our market share. Such a failure to maintain market share could result in a further decline in our revenues and operating results. Moreover, if we seek to increase our research and development expenses without a corresponding increase in revenues, it could have a material adverse effect on our operating results. We may not be able to successfully complete the development and market introduction of new products or product enhancements, in which case our revenues will decline and we may lose market share to our competitors.

Our failure to invest in new products and markets or to manage the effects of changes in our offering portfolio could result in our loss of market share, and our business, financial condition and results of operations could be materially and adversely affected as a result.

Our results have been materially adversely affected by the impairment of the value of certain intangible assets, and we may experience impairment charges in the future.

The assets listed in our consolidated balance sheet as of June 30, 2013, include, among other things, goodwill valued at approximately $12.5 million and intangible assets related to customers’ relations valued at approximately $162,000. The applicable accounting standards require that:

● goodwill is not amortized, but rather is subject to an annual impairment test, as well as periodic impairment tests if impairment indicators are present; and

● 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.

In 2011, we performed impairment tests and sold certain assets resulting in a decrease of our goodwill of $22.7 million, of which $9.6 million were identified as impairment loss related to goodwill of our overall assets and $13.1 million were the result of the sale of AppBuilder. These losses were charged to operations. The impairment of our overall assets was due, in part, to a reduction in future expected cash flows from these assets and reduction in our market capitalization. In 2012, following an impairment test we performed, no goodwill impairment was identified.

If we continue to experience reduced cash flows and our market capitalization falls below the value of our equity, or actual results of operations differ materially from our modeling estimates and related assumptions, we may be required to record additional impairment charges for our goodwill. If our goodwill or intangible assets were deemed to be impaired in whole or in part due to our failure to achieve our goals, or if we fail to accurately predict the useful life of the intangible assets, we could be required to reduce or write off such assets. Such write-offs could have a material adverse effect on our business and operating results.

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

In order to achieve our objectives, we hire from time to time software, administrative, operational, sales, and technical support personnel. The process of attracting, training, and successfully integrating qualified personnel can be lengthy and expensive. We may not be able to compete effectively for the personnel we need. Such a failure could have a material adverse effect on our business and operating results.

8

As part of our expansion strategy, we developed offshore development centers in Romania and Russia. We hired professional consultants for these development centers, leveraging the lower employer costs that existed in these countries. In recent years, professional work in these countries became more expensive and professional fees may continue to increase in the future. As a result, in February 2013, we closed our offshore center in Russia. The establishment of additional offshore facilities, if that occurs, may result in significant capital expenses, which may affect our cash position. We cannot assure you that our offshore facilities will continue to be cost effective. Our future success depends on our ability to absorb and retain senior employees and to attract, motivate, and retain highly qualified professional employees worldwide at competitive prices.

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

In the course of providing our modernization solutions, the project team conducts testing to detect the existence of failures, errors, and bugs. If our modernization solutions fail to function efficiently or if errors or bugs are detected in our technology, we may incur significant expenditures in an attempt to remedy the problem. The consequences of failures, errors, and bugs could have a material adverse effect on our business, operating results, and financial condition.

If we fail to satisfy our customers’ expectations regarding our solutions, or if we fail to timely deliver our solutions to our customers, we may be required to pay penalties, our contracts may be cancelled and we may be the subject of damages claims.

In the event that we fail to satisfy our customers’ expectations from the results of the implementation of our solutions, or if we fail to timely deliver our solutions to our customers, these customers may suffer damages. When and if this occurs, we may be required under the customer agreement to pay penalties to our customers or pay their expenses (as has occurred in the past) and our customers may have the ability to cancel our contracts. Payments of penalties or a cancellation of a contract could cause us to suffer damages. In addition, we might not be paid for costs that we incurred in performing services prior to the date of cancellation. In addition, from time to time we may be subject to claims as a result of not delivering our products on time or in a satisfactory manner. Such disputes or others may lead to material damages.

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

Some of the solutions we provide involve key aspects of our customers’ information systems. These systems are frequently critical to our customers’ operations. As a result, our customers have a greater sensitivity to failures in these systems than do customers of other software products generally. If a customer’s system fails during or following the provision of modernization solutions or services by us, or if we fail to provide customers with proper support for our modernization solutions, we are exposed to the risk of a claim for substantial damages against us, regardless of our responsibility for the failure. We cannot guarantee that the limitations of liability under our product and service contracts, if any, would be sufficient to protect us against legal claims. We cannot assure you that our insurance coverage will be sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. If we lose one or more large claims against us that exceed available insurance coverage, it may have a material adverse effect on our business, operating results, and financial condition. In addition, the filing of legal claims against us in connection with contract liability may cause us negative publicity and damage to our reputation.

If third parties assert claims of intellectual property infringement against us, we may, regardless of actual merits or success of any claims, suffer substantial costs and diversion of management’s attention, which could harm our business.

Substantial litigation over intellectual property rights exists in the global software industry. Software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps. Our success depends, in part, upon our ability not to infringe the intellectual property rights of others. We cannot predict whether third parties will assert claims of infringement against us. In addition, our employees and contractors have access to software licensed by us from third parties. A breach of the nondisclosure undertakings by any of our employees or contractors may lead to a claim of infringement against us.

Any claim, with or without merit, could be expensive and time-consuming to defend, and would probably divert our management’s attention and resources. In addition, such a claim, if submitted, may require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.

A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition, and results of operations.

9

We may experience greater than expected competition that could have a negative effect on our business.

We operate in a highly competitive market. Competition in the modernization field is, to a large extent, based upon the functionality of the available solutions. Our competitors may be in a better position to devote significant funds and resources to the development, promotion and sales of their technology and services, thus enabling them to respond more quickly to emerging opportunities and changes in technology or customer requirements. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase such competitors’ ability to successfully market their technology and services. We also expect that competition will increase as a result of consolidation within the industry. As we develop new solutions, we may begin to compete with companies with which we have not previously competed. Our competitors include:

● small vendors who provide specific solutions for a particular area of modernization, such as Ateras, Anubex, Migrationware, HTWC, Fresche Legacy, and MSS International;

● large system integrators such as IBM, HP, Dell, Accenture and Capgemini, some of whom we also partner with;

● independent software vendors such as Micro Focus and Metaware; and

● Indian system integrators such as TCS, WIPRO, Infosys and Patni. 

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

Many of our existing and potential competitors may have or acquire more extensive development, marketing, distribution, financial, technological and personnel resources than we do. This increased competition may result in our loss of market share and pricing pressure which may have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that competition with both competitors within our industry and with the in-house IT departments of certain of our customers or prospective customers will not result in price reductions for our solutions, fewer customer orders, deferred payment terms, reduced revenues or loss of market share, any of which could materially adversely affect our business, financial condition, and results of operations.

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

Our success and ability to compete are substantially dependent upon our internally developed technology. Our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. Our employees and contractors have direct access to our technology. In general, we have relied on a combination of technical leadership, trade secret, copyright and trademark law, and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition, and results of operations. Intellectual property laws only provide limited protection and policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States.

Pursuant to agreements with certain of our customers, we have placed, and in the future may be required to place, in escrow, the source code of certain software. Under the escrow arrangements, the software may, in specified circumstances, be made available to our customers. From time to time, we also provide our software directly to customers. These factors may increase the likelihood of misappropriation or other misuse of our software.

10

If the Ministry of Production in Italy requires the immediate repayment of an outstanding loan received by a subsidiary, our business, financial condition and results of operations may be harmed.

During 2007, our subsidiary, BluePhoenix I-Ter S.p.A., or “I-Ter,” received an amount of $585,000 from the Ministry of Production in Italy under a plan called Easy4Plan. Approximately $371,000 of that amount is in the form of a 10-year loan payable in equal annual installments until September 2018. The loan bears an annual interest of 0.87% and is linked to the euro. As of June 30, 2013, the remaining loan balance was approximately $234,000. Our subsidiary’s operations have been reduced significantly, which may result in the Ministry of Production in Italy requiring the immediate repayment of the full outstanding loan amount. If this happens, our business, financial condition and results of operations may be harmed.

Risks Related to International Operations

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

We have international operations, which require significant management attention and financial resources. In order to expand worldwide sales, we hired a Vice President of Sales and Vice President of Marketing which focus on increasing sales and number of customers. Depending on market conditions, we may consider establishing additional marketing and sales operations, hire additional personnel, and recruit additional resellers internationally.

Risks inherent in our worldwide business activities generally include:

● currency exchange fluctuations;

● unexpected changes in regulatory requirements;

● tariffs and other trade barriers;

● costs of localizing products for foreign countries;

● 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.

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

Inflation, devaluation, and fluctuation of various currencies may adversely affect our results of operations, liabilities, and assets.

Since we operate in several countries, we are impacted by inflation, deflation, devaluation and fluctuation of various currencies. We enter into transactions with customers and suppliers in local currencies, while the reporting currency of our consolidated financial statements and the functional currency of our business is the U.S. dollar. Fluctuations in foreign currency exchange rates in countries where we operate can adversely affect the reflection of these activities in our consolidated financial statements. In addition, fluctuations in the value of our non-dollar revenues, costs, and expenses measured in dollars could materially affect our results of operations, and our balance sheet reflects non-dollar denominated assets and liabilities, which can be adversely affected by fluctuations in the currency exchange rates.

Consequently, we are exposed to risks related to changes in currency exchange rates and fluctuations of exchange rates, any of which could result in a material adverse effect on our business, financial condition and results of operations.

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

Most of our worldwide sales are currently denominated in U.S. dollars, British pounds and euros while our reporting currency is the dollar. A decrease in the value of the dollar relative to these foreign currencies would make our products more expensive and increase our operating costs and, therefore, could adversely affect our results and harm our competitive position in the markets in which we compete.

11

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

We operate within multiple taxing jurisdictions and are subject to taxation by these jurisdictions at various tax rates. In addition, we may be subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We cannot assure you that the final tax outcome of these issues will not be different from management estimates, which are reflected in our income tax provisions. Such differences could have a material effect on our income tax provision and net income in the period in which such outcome occurs.

Risks Related to Our Operations in Israel

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

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of terror activities and other hostilities. Political, economic and security conditions in Israel could directly affect our operations. We could be adversely affected by hostilities involving Israel, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a significant downturn in the economic or financial condition of Israel. Any on-going or future armed conflicts, terror activities, tension along the Israeli borders or political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business and could harm our results of operations.

Political relations could limit our ability to sell or buy internationally.

We could be adversely affected by the interruption or reduction of trade between Israel and its trading partners. Some countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Also, over the past several years there have been calls in Europe and elsewhere to reduce trade with Israel. There can be no assurance that restrictive laws, policies or practices directed towards Israel or Israeli businesses will not have an adverse impact on our business.

Risks Related to Our Traded Securities and this Offering

If we fail to comply with the minimum bid price requirement or any other minimum requirement for continued listing on the NASDAQ Global Market, our shares may be delisted.

In the past, we received a letter from the NASDAQ Global Market notifying us that we failed to comply with the minimum bid price requirement for continued listing on the NASDAQ Global Market as set forth in Marketplace Rule 5450(a)(1). Following the receipt of such letter, on December 28, 2011, we executed a one-for-four reverse split of our ordinary shares, which resulted in an increase of the par value per ordinary share from NIS 0.01 to NIS 0.04, following which we regained compliance with NASDAQ’s minimum bid price requirement of $1.00 per share. The closing bid price of our ordinary shares on the NASDAQ Global Market, as of November 4, 2013, was $4.28.

In September 2012, we received an additional letter from NASDAQ Global Market advising us that according to the Form 6-K filed by us for the period ended June 30, 2012, our shareholder equity fell below the minimum $10 million requirement set forth in Marketplace Rule 5450(b)(1)(A) for continued listing on the NASDAQ Global Market. During the third quarter of 2012, we regained compliance with the shareholder equity minimum requirement. As of June 30, 2013 our shareholders equity was $14.2 million.

We cannot assure you that we will be able to continue to comply with The NASDAQ Global Market minimum requirements. If we fail to comply with those requirements within the required period, and we shall not be able to take sufficient steps to regain compliance, our shares may be delisted from The NASDAQ Global Market, which could reduce the liquidity of, and have an adverse effect on the price of, our ordinary shares.

12

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

During the past years, the closing price of our ordinary shares experienced significant price and volume fluctuations. The high and low closing prices of our ordinary shares traded on the NASDAQ Global Market during each of the last three years are summarized in the table below:

		High		Low
Nine Months ended September 30, 2013	$	4.70	$	3.46
2012	$	4.29	$	1.25
2011	$	10.00	$	2.01
2010	$	11.76	$	4.80

As of November 4, 2013, the market price of our ordinary shares was $4.28. We cannot assure you that the market price of our ordinary shares will return to previous levels. The market price of our ordinary shares may continue to fluctuate substantially due to a variety of factors, including:

● impairments of our intangible assets;

● our continued operating losses and negative cash flows;

● our inability to secure funding;

● 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;

● 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.

Future sales of our shares to be registered for resale in the public market could dilute the ownership interest of our existing shareholders and could cause the market price for our ordinary shares to fall.

As of September 30, 2013, we had 10,766,126 ordinary shares outstanding and 711,235 ordinary shares reserved for issuance under our employee equity compensation plans, including 657,912 shares reserved for issuance upon the exercise of outstanding employee options, warrants and unvested restricted stock units. As of such date, we also had the following commitments to issue our ordinary shares:

· 102,343 ordinary shares issuable upon exercise of warrants issued by us to institutional investors in connection with the private placement consummated in October 2009.

We registered for resale the shares underlying the warrants issued to the institutional investors in October 2009, pursuant to registration rights agreements entered into with such investors. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Contractual Commitments and Guarantees.”

The exercise of options by employees and office holders, vesting of restricted stock units granted to employees and office holders, exercise of warrants by investors and conversion of loans to equity would dilute the ownership interests of our existing shareholders. Any sales in the public market of our ordinary shares issuable upon exercise of options, warrants or conversion rights, could adversely affect the market price of our ordinary shares. If a large number of our ordinary shares is sold in a short period, the price of our ordinary shares would likely decrease.

13

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

Generally, a foreign corporation is a PFIC for U.S. federal income tax purposes if (i) 75% or more of its gross income in a taxable year is passive income, or (ii) the average percentage of its assets for the taxable year that produce, or are held for the production of, passive income is at least 50%. Passive income includes interest, dividends, royalties, rents and annuities. Passive assets include working capital, including cash raised in public offerings.  If we are or become a PFIC, our U.S. investors could suffer adverse tax consequences, including being taxed at ordinary income tax rates and being subject to an interest charge on gain from the sale or other disposition of our ordinary shares and on certain “excess distributions” with respect to our ordinary shares. Because we expect to hold following this offering a substantial amount of cash or cash equivalents, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares, which may fluctuate after this offering and may fluctuate considerably given that market prices of technology companies historically often have been volatile, we may be a PFIC in 2013 or in a subsequent year.  For additional information regarding our PFIC status, see the discussion under “Taxation — United States Federal Income Tax Considerations — Tax Consequences — If We Are a Passive Foreign Investment Company.”

For the remainder of 2013, as a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance practices instead of certain listing requirements, which may not afford shareholders with the same protections that shareholders of domestic companies have.

As a foreign private issuer whose ordinary shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Global Market. A foreign private issuer that elects to follow a home country practice instead of such requirements must submit to the NASDAQ Global Market in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. We follow home country practice with regard to distribution of annual reports to shareholders, meetings of independent directors in which only independent directors participate, approval of share compensation plans and changes in such plans and approval of share issuance or potential issuance which results in a change of control of the company. Beginning on January 1, 2014, we will lose our “foreign private issuer” status and accordingly, we shall be required to comply with the disclosure and reporting requirements that apply to domestic U.S. issuers.

As of January 1, 2014 we will be required to report as a U.S. domestic issuer which could result in additional costs and expenses to us. In addition, the benefits available to us as a “foreign private issuer” will no longer be available.

Whereas more than 50% of our outstanding voting securities are owned by residents of the United States and a majority of our executive officers and directors are U.S. citizens or residents, we will be required, as of January 1, 2014, to modify our disclosure and reporting to comply with the requirements for domestic U.S. companies. As a result:

● we will be required to commence reporting on forms required of U.S. companies, such as Forms 10-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms 20-F and 6-K;

● the introduction or market acceptance of new products or service offerings by us or by our competitors;

● we will be required to include substantially more information in proxy statements than presently provided; and

● if we engage in capital raising activities, there is a higher likelihood that investors may require us to file resale registration statements with the SEC as a condition to any such financing.

We expect that complying with these additional requirements will increase our legal and audit fees which in turn, could have a material adverse effect on our business, financial condition and results of operations.

In addition, as a result of being considered a “domestic issuer” for reporting and disclosure requirements:

● we will no longer be exempt from certain of the provisions of U.S. securities laws such as, Regulation FD, exemptions for filing beneficial ownership reports under Section 16(a) for officers, directors, and 10% shareholders (Forms 3, 4, and 5), and the Section 16(b) short swing profit rules; and

● we will lose the ability to reply upon exemptions from NASDAQ corporate governance requirements that are available to foreign private issuers.

14

We have broad discretion in the use of the proceeds of this offering and may apply the proceeds in ways with which you do not agree.

Our net proceeds from this offering will be used, as determined by management in its sole discretion, for general corporate purposes. Our management will have broad discretion over the use and investment of these net proceeds, and, accordingly, you will have to rely upon the judgment of our management with respect to our use of these net proceeds, with only limited information concerning management’s specific intentions. You will not have the opportunity, as part of your investment decision, to assess whether we use the net proceeds from this offering appropriately. We may place the net proceeds in investments that do not produce income or that lose value, which may cause our stock price to decline.

Our three largest shareholders will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including changes of control.

As of September 30, 2013, our three largest shareholders, Columbia Pacific Opportunity Fund, LP, Prescott Group Capital Management, LLC, and Lake Union Capital Management, LLC, beneficially owned approximately 39.6%, 23.9% and 18.4%, respectively, of our ordinary shares based on information each had filed with the Securities and Exchange Commission as of that date. Immediately following the offering, Prescott Group Capital Management, LLC will beneficially own approximately 28.1% of our ordinary shares based on information each had filed with the Securities and Exchange Commission as of September 30, 2013.  Based on this information, we anticipate that these shareholders will, in the aggregate, beneficially own approximately 83.0% of our ordinary shares following the completion of this offering (assuming no additional ordinary shares to prevent anti-dilution are issued related to such ordinary shares). We also have agreed to refrain from entering into a transaction with a third party or series of related transactions, under which more than 50% of our outstanding share capital following such transaction or series of related transactions, would be held by a person or entity or group of affiliated entities, other than the existing shareholders as of the date of closing, unless the buyers were approved in advance by these three shareholders, which approval may not be unreasonably withheld. As a result, our three largest shareholders are able to control or influence significantly all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other significant corporate transactions. These shareholders may have interests that differ from yours, and they may vote in a way with which you disagree and that may be adverse to your interests.

15

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This prospectus (including documents incorporated by reference herein) may contain forward-looking statements that involve substantial risks and uncertainties regarding future events or our future performance. Forward-looking statements convey our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. We use words like “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to mean that the statements are forward-looking.

Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may differ materially from the results currently expected. Factors that could cause such differences include, but are not limited to:

● adverse economic conditions in various geographic areas where our customers and potential customers operate;

● timing of completion of specified milestones and delays in implementation;

● increases in selling and marketing expenses, as well as other operating expenses;

● our ability to accurately predict and respond to market developments or demands;

● the impact of failures to accurately estimate the costs of fixed-price projects which may result in lower margins or losses;

● fluctuations in inflation and currency rates;

● delays in collection of our fees from customers which may result in cash flow shortages;

● the competitive nature of the modernization market in which we operate, including the functionality of technology developed and marketed by our competitors; and

● the risks discussed in the Risk Factors section of this prospectus and in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” of our Form 20-F for 2012.

In addition, you should note that our past financial and operational performance is not necessarily indicative of future financial and operational performance.

We undertake no obligation to update any forward-looking statements after the date of this prospectus, whether as a result of new information, future events, or otherwise, except as required by applicable law.

16

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of $2,254,678 based upon the offering price of $4.00 per ordinary share, after deducting estimated offering expenses payable by us.

We are conducting the offering for general capital raising purposes, and we intend to use the net proceeds received from the sale of the ordinary shares we offer by this prospectus for general corporate purposes.

DIVIDEND POLICY

      We have never declared or paid dividends to our shareholders and we do not intend to pay dividends in the future. We anticipate that we will retain all of our future earnings for use in the expansion and operation of our business. We are not subject to any contractual restrictions on paying dividends. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and other factors as the board of directors may deem relevant. Israeli law limits the distribution of cash dividends to the greater of retained earnings or earnings generated over the two most recent years, in either case provided that we reasonably believe that the dividend will not render us unable to meet our current or foreseeable obligations when due

17

PRICE RANGE OF OUR ORDINARY SHARES

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

Calendar Period	Closing Price  Per Share In US$
	High		Low
Annual
2008		82.64		5.60
2009		15.40		6.48
2010		11.76		4.80
2011		10.00		2.01
2012		4.29		1.25
Fiscal Quarters
2011
First Quarter		10.00		6.78
Second Quarter		7.72		4.04
Third Quarter		4.84		2.01
Fourth Quarter		3.24		2.20
2012
First Quarter		3.02		1.26
Second Quarter		2.60		1.25
Third Quarter		3.97		2.62
Fourth Quarter		4.29		3.53
2013
First Quarter		4.58		3.95
Second Quarter		4.27		3.46
Third Quarter		4.70		4.10
Most Recent Six Months
May 2013		4.24		3.69
June 2013		4.07		3.93
July 2013		4.24		4.10
August 2013		4.70		4.23
September 2013		4.50		4.21
October 2013		4.39		4.05
November 2013 (through November 4, 2013)		4.28		4.28

On November 4, 2013, the closing price of our ordinary shares on the NASDAQ Global Market was $4.28.

18

CAPITALIZATION AND INDEBTEDNESS

The table below sets forth our capitalization as of September 30, 2013:

● on an actual basis, and

● on an as adjusted basis to give effect to the issuance of ordinary shares registered under this prospectus at the offering price of $4.00 per ordinary share.

	September 30, 2013
	Actual			As Adjusted
	(in thousands US$,  except share numbers)
Short-term bank credit		151			151
Long term bank credit and other		162			162
Warrants		287			287
Equity
Share capital — ordinary shares of NIS 0.04 par value (authorized 17,500,000 shares; 10,839,095 issued: 10,766,126  shares outstanding; 11,464,095 issued and  11,391,126 shares outstanding, as adjusted)		98			105
Non-controlling interest		366			366
Additional paid-in capital		131,792			134,040
Accumulated other comprehensive loss		(1,537	)		(1,537	)
Cost of shares held by subsidiaries		(2,580	)		(2,580	)
Accumulated deficit		(114,787	)		(114,787	)
Equity
Total Capitalization		13,952			16,207

The table above does not include:

● 444,839  ordinary shares issuable upon exercise of share options outstanding as of September 30, 2013 under our share option plan, at a weighted average exercise price of $4.30 per share;

● 237,222  ordinary shares available for future grant or issuance as of September 30, 2013 pursuant to our RSU plan; and

● 102,343 ordinary shares issuable upon the exercise of warrants outstanding as of September 30, 2013, at an exercise price of $1.5634 per share.

19

DILUTION

If you purchase ordinary shares from us, your interest will be diluted to the extent of the difference between the public offering price per share you pay and the net tangible book value per share of our ordinary shares immediately after this offering. Our net tangible book value as of September 30, 2013, was approximately $13.2 million, or $1.23 per share. Net tangible book value per share is calculated by subtracting our total liabilities from our total tangible assets, which is total assets less intangible assets of approximately $120,000, and dividing this amount by the 10,766,126 issued and outstanding ordinary shares as of September 30, 2013.

Following the sale of the 625,000 shares in this offering at the purchase price of $4.00 per share, and after deducting the estimated offering expenses of $245,322 payable by us in such event, our adjusted net tangible book value as of September 30, 2013 will be approximately $15.5 million, or $1.36 per share. This will represent an immediate increase in the net tangible book value of approximately $0.13 per share to our existing shareholders and an immediate and substantial dilution in net tangible book value of $2.64 per share to new investors. The following table illustrates this calculation on a per share basis:

Offering price per ordinary share			$	4.00
Net tangible book value per ordinary share as of September 30, 2013	$	1.23
Increase in net tangible book value per ordinary share attributable to the offering	$	0.13
Pro forma net tangible book value per ordinary share as of September 30, 2013 after giving effect to the offering			$	1.36
Dilution per ordinary share to new investors			$	2.64

20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes, prepared in accordance with accounting principles generally accepted in the United States, or “U.S. GAAP” for the six months ended June 30, 2013 and our audited financial statements for the year ended December 31, 2012 included in our Form 20-F for 2012 and incorporated by reference herein.

Overview

We engage in the IT modernization solutions business and provide professional services. During 2011, 2012, and 2013, we pursued our strategic plan in order to focus on the legacy modernization business. Accordingly, we sold certain activities and our holdings in certain subsidiaries, and shut down certain of our operations as described below.

We have experienced a significant decline in our revenues from $42.0 million in 2010 to $21.5 million in 2011 and $10.6 million in 2012. Our revenues for the six months ended June 30, 2013 were $4.6 million compared to $4.9 million for the six months ended June 30, 2012. The decline in our revenues stems from the sale of AppBuilder technology in 2011, as well as the sale of certain other activities and subsidiaries in 2012. In addition, the general economic recession, including in the financial services and banking sector, resulted in a decline in the number of our customers.

Economic conditions in our target markets have experienced a significant prolonged downturn and remain uncertain. Challenging economic times have caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and reduced corporate profits and capital spending, all of which have had and continue to have a negative effect on our business, results of operations and financial condition. Our services, particularly in modernization projects, deal with customer mission critical applications and encapsulate risk for the customer. Therefore, our customers are more cautious in entering into these types of transactions with us, and consequently, the process for approval and signing of deals may be lengthy and expensive.

In response to these market conditions, we are focusing on providing customers with legacy modernization solutions that have a cost effective impact on the customers’ information technology spending, which is particularly important during difficult economic environment.

Based on the continuing decline in revenues in 2011, 2012 and the first six months of 2013, we continued to assess our infrastructure costs and reduce workforce and labor costs as they constitute a substantial portion of our costs of revenues, selling and administrative expenses and research and development expenses.  The number of our employees has decreased from approximately 300 in 2010 to 180 in 2011 and 108 in 2012. As of September 30, 2013, we employed 97 employees.

In 2011, we entered into an agreement with Magic Software Enterprises Ltd., referred to as Magic, pursuant to which we sold to Magic our AppBuilder technology. The net consideration for the AppBuilder was $12.5 million, of which approximately $3.8 million was deposited in escrow. As of September 30, 2013, $100,000 was still held in escrow. This amount shall be released upon the fulfillment of certain conditions.  As a result of the transaction, in 2012 we recorded a capital gain of $2.3 million in relation to proceeds received from this transaction.  During the six months ended June 30, 2013, we recorded a capital gain of $786,000 due to money released from escrow.

In addition, we undertook to provide Magic with certain professional services during a three-year period commencing at the closing of the transaction. Revenues generated from these services in 2012 were $1.44 million. Following the initiation of our sale of operations of BridgeQuest Inc., we reached an understanding with Magic with respect to these services, whereby no additional revenues were generated or expected from these services in 2013 .

In the six months ended June 30, 2013, our investment in research and development amounted to $696,000 compared to $264,000 in the six months ended June 30, 2012. The increase in research and development costs in the six months ended June 30, 2013 compared to the six months ended June 30, 2012, was attributable to reallocation of human resources to research and development from cost of revenues.

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Challenges and opportunities

In a market that continues to innovate and evolve, new technologies and practices, by definition, render existing technology deployments out-of-date or legacy. By the same measure, however, in order for us to capitalize on the constant source of legacy solutions, we must evolve our solutions portfolio to deal with the changing definition of what constitutes “leading edge” technologies and the growing set that is deemed to be “legacy.” Over time, as one legacy set of technologies is gradually replaced, we must be capable of addressing the modernization needs of the next set of aging technologies. However, these cycles are slow and provide us with the time to update our technology and products and build the necessary knowledge in house.

The fact that the modernization needs of the market are evolving on a constant basis, necessitates that we be capable of tracking and predicting changes in technologies. Anticipating the needs of the IT modernization market and delivering new solutions that satisfy the emerging needs is a critical success factor.

However, even if we develop modernization solutions that address the evolving needs of the legacy IT modernization market, we cannot assure that there will be a predictable demand for our offerings. Variables ranging from the macro-economic climate, to the competitive landscape, and to the perceived need that the enterprise market has for a specific modernization solution, may have an impact of a longer sales cycle or increased pricing pressure.

To keep up with the anticipated growing demand for our solution, we must retain our skilled personnel in the fields of project management, legacy systems, and leading modern technologies. Maintaining and growing the requisite skill base can be problematic.  Personnel with an understanding of legacy technologies are a finite resource and the market for recruiting and retaining such workforce can be highly competitive.

Critical Accounting Policies

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

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

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.

We typically sell our software products and services in stand-alone contracts for software product licenses, services, or maintenance and support. A relatively small portion of our arrangements includes multiple elements. These arrangements are usually arrangements in which we sell a software product license and post-contract support, referred to as PCS.

We allocate the total fee arrangement to the software and the PCS undelivered element based on vendor-specific objective evidence, referred to as VSOE, under which “The fair value of the PCS should be determined by reference to the price the customer will be required to pay when it is sold separately.” The fair value of the PCS is calculated by the consistent renewal rate of the PCS stated in the relevant contract. The portion of the fee arrangement allocated to the PCS is recognized as revenues ratably over the term of the PCS arrangement.

In some agreements with our customers, the customers have the right to receive unspecified upgrades on an if-and-when available basis (we do not provide specific upgrades). These upgrades are considered post-contract support (PCS). Revenue allocated to the PCS is recognized ratably over the term of the PCS.

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Long term contracts accounted for pursuant to FASB ASC Topic 605-35-25 (prior authoritative literature: SOP 81-1, “Accounting for Performance of Construction-Type Contracts”) are contracts in which we sell our software framework, on which material modifications, developments and customizations are performed, to provide the customer with a new and modern IT application with enhanced capabilities that were unavailable in its former legacy system. The services are essential to the functionality of the software and to its compliance with customers’ needs and specifications. Under this method, estimated revenue is generally accrued based on costs incurred to date, as a percentage of total updated estimated costs. Changes in our estimates may affect the recognition of our long-term contract revenues. We recognize contract losses, if any, in the period in which they first become evident. Some of our contracts include client acceptance clauses. In these contracts, we follow 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, we consider our history with similar arrangements, the customer’s involvement in the negotiation process, and the existence of other service providers and the payment terms.

We present revenues from products and revenues from services in separate line items. The product revenues line item includes revenues generated from (i) stand-alone 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, we include (i) revenues generated from stand-alone consulting services; (ii) revenues generated from stand-alone 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. We have included all long term contracts arrangements in the service revenue line item since we cannot establish VSOE of fair value to neither the service element nor the software element. Our software framework and these kinds of modifications and customizations are not sold separately. Therefore, we cannot appropriately justify reflecting the product portion separately in our statement of operations.

Impairment of goodwill and intangible assets. Our business acquisitions resulted in goodwill and other intangible assets. We periodically evaluate our goodwill, intangible assets, for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, and operational performance of our acquired businesses and investments.

In accordance with FASB ASC Topic 350 “Intangible — goodwill and other,” indefinite life intangible assets and goodwill are not amortized but rather subject to periodic impairment testing.

Goodwill and intangible assets are tested for impairment by comparing the fair value of the reporting unit with its carrying value. These write downs may have an adverse effect on our operating results. Future events could cause us to conclude that impairment indicators exist and that additional intangible assets associated with our acquired businesses are impaired. In addition, we evaluate a reporting unit for impairment if events or circumstances change between annual tests, indicating a possible impairment. Examples of such events or circumstances include: (i) a significant adverse change in legal factors or in the business climate; (ii) an adverse action or assessment by a regulator; (iii) a more likely than not expectation that a portion of the reporting unit will be sold; (iv) continued or sustained losses at a reporting unit; (v) a significant decline in our market capitalization as compared to our book value; or (vi) the testing for recoverability of a significant asset group within the reporting unit.

We have one operating segment and one reporting unit related to overall IT modernization. We utilize a two-step method to perform a goodwill impairment review in the fourth quarter of each fiscal year or when facts and circumstances indicate goodwill may be impaired. In the first step, we determine the fair value of the reporting unit. If the net book value of the reporting unit exceeds its fair value, we would then perform the second step of the impairment test which requires allocation of the reporting unit’s fair value of all of our assets and liabilities in a manner similar to an 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. In 2012, we determined the fair value of a reporting unit using the market approach which is based on the market capitalization by using our share price in the NASDAQ Global Market and an appropriate control premium. As of December 31, 2012, our market capitalization was significantly higher than the net book value of the reporting unit and therefore there was no need to continue to step 2.

Prior to 2012, we utilized the discounted cash flow model, as we believed it was an approach that best approximated our fair value at that time. We 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, we evaluated the reasonableness of the estimated fair value of our reporting unit by reconciling to our market capitalization. This reconciliation allowed us to consider market expectations in corroborating the reasonableness of the fair value of the reporting unit.

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In determining gain or loss on disposal of a portion of the AppBuilder technology in 2011, the amount of goodwill that was included in that carrying amount of the disposed reporting unit was based on the relative fair values of the disposed of business and the portion of the reporting unit that was retained.

Stock Based Compensation. We account for stock-based compensation to employees in accordance with FASB ASC Topic 718 “Compensation — Stock Compensation.” In the past three years, most of the awards were of restricted stock units (“RSUs”).  RSUs are valued based on the market value of the underlying stock at the date of grant. A small portion of the awards are share options. We measure and recognize 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 we make several estimates, including the option’s expected life and the price volatility of the underlying stock.

Income taxes. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty.  Accounting for uncertainty in income taxes requires that tax benefits recognized in the financial statements must be at least more likely than not of being sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations. As of June 30, 2013, there were 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 basis 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. We provide a valuation allowance, when it is more likely than not that deferred tax assets will not be realized in the foreseeable future. In calculating our deferred taxes we are taking into account various estimations, which are examined and if necessary adjusted on a quarterly basis, regarding our future utilization of future carry forward losses.

Accounts receivable and Allowances for Doubtful Accounts. Our trade receivables include amounts due from customers. We perform ongoing credit evaluations of our customers’ financial condition and we require collateral as deemed necessary. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables, historical bad debt experience and the general economic environment. Management applies considerable judgment in assessing the realization of receivables, including assessing the probability of collection and the current credit worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Derivative Instruments. Under the provisions of FASB ASC Topic 815 “Derivatives and hedging,” all derivatives are recognized on the balance sheet at their fair value.

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1, 2013, did not have an impact on our consolidated financial statements .

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our financial statements upon adoption.

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Our Reporting Currency

The currency of the primary economic environment in which the operations of BluePhoenix and most of its subsidiaries are conducted is the U.S. dollar. In addition, a substantial portion of our revenues and costs are incurred in dollars. Thus, the dollar is our functional and reporting currency.

We follow FASB ASC Topic 830 “Foreign currency translation” 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.

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

For the  six months ended June 30,	Inflation rate  in Israel		Revaluation (Devaluation) of NIS against the US$			Revaluation (Devaluation) of euro against the US$
	%		%			%
2013		1.50		2.58			1.48
2012		1.06		(2.86	)		3.09

Operating Results

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

Statement of Operations Data as a Percentage of Revenues:

	Six months ended June 30,
	2013			2012
	%			%
Revenues		100			100
Cost of revenues		48			87
Gross profit		52			14
Research and development costs		15			5
Selling, general, and administrative expenses		68			96
Loss on sale of subsidiary and AppBuilder		(17	)		(5	)
Operating loss		(14	)		(83	)
Financial expenses, net		1			50
Other income, net		0			12
Loss before taxes on income		(15	)		(121	)
Income tax benefit		1			3
Net loss from continued operation		(16	)		(124	)
Loss from discontinued operation		9			24
Net loss		(25	)		(148	)
Net results attributable to non-controlling interests		5			3
Net loss attributable to BluePhoenix’ shareholders		(30	)		(151	)

Six months ended June 30, 2013 and 2012

Revenues. Revenues decreased 6% from $4.9 million in the six months ended June 30, 2012 to $4.6 million in the six months ended June 30, 2013. The decrease is mainly attributable to normal business fluctuations.

We depend upon our customers making capital investments in information technology products. These spending levels are impacted by the worldwide level of demand for enterprise legacy IT modernization solutions and services. Demand for these is normally a function of prevailing global or regional economic conditions and is negatively affected by a general economic slow-down as consumers reduce discretionary spending on information technology upgrades.

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We currently concentrate our resources on providing legacy modernization solutions and services. Our revenues are generated from fixed-price projects, consulting fees, and long-term maintenance contracts. Revenues generated from fixed price projects increased 19% from $2.7 million in the six months ended June 30, 2012 to $3.2 million in the six months ended June 30, 2013, due to an increase in the average revenue per project increasing from $68,000 in 2012 to $145,000 in 2013.

Revenues generated from our consulting services decreased by 33%, from $852,000 during the six months ended June 30, 2012 to $572,000 during the six months ended June 30, 2013, due to a decrease in the scope of consulting services provided. Revenues generated from our long-term maintenance contract services decreased by 43% from $1.0 million during six months ended June 30, 2012 to $569,000 during the six months ended June 30, 2013, due to a decrease in the number of long-term maintenance projects.

Gross profit. Gross profit increased by 261% from $660,000 in the six months ended June 30, 2012 to $2.4 million in the six months ended June 30, 2013. The increase is mainly attributable to the significant reduction in cost of revenues due to the reduction in our overall workforce, the reallocation of human resources to research and development, and a decrease in amortization of our intangibles assets.

Gross profit as a percentage of revenues, was 52% in the six months ended June 30, 2013 compared to 14% in the six months ended June 30, 2012. The increase is mainly attributable to the reduction in our cost of revenues.

Cost of revenues. Cost of revenues consists of salaries, amortization of intangible assets, fees paid to independent subcontractors and other direct costs. Cost of revenues decreased by 48% from $4.2 million in the six months ended June 30, 2012 to $2.2 million in the six months ended June 30, 2013. This decrease resulted primarily from the reduction in our overall workforce, the reallocation of human resources to research and development, and a decrease in amortization of our intangibles assets.  Cost of revenues as a percentage of revenues decreased from 87% in the six months ended June 30, 2012 to 48% in the six months ended June 30, 2013. This decrease is attributable to the reduction in salary costs due to the reduction in our workforce.

Research and development costs. Research and development costs consist of salaries and consulting fees that we pay to professionals engaged in the development of new software and related methodologies. Our development costs are allocated among our modernization suite of solutions and are charged to operations as incurred. Research and development costs increased by 164% from $264,000 in the six months ended June 30, 2012 to $696,000 during the six months ended June 30, 2013. The increase was mainly as a result of the increase of our research and development activities and a reallocation of professional human resources back to research and development activities from cost of revenues. As a percentage of revenues, research and development costs increased from 5% in the six months ended June 30, 2012 to 15% in the six months ended June 30, 2013.

Selling, general, and administrative expenses. Selling, general, and administrative expenses consist primarily of wages and related expenses, travel expenses, sales commissions, selling expenses, marketing and advertising expenses, rent, insurance, utilities, professional fees, depreciation and amortization. Selling, general, and administrative expenses decreased by 33% from $4.7 million in the six months ended June 30, 2012 to $3.1 million in the six months ended June 30, 2013. Most of the decrease is attributable to the dismissal of employees as part of the continued implementation of our cost saving plan in 2012.  As a percentage of revenues, selling, general and administrative expenses decreased from 96% in the six months ended June 30, 2012 to 68% in the six months ended June 30, 2013. The decrease is also attributable to reduced computer and software amortization costs, professional fees, and overhead costs. Expenses for doubtful accounts increased from $53,000 in the six months ended June 30, 2012 to $178,000 in the six months ended June 30, 2013, based on quarterly reassessment.

Gain (Loss) on sales of subsidiaries and AppBuilder. Gain on sale of AppBuilder, in the six months ended June 30, 2013, amounted to $786,000, and constitute proceeds previously received as part of the AppBuilder transaction that were subject to fulfillment of certain conditions that have been met.

Financial expenses, net. Financial expenses decreased from $2.5 million in the six months ended June 30, 2012 to $42,000 in the six months ended June 30, 2013. Financial expenses include interest paid on a loan extended by third party and an expense due to derivative financial instruments. Financial expenses also include accounting charges related to warrants previously issued by us, which we record as a derivative, and expenses from fluctuations in foreign currency exchange rate. The decrease in financial expenses is mostly attributable to (a) accounting charges related to warrants issued by us in prior years, which we record as a derivative; and (b) increase in fair value of embedded derivative in connection with the loans received from our three major shareholders. This derivative was converted into shares in 2012 with no influence over 2013 finance expense.

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Other income. There was no other income in the six months ended June 30, 2013. Other income in the six months ended June 30, 2012 was $580,000 and constitutes the repayment of loan extended by us to Cicero Inc.

Taxes on income. In the six months ended June 30, 2013, we had income tax expense of $51,000 compared to income tax expense of $137,000 in the six months ended June 30, 2012. The tax expense in the six months ended June 30, 2013 is compounded from $50,000 current tax expense and $1,000 tax benefit related to previous years.

Net loss  from discontinued operation. Net loss from BridgeQuest in the six months ended June 30, 2013 was $399,000 compared to net loss of $1.2 million in the six months ended June 30, 2012, from Liacom Systems Ltd. and BridgeQuest Inc.

Net result attributable to non-controlling interest. Net loss attributable to non-controlling interest in the six months ended June 30, 2013 was $221,000 compared to net loss of $141,000 in the six months ended June 30, 2012, and represented the non-controlling share in the net loss of our subsidiary, Zulu Software Inc.

Liquidity and Capital Resources

How We Have Financed Our Business

Public Offerings

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

In February 2006, we completed an underwritten public offering in Israel of series A convertible notes in an aggregate principal amount of NIS 54.0 million that were equal at the time of the transaction to approximately $11.5 million (the dollar amount was calculated based on the exchange rate at the date of the transaction). All of the notes have been converted into ordinary shares.

Private Placements

In 2004, we completed a $5 million private placement of convertible debentures and warrants to institutional investors. Pursuant to our agreement with the institutional investors, in March 2006, the institutional investors exercised their right to purchase from us, for an aggregate purchase price of $3 million, additional convertible debentures due in 2009. In 2008, the institutional investors converted the entire principal amount of the debentures into 405,198 ordinary shares. As of the date of this prospectus, all warrants were expired.

In November 2007, we completed a $35 million private placement of ordinary shares and warrants issued to institutional investors. The net proceeds from the offering were mainly used for repayment of debt. As of the date of this prospectus, all warrants were expired.

In October 2009, we completed a $4.2 million private placement of ordinary shares and warrants issued to institutional investors. Under the Securities Purchase Agreement entered into with the institutional investors, we sold to the investors 341,144 ordinary shares and the investors were also granted Series A Warrants exercisable into 204,686 ordinary shares, until October 2014, of which warrants to purchase 102,343 ordinary shares are still outstanding as of September 30, 2013. The adjusted exercise price of these warrants is $1.5634 per share. As agreed with the investors, we registered the shares purchased by the investors and those underlying the warrants for resale under an effective registration statement.

Credit Facilities with Banks

As of September 30, 2013, we had an outstanding credit facility with Bank Leumi Le’Israel Ltd. The aggregate amount outstanding under this credit facility was approximately $112,000. In connection with this credit facility, we are committed to a minimum cash balance covenant. As of June 30, 2013, we were in breach of a covenant under our credit facility.  We repaid all amounts outstanding under the facility on October 28, 2013.

As part of our arrangement with the bank, we provided the bank with a floating charge on our assets and a fixed charge on our goodwill, as well as certain other fixed charges.

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Agreements with our Three Major Shareholders

On March 19, 2012, we entered into a series of agreements with three of our shareholders: (i) Lake Union Capital Management, LLC, referred to herein as “Lake Union”; (ii) Prescott Group Capital Management, LLC, referred to herein as “Prescott”; and (iii) Columbia Pacific Opportunity Fund, LP, referred to herein as “Columbia.” Lake Union, Prescott and Columbia are collectively referred to herein as the “three shareholders” or “three major shareholders.” The agreements entered into with the three shareholders, and referred to herein as the “transactions,” included the following:

(a)           an Assignment and Assumption Agreement pursuant to which the rights and obligations of the lenders with respect to a $5 million loan granted to us in April 2011, by a financial institution and other lenders, referred to herein as the original loan and original lenders, respectively, were purchased from the original lenders by Lake Union, Prescott and Columbia, in equal shares, subject to certain terms and conditions;

(b)           an Amended Loan Agreement (as further amended on April 15, 2012);

(c)           a Bridge Loan Agreement (as amended on September 5, 2012) referred to as the Bridge Loan Agreement, for extension to us of (a) a $500,000 bridge loan; and (b) additional loans of up to $1.5 million; and

(d)           a Registration Rights Agreement pursuant to which we were required to file a registration statement on Form F-3 to cover the resale of the ordinary shares issued upon conversion of the abovementioned loans and interest accrued thereon.

During July and August 2012, the three shareholders exercised their conversion right with respect to the total outstanding amount under the loan assigned to them by the original lenders, and accordingly, in reliance upon the exemption from the registration provisions of the U.S. Securities Act of 1933, as amended, set forth in Section 4(2) thereof, we issued to the three shareholders 3,350,534 ordinary shares, of which 1,111,911 were issued to Lake Union, 1,121,194 to Prescott and 1,117,429 to Columbia.  In September 2012, the three shareholders exercised their conversion right with respect to the total outstanding amount under the bridge loan, and accordingly, in reliance upon the exemption from the registration provisions of the U.S. Securities Act of 1933, as amended, set forth in Section 4(2) thereof, we issued to the three shareholders 327,858 ordinary shares. As a result of these conversions, our obligations under the Amended Loan Agreement and the Bridge Loan Agreement were satisfied in full. As agreed with the three shareholders, we registered the shares issued to the three shareholders under the transactions, for resale under an effective registration statement.

Cash and Cash Equivalents

As of June 30, 2013, we had cash and cash equivalents of $1.9 million and working capital of $2 million. As of June 30, 2012, we had cash and cash equivalents of $2.2 million and working capital of $1.5 million. The working capital increased primarily due to the decrease in short-term loans and the decrease in trade payables and other account payables. Improving our working capital was enabled following the conversion of our shareholders loan in July 2012 and closing part of our current liability. This was partially offset by the decrease of trade account receivables and cash and cash equivalents.

Net cash used in operating activities during the six months ended June 30, 2013, was $1.3 million compared to $3.7 million during the six months ended June 30, 2012. The change is primarily attributable to the significant decrease in our operating loss due to the continued execution of our cost saving plan, which was reflected in the significant decrease in our overall operating expenses, mainly related to salaries as a result of a reduction in the number of our employees.

Net cash provided by investment activities in the six months ended June 30, 2013, was $791,000 compared to $6.9 million in the six months ended June 30, 2012. Cash provided by investment activities in the six months ended June 30, 2013 includes proceeds from sales of subsidiaries and AppBuilder of $800,000.

Net cash used in financing activities was $149,000 in the six months ended June 30, 2013 and $5 million in the six months ended June 30, 2012, and consisted primarily from repayment of loans to banks and a third party.

Our working capital is not sufficient for our present requirements.  We will use the proceeds from this offering to increase our working capital, as described in the section “Use of Proceeds.”

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Capital Expenditures

Our capital expenditures include consideration paid for fixed assets.

Investment in property and equipment required to support our software development activities was comprised mainly of office reconstruction and purchase of computers and peripheral equipment.  This investment amounted to $9,000 in the six months ended June 30, 2013 and $60,000 in the six months ended June 30, 2012. The decrease was primarily the result of no additional office reconstruction charges.

Since January 1, 2013, we have not repurchased any of our shares. As of December 31, 2012, we had repurchased an aggregate of 592,810 of our ordinary shares under our buy-back programs, for an aggregate of approximately $15.2 million. Some of the repurchased shares were allotted to employees and consultants in connection with the exercise of options and vesting of RSUs under our option and award plans. Under our buy-back programs, we may purchase our shares from time to time, subject to market conditions and other relevant factors affecting us. Under the Israeli Companies Law, 1999, referred to as the Companies Law, the repurchased shares held by us do not confer upon their holder any rights. The first buy-back program adopted in May 1998 enables us to purchase our shares, utilizing up to $5 million. Under the second buy-back program adopted in September 1998, and amended in May 1999, we may purchase, up to an additional 500,000 ordinary shares. We do not currently intend to make any additional repurchases under these two buy-back programs. The closing price of our ordinary shares as quoted on the NASDAQ Global Market on November 4, 2013 was $4.28.

Contractual Commitments and Guarantees

2009 Warrants

In October 2009, as part of a $4.2 million private placement, we issued to institutional investors Series A Warrants exercisable into 204,686 ordinary shares until October 2014, of which warrants to purchase 102,343 ordinary shares are still outstanding as of September 30, 2013. The adjusted exercise price of these warrants is $1.5634 per share. As agreed with the investors, we registered the shares purchased by the investors and those underlying the warrants for resale under an effective registration statement.

Liolios Warrants

In connection with certain services provided to us, we issued to Liolios Group, Inc. warrants exercisable into 3,000 ordinary shares, of which warrants exercisable into 1,500 ordinary shares expired in August 2013 and the remaining warrants exercisable into 1,500 ordinary shares expired on September 30, 2013.

Chief Scientist

One of our subsidiaries has entered into an agreement with Israel’s Office of the Chief Scientist, or OCS. This subsidiary is 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 June 30, 2013, the contingent liability amounted to $252,000.

Ministry of Production in Italy

During 2007, our subsidiary, I-Ter, received an amount of $585,000 from the Ministry of Production in Italy under a plan called Easy4Plan. Approximately $371,000 of that amount is in the form of a 10-year loan payable in equal annual installments until September 2018. The loan bears an annual interest of 0.87% and is linked to the euro. As of June 30, 2013, the remaining loan balance was approximately $234,000. Our subsidiary’s operations have been reduced significantly, which may result in the Ministry of Production in Italy requiring the immediate repayment of the full outstanding loan amount.

Operating Leases

We are committed under operating leases for rental of office facilities, vehicles, and other equipment for the years 2013 until 2016. Annual rental fees under current leases are approximately $359,000.

Indemnification of Office Holders

 We entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to certain limitations. For more information, see “Principal Shareholders and Related Party Transactions — Indemnification of Office Holders” below.

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The following table summarizes our contractual obligations and commitments as of December 31, 2012:

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1–2 years		3-5 years		More than 5 years
					in thousands $
Operating Lease Obligations		581		257		324		—	—
Loans from Banks		498		217		160		121	—
Total		1,079		474		484		121	—

The above table does not include royalties that we may be required to pay to the OCS and that may reach, in the aggregate, as of December 31, 2012, $235,000. For more information about grants received from the OCS, see the section “Business — Business Overview — Research and Development.” We are unable to reasonably estimate the amounts that we will eventually be required to pay to the OCS, if at all, and the timing of such payments, since these payments depend on our ability to sell products based on the OCS-funded technologies and the timing of such sales, if any.

Effective Corporate Tax Rates

Under Israeli law, Israeli corporations are generally subject to 25% corporate tax (26.5% starting from January 1, 2014). An Israeli company is subject to tax on its worldwide income. An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries will receive a credit for income taxes paid by the subsidiary in its country of residence, subject to certain conditions. Israeli tax payers are also subject to tax on income from a controlled foreign corporation, according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary, if such subsidiary’s primary source of income is a passive income (such as interest, dividends, royalties, rental income, or capital gains).

Our international operations are taxed at the local effective corporate tax rate in the countries where our activities are conducted.  We have significant amounts of carry forward losses, including at BluePhoenix Solutions USA Inc. from which our headquarters operates; therefore we do not estimate changing the headquarters to Seattle, WA from Herzliya, Israel will have a material impact on the amount of future tax payments until these carry forward losses are utilized or until we will have taxable income on an ongoing basis.

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BUSINESS

Business Overview

Our Business

BluePhoenix solves enterprise problems specific to legacy technology and mainframe modernization.  Our technology helps customers reduce cost around existing mainframe applications, integrate legacy data with modern platforms and reduce risk around migrating to new target states.

IT Legacy Modernization Solutions

Our IT legacy modernization solutions enable companies to automate the process of modernizing and upgrading their mainframe and distributed IT infrastructure to more modern environments in order to more effectively compete in today’s business environment. We also provide professional services on an ongoing basis for customers who use our technology for specific tasks that run continually.  The combination of our comprehensive modernization technology with our unique proven delivery methodology provides an efficient and cost-effective process for extending the return on investment of existing enterprise IT assets.

BluePhoenix’s ATLAS (Automated Translation and Legacy Advancement System) Platform reduces risk and solves business problems specific to the legacy application lifecycle. We apply cutting-edge modern technology (cloud computing, automation) to the legacy environment in a way that creates a clear, value-driven path to the target state. We believe ATLAS distinguishes itself from our competitor's similar products by allowing customers to move at their own pace while reducing risk and cost each step of the way.

ATLAS:

● Is applicable to mainframe applications written in COBOL, CA GEN, Natural, PL/1 and more;

● Is applicable to legacy databases such as IDMS, ADABAS, VSAM, IMS, ICL and more;

● Generates fully maintainable Java and/or C# code for uncompromised use and control of the target environment;

● Enables mainframe data migration to and/or integration with SQL Server, Oracle and/or DB2 environments;

● Doesn’t restrict choices for target infrastructure — works in public or private cloud; and

● Is a proven solution being used by the world’s biggest and most transaction-intensive brands.

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Additional functionality available in the ATLAS Platform includes:

● Understanding and mapping an application;

● Migration of platforms, databases and languages and data;

● Testing;

● Remediation;

● Data mirroring; and

● Ongoing monitoring and management of environments.

ATLAS empowers customers to fully leverage their current systems and applications, speed up and reduce the cost of the renewal process, and effectively update their systems in order to be more agile when having to adapt to new business demands or regulations. In addition, by leveraging ATLAS, customers gain the added value of extending their systems to be ready for future demands, such as Service Oriented Architecture (SOA) and cloud computing. Our modernization solutions are offered to customers in numerous business market sectors, particularly IT, financial services and insurance.

Our solution portfolio includes software and professional services that address IT challenges that organizations and companies face today, including:

● lack of agility and responsiveness to changing business needs;

● difficulty in recruiting and retaining mainframe professionals;

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● 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 technology and inhibit the ability to meet business expectations.

Our solutions enable companies to:

● better understand and manage their IT systems and resources;

● effectively plan and carry out strategic projects that provide real business value;

● transform to modern technology, which we believe enables enterprises to recruit professional resources easily;

● 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;

● directly gain access to cutting edge technology and new business channels; and

● leverage off mainframe computing in either a public or private cloud.

Our comprehensive enterprise technologies span mainframe, midrange, and client/server computing platforms. We have enhanced our expertise through the successful completion of projects for many large organizations over the past two decades, establishing our credibility and achieving international recognition and presence. Based on our technology, we develop and market software and related methodologies. We deliver our solutions with training and support in order to provide enterprises with comprehensive and one stop shop solutions, primarily for the modernization of existing IT systems.

Market Background

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

● maintaining a competitive edge in the market;

● addressing changing business needs;

● complying with new regulations;

● reducing maintenance, human resources, and technology costs; or

● gaining access to cutting edge technology and new business channels.

Alternatives to modernization include, among others, renewing legacy systems, buying packaged software, or rebuilding entire applications. Enterprise IT modernization has proven to be the most efficient, cost effective and lowest risk path for companies looking to protect their existing investments. We provide a range of solutions designed to efficiently address the challenge of retaining the business knowledge built into the application code while updating the system to reflect new requirements and software / hardware infrastructure.

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

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

Enterprise IT Migration — These solutions enable companies to consolidate and eliminate a wide range of legacy hardware and software through automated migration of applications, databases, platforms, programming languages, and data. This solution reduces costs and resources, and minimizes reliance on proprietary technology, sunset products, and dwindling skill sets.

Our migration solutions provide numerous advantages, including:

● significantly decreasing project costs, risk of errors and time;

● preserving corporate business knowledge;

● substantially reducing dependency on scarce legacy technology skill sets;

● solving problematic maintenance issues;

● gaining access to cutting edge technology and new business channels.

● directly supplying a full audit trail and documentation of all changes;

● minimizing system freeze time with a unique “refresh” feature; and

● comprehensively working with most mainframe and non-mainframe platforms.

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Our solutions cover legacy databases modernization such as CA-IDMS DB/DC, ADABAS, IMS DB and VSAM, to relational databases, such as DB2, Oracle, and SQL Server. Our technology performs automated conversions that provide companies with fully functional compliance for source and target applications and minimal application, functional, and logical program flow changes. Our solution leaves no residuals, emulation software, or translation procedures and allows system support to continue uninterrupted during the migration project. As a result of the conversion process, the migrated application operates more efficiently, is easier to maintain, and contains complete documentation of the customer’s knowledge base and guidelines.

Platform Modernization

An automated migration software that convertsa range of platforms, including IBM mainframe with operating systems such as VSE, z/OS, in addition to Fujitsu ICL, to Unix, Linux, Windows, and Java / .Net. Our technology can be customized to fit the unique IT configuration and business rules of each customer site. The technology converts platforms to a pure, native installation (e.g., Java or C#) so that programs are not required to run under emulation or through translation techniques. Our solutions assist companies with reducing IT costs, maintaining service levels, setting and upgrading standards, implementing the new IT environment, training IT users, implementing new facilities such as a security system or a batch scheduler, and testing for functional equivalence.

Using our various automated migration technology, and through cooperation with our partners, we offer COBOL migrations, System i and mainframe solutions. We formed the following alliances for providing these solutions:

● an alliance with Dell 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 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.

BluePhoenix™ CTU is an automated migration technology for converting COBOL and 4GLs (fourth generation languages) such as ADSO, Natural, CA Gen (formerly COOL: Gen) to COBOL, Java/J2EE and C#/.Net. This reliable, time-efficient, and comprehensive solution enables site-wide installation, simultaneous testing, and implementation of batch programs. In addition, our technology identifies the compatibility of the code, converts it to the new standards required by customers, and analyzes converted programs to identify potential problems.

Investments and Acquisitions

In order to enhance our solutions and services portfolio, we have invested in certain complementary businesses as described below. For more information about our capital expenditures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — How We Have Financed Our Business — Capital expenditures” elsewhere in this prospectus.

Following is a description of our principal investments and divestitures during the last three fiscal years, as well as those currently in progress:

Sale of Operations of BridgeQuest. In February 2013, we executed an agreement for the sale of the operations of BridgeQuest, Inc. and its relevant subsidiary. Total consideration for BridgeQuest Inc. was $6,500. In addition, as part of the sale agreement, we expect to receive additional consideration upon collection of existing account receivables. BridgeQuest Inc., a North Carolina corporation which managed and operated a professional outsourcing center in St. Petersburg, Russia, was purchased by us in April 2007. The consideration amounted to $2.0 million. Under the terms of the transaction, we committed to pay to the selling shareholders additional consideration computed based on BridgeQuest’s revenues and earnings before interest and taxes, during 2007 through 2009. For 2007, the contingent consideration amounted to $1.8 million and was recorded as goodwill in 2007. Under an amendment to the agreement entered into in January 2008, we granted to the selling shareholders warrants to purchase 200,000 BluePhoenix ordinary shares upon reaching a certain financial milestone. The warrants were valued at $2.5 million based on the Black-Scholes pricing model applied as of the commitment date, and such amount was recorded as additional goodwill in 2008. These warrants were exercised in 2008. On December 31, 2008, we signed an additional amendment to the purchase agreement, pursuant to which we paid to the selling shareholders in 2009 and 2010 additional aggregate consideration of $1.6 million. This amount was recorded as goodwill in 2008.

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Sale of AppBuilder to Magic. In 2011, we entered into an agreement with Magic Software Enterprises Ltd., referred to as Magic, pursuant to which we sold to Magic our AppBuilder technology. The net consideration for the AppBuilder was $12.5 million, of which approximately $3.8 million was deposited in escrow. As of September 30, 2013, $100,000 was still held in escrow and is expected to be released upon the fulfillment of certain conditions. As a result of the transaction, we recorded a capital loss of $4.1 million in 2011, mostly derived from the realization of goodwill in the amount of $13.1 million. In 2012, we recorded a capital gain of $2.3 million in relation to proceeds received from this transaction. During the six months ended June 30, 2013, we recorded a capital gain of $786,000 due to money released from escrow.

In addition, as part of the agreement with Magic, we undertook to provide Magic with certain professional services during a three-year period commencing at the closing of the transaction. Revenues generated from these services in 2011 and 2012, were $483,000 and $1.44 million, respectively. Following the sale of operations of BridgeQuest Inc., we reached an understanding with respect to these services, whereby no additional revenues were generated or expected from these services in 2013.

Sale of Liacom. In May 2012, we completed the sale of our 51% share holdings in Liacom Systems Ltd. for an aggregate consideration of $1.7 million. This sale was part of our strategic plan to focus on the legacy modernization business. The proceeds from the sale were used to repay loans.

Sale of Knowledge Management Business. In June 2012, we entered into an agreement for the sale of our holdings in BluePhoenix Knowledge Management Systems Ltd., for a consideration of $550,000. We purchased the knowledge management business in December 2009 for approximately $3.0 million. The criteria for payment of additional contingent consideration were not met and therefore no additional consideration was accrued.

Danshir Software Ltd. and Danshir Tmurot Ltd. In January 2010, we acquired from two Israeli companies, Danshir Software Ltd. and Danshir Tmurot Ltd., through the temporary receiver appointed to the companies by the Israeli court, certain business activities in the field of professional services in Israel.  The companies are related to DSKnowledge Ltd., the business we purchased in December 2009. The total consideration paid for the activities of Danshir Software Ltd. and Danshir Tmurot Ltd. was $796,000, of which $93,000 was paid in 2009 as an advance.

Customers

We provide our modernization solutions directly to our customers or through our strategic partners, such as IBM, CSC, Oracle, Microsoft, HP, NCS, T-Systems, Cognizant, Capgemini and Dell. Additionally, from time to time, other IT services companies license our technologies for use in modernization projects in various markets. Our partners include system integrators, as well as other software vendors who assist us in increasing our penetration and exposure in the market. We provide solutions to our partners’ customers in collaboration with the system integrator’s team. In most cases, the partners provide related services to the customers. Our arrangements with our partners vary. We may enter into distribution agreements under which we grant license rights to our partners or to the partners’ customers or provide related services, or a combination of both. Alternatively, we may enter into subcontractor relationships with our strategic partners.

A substantial portion of our agreements are in the form of fixed price contracts. These projects bear risks and uncertainties as we price these contracts based on estimates of future costs, duration of the project, and the impact of potential changes in the scope of the work. We also enter into other types of contracts, including annual maintenance contracts, license agreements, and arrangements on a time and materials basis.

In 2012, NCS PTE Ltd. and CenterPoint Energy Service Company LLC accounted for 14.3% and 11.7% of our revenues, respectively. In 2011, no individual customer accounted for 10% or more of our revenues. In 2010, SDC accounted for 21.8% of our revenues.

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The following table summarizes the revenues from our technology and services by geographic regions based on the location of the end customer for the periods indicated:

	Year ended December 31,
	2012		2011		2010
	(in thousands)
North America		3,182		3,765		9,054
Europe		4,488		11,918		27,105
Israel		1,382		2,666		3,686
Other		1,572		3,121		2,127
	$	10,624	$	21,471	$	41,972

Research and Development

We continue to reinvest in our company through our investment in technology and process improvement. We also invest in a skilled and specialized workforce. In 2012, our investment in research and development amounted to $691,000, as compared to $3.1 million in 2011 and $5.2 million in 2010. This decrease is attributable to the restructuring of the company’s activities to focus on the core business and products we intend to market in the future.  Accordingly, we reduced our investment in Client/Server tools and re-hosting tools. However, we have continued to invest and increased our investment in our application and database transformation software.

Enterprise IT Automated Migration

Language Migration — In the area of automated language migration, we continue to build on, and develop our COBOL and 4GL migration solutions. Our assets in the migration area cover an integrated migration tool — CTU, which includes automated migration of IBM Mainframe environment to Java or C# (COBOL, JCL, Utilities, Sort, VSAM and CICS). In addition, we have complimentary solutions for COOL:Gen, ADSO, Natural, PL/I and other transformations. We continue to extend the support target platform of these transformations to include J2EE and .NET platforms.

Chief Scientist Grants

PowerText — We received through a subsidiary, an aggregate of approximately $300,000 in grants from the Office of the Chief Scientist in the Ministry of Industry, Trade and Labor of the State of Israel, or the OCS, for the development of PowerText. PowerText is a software solution for automated electronic document mining, management and presentment. Royalties of 3% are payable to the OCS on all sales of PowerText up to 100% of the dollar-linked grant received.

The balance of the contingent liability relating to the royalties payable by our subsidiaries to the OCS, at December 31, 2012, amounted to approximately $235,000.

Other Grants

During 2007, our subsidiary, I-Ter, received an amount of $585,000 from the Ministry of Production in Italy for I-Ter’s Easy4Plan product. 36.5% of the funds received constitute a grant, and the remaining 63.5%, is a 10-year loan to be repaid by I-Ter in annual installments until September 2018. The loan bears a minimal annual interest of 0.87% and is linked to the euro. As of December 31, 2012, the remaining loan balance was approximately $210,000. Our subsidiary’s operations have been reduced significantly, which may result in the Ministry of Production in Italy requiring the immediate repayment of the full outstanding loan amount.

Intellectual Property

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

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Challenges and Opportunities

In a market that continues to innovate and evolve, new technologies and practices, by definition, render existing technology deployments out-of-date or legacy. By the same measure, however, in order for us to capitalize on the constant source of legacy solutions, we must evolve our solutions portfolio to deal with the changing definition of what constitutes “leading edge” technologies and the growing set that is deemed to be “legacy.” Over time, as one legacy set of technologies is gradually replaced, we must be capable of addressing the modernization needs of the next set of aging technologies. However, these cycles are slow and provide us with the time to update our technology and build the necessary knowledge in house.

The fact that the modernization needs of the market are evolving on a constant basis, necessitates that we be capable of tracking and predicting changes in technologies. Anticipating the needs of the IT modernization market and delivering new solutions that satisfy the emerging needs is a critical success factor.

However, even if we develop modernization solutions that address the evolving needs of the legacy IT modernization market, we cannot assure that there will be a predictable demand for our offerings. Variables ranging from the macro-economic climate, to the competitive landscape, to the perceived need that the enterprise market has for a specific modernization solution, may have an impact such as, a longer sales cycle or increased pricing pressure.

To keep up with the anticipated growing demand for our solution, we must retain our highly skilled personnel in the fields of project management, legacy systems, and leading modern technologies. Maintaining and growing the requisite skill base can be problematic; personnel with an understanding of legacy technologies is a finite resource and the market for recruiting and retaining such skills can be highly competitive.

Competition

Legacy Modernization

We face competition for our solution from various entities operating in the market. At the highest level, the legacy IT modernization market competes with two other approaches that can be employed to evolve the operating capabilities of a business: re-building business systems from scratch or buying a commercially available application package that can be configured to serve the specific needs of a particular business. The benefits of each approach have been widely documented by major research firms such as Gartner Group and Forrester Research. It is typically understood that legacy IT modernization provides several key advantages over the other two, including:

● Lowest risk — existing tried, tested and proven information technology is leveraged directly and translated into a version of itself based on a newer technology (Software and /or Hardware platform);

● Least cost and time; and

● Least impact on the business and professional skill set.

However, some enterprises still choose to abandon legacy technologies and invest in the redevelopment of new business applications.

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

● the ability to offer automated solutions for legacy IT modernization;

● the range and number of languages, operating systems and databases supported by said technology;

● 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.

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Competition in the legacy IT modernization field is, to a large extent, based upon the functionality of the available technology and personnel expertise. Vendors in this market address the modernization of legacy systems in different ways, and therefore do not always compete directly with others. Many small vendors, those that possess just a few niche modernization technologies or a focused set of skills, are only capable of addressing a small portion of the overall modernization market. Selected few others are able to offer comprehensive suites of integrated solutions and are able to address the broad set of needs encountered by businesses.

Our principal competitors consist of system integrators, offshore outsourcers, and tool vendors, including leading software developers, who provide replacement or modernization of legacy systems.

Major system integrators in our market include IBM, HP, Accenture and Capgemini, some of whom, we also partner with. IBM has established Legacy Modernization as a strategic aspect of its long-term application development strategy. Major system integrators have a specific and dominant advantage in the underlying application development infrastructure associated with many legacy environments (predominantly IBM mainframes) and a large service delivery capability. In some cases, we cooperate with some of these system integrators in providing specific solutions or portions of a comprehensive project. Major offshore outsourcers in the market include TCS, WIPRO, Infosys and Patni. Both systems integrators and offshore outsourcers have vertical market groups offering consulting and professional services. Although system integrators and offshore outsourcers often have the advantage of brand recognition and depth of resources, their ability to compete with purely automated tool-based modernization techniques is still limited. Modernization approaches that use relatively inexpensive offshore manual labor to conduct migration projects are still more expensive than those conducted using automated technology and are more prone to project risks and delays.

We also face competition from niche tools and solutions companies operating in the enterprise IT modernization continuum.

Examples of businesses that address specific sub-segments of the market include MicroFocus, Meta Ware, Ateras, Anubex, Migrationware, Alchemy Solutions, HTWC, Fresche Legacy, MSS International and Dell.

In addition, enterprises themselves represent one of the largest categories of competition. For a variety of reasons, many businesses choose to execute legacy IT modernization projects using their own internal IT resources. The rationale for a company to attempt to conduct modernization activities using in-house resources varies.

Reasons include wanting to justify the existence of available resources, the belief that using internal resources will be quicker or cheaper, and decision makers underestimating the complexity of modernization projects or failing to appreciate the benefits that can result by using experienced personnel and built-for-purpose technology.

Organizational Structure

We run our worldwide operations through several wholly owned and controlled subsidiaries, the significant of which are named below:

Name of Subsidiary	Ownership Interest	Country of Incorporation
BluePhoenix Solutions USA Inc.	100%	United States
BluePhoenix Solutions U.K. Limited	100%	United Kingdom
Bluephoenix Legacy Modernization s.r.l.	100%	Italy
BluePhoenix Solutions Srl.	100%	Romania
Zulu Software Inc.	72%	United States

Property, Plants and Equipment

We, together with our subsidiaries and affiliates, currently occupy approximately 1,347 square meters of office space. The aggregate annual rent we paid for our facilities in 2012 was $530,000. The following table presents certain information about our current facilities and the terms of lease of these facilities.

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Country and State	City	Sq. Meters		Expiration	Annual anticipated rental fees in 2013 (*) in thousands $
Israel	Herzliya		242	December  2013		60
USA, Washington	Seattle		52	Month-to-Month		50
Romania	Bucharest		802	August 2015		139
United Kingdom	Buckinghamshire		12	March 2014		12
Italy	Riccione		4	December  2013		11
USA, Virginia	Herndon		235	November 2013		52
Total			1,347			324

________________________

(*) Includes related fees such as management fees, parking, etc.

If, in the future, we determine that we need additional space to accommodate our facilities, we believe that we will be able to obtain this additional space without difficulty and at commercially reasonable prices. We do not own any real property.

History and Development of the Company

We were incorporated in Israel in 1987 under the name A. Crystal Solutions Ltd. In 1996, we changed our name to Crystal Systems Solutions Ltd. and in 2003, we changed our name to BluePhoenix Solutions Ltd. Our registered office is located at 8 Maskit Street, Herzliya, 46733, Israel and our telephone number is: 972-9-9526110.  Our headquarters are located at 601 Union Street, Suite 4616, Seattle, Washington, 98101 and our telephone number is (206) 395-4152.

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MANAGEMENT

Directors and Senior Management

The following table describes information about our executive officers and directors as of September 30, 2013. The business address for our directors and officers is 601 Union Street, Suite 4616, Seattle, Washington, 98101.

Name	Age		Position
Melvin L. Keating		66	Chairman of the Board
Matt Bell		40	Chief Executive Officer
Rick Rinaldo		48	Chief Financial Officer
Brian Crynes (1)(2)(3)		66	Director
Carla Corkern (1)(2)(3)		46	Director
Thomas J. Jurewicz (1)(2)		49	Director
Harel Kodesh		55	Director

________________

(1) Member of the audit committee and compensation committee.

(2) Independent director under The NASDAQ Global Market listing requirements.

(3) An outside director.

Melvin L. Keating has served as a director and chairman of our board of directors since January 2012. Mr. Keating has served as a consultant to various private equity firms since October 2008, and has served as a director of various corporations as described below. From October 2005 through October 2008, Mr. Keating was president and chief executive officer of Alliance Semiconductor Corp., in Santa Clara, CA, a worldwide manufacturer and seller of semiconductors (NASDAQ). Mr. Keating is currently a director of several other publicly traded companies, including Red Lion Hotels Corp (NYSE), API Technologies Corp (NASDAQ) and Marlborough Software Development (successor to Bitstream Inc.). Mr. Keating holds both an MS in accounting and an MBA in finance from the Wharton School at the University of Pennsylvania and holds a B.A. in art history from Rutgers University.

Matt Bell has served as our chief executive officer since July 2012. Prior to joining our company, in 2011, Mr. Bell served as chief operating officer at PitchBook Data, Inc. Between 2007 and 2011, Mr. Bell served as vice president of sales and business development for three enterprise startup companies backed by a venture capital firm from Seattle, WA. Mr. Bell also served as general manager of sales of RealNetworks where he managed the enterprise, education, government, and ASP sales throughout North America. He also managed all enterprise OEM business globally. Mr. Bell holds a B.A. in business and administration specializing in marketing and finance from the University of Washington.

Rick Rinaldo has served as our chief financial officer since April 2013. Prior to this position, between 2009 and 2013, Mr. Rinaldo worked for Expedia.com running the treasury operations group which included worldwide responsibilities for cash management, investments and insurance.  Prior to that, Rick had over 15 years of financial experience at various positions. Mr. Rinaldo holds a B.S. in finance from California State University.

Brian Crynes has served as a director and as a member of our audit committee since September 2012. Mr. Crynes served as interim chief information officer at Russell Investments, during 2009 and 2010. Prior to that, from 2001 to 2008, Mr. Crynes served as chief information officer at Starbucks Coffee Company. Between 1997 and 2001, Mr. Crynes served as chief information officer at Coca-Cola Amatil, Ltd. Prior to that, from 1994 to 1997, Mr. Crynes served as business unit chief information officer at Bristol-Myers Squibb, Inc. Between 1989 and 1993, Mr. Crynes served as senior director, Cross Functional Systems at Apple, Inc. From 1983 to 1989, he served as vice president, information systems at New York Daily News, Inc. Mr. Crynes holds both a B.S. in mathematics and an M.B.A. in finance from the University of Scranton.

Carla Corkern has served as a director and as a member of our audit committee since April 11, 2013. Ms. Corkern has served as chief executive officer and chairman of the board of Talyst, Inc. since 2008. During 2006 and 2007, she served as president of extended care at Talyst, Inc. and thereafter, until 2008, she served as chief operating officer. Between 2004 and 2006, Ms. Corkern served as vice president of engineering and chief operations officer at Vykor, Inc. During 2004, Ms. Corkern acted as principal of Cosmochan Consulting. In 2001 and 2002, she served as vice president and general manager of Netegrity, and from 1999 to 2001, she served as vice president, professional services and training at DataChannel Inc. Ms. Corkern was the president and founder of Isogen International, until its sale to DataChannel Inc. in 1999. Ms. Corkern holds a BS in technical communication finance from Louisiana Tech University.

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Thomas J. Jurewicz has served as a director since December 2012and as a member of our audit committee since February 2013. Between 1999 and 2011, Mr. Jurewicz held various financial positions at VMware, Inc. and its subsidiaries, including treasurer, interim CFO, director and EMEA controller. Prior to that, Mr. Jurewicz held various financial roles at CMC Industries, Inc., NETCOM and On-Line Communications. Early in his career, he was an investment banker for Merrill Lynch & Co. Mr. Jurewicz holds an MBA from Stanford University, and a BS in applied mathematics from Yale University.

Harel Kodesh has served as a director sinceJune 2012.Mr. Kodesh has served as an executive vice president at VMware since 2011. Prior to that, between 2008 and 2011, Mr. Kodesh was the president of EMC’s Cloud Infrastructure Business and the chief executive officer of Decho, an EMC subsidiary, focused on personal information management in the cloud. Between 2003 and 2008, Mr. Kodesh served as chief product officer at Amdocs, Inc. Prior to that, Mr. Kodesh held a variety of executive positions at Microsoft, including vice president of the information appliance division. During 2000 until 2003, Mr. Kodesh served as president and chief executive officer of Wingcast, Inc., a company formed by Qualcomm and Ford Motor Company to provide services for sending, receiving, and storing information via telecommunication devices to the automotive industry. Mr. Kodesh has MSc in electrical engineering and BSc in computer engineering from the Israel Institute of Technology in Haifa, Israel.

Compensation

In 2012, we paid to all of our directors and executive officers, as a group (14 persons), aggregate remuneration of approximately $758,000. This amount includes cash, bonuses and amounts set aside or accrued to provide pension, social security or similar benefits. This amount does not include amounts expended by us for automobiles made available to our officers and expenses reimbursed to officers (including business travel, professional and business association dues and expenses), RSUs and stock option expenses. During 2012, we granted to all of our directors and executive officers, as a group (14 persons), an aggregate of 387,854 RSUs and options to purchase an aggregate of 300,000 ordinary shares.

Under Israeli law, we are not required to disclose, and have not otherwise disclosed, the compensation of our senior management and directors on an individual basis.

Compensation Committee

In December 2012, an amendment to the Companies Law came into effect which requires publicly traded companies, like us, to establish a compensation committee. In addition, under this amendment, we were required to adopt a compensation policy, to be recommended by the compensation committee, with respect to the remuneration of our officers and directors. Such compensation policy must include, among others, certain mandatory provisions as stipulated in the amendment.

The compensation committee is responsible to periodically advise the board of directors as to the necessity to update the compensation policy and to examine its implementation. In the event that a compensation policy is set to expire after a period longer than three years, the compensation committee shall advise the board, every three years, whether such policy should be amended, discontinued or remain intact.

In addition, under the Companies Law, the compensation committee is authorized to approve the compensation of certain officers, including the chief executive officer, the company’s directors and the controlling shareholder, if he or she is employed by the company. Furthermore, the compensation committee is authorized to exempt the company from bringing the chief executive officer’s compensation to shareholders approval, under certain circumstances stipulated in the Companies Law.

According to the Companies Law, the compensation committee shall be comprised of no less than three directors and only directors eligible to serve as members of the audit committee may serve on the compensation committee. All of the outside directors must serve as members of the compensation committee and shall constitute a majority thereof. The chairman shall be an outside director. The compensation of all members of the compensation committee shall be identical. Our compensation committee is comprised of those three members serving on the audit committee, which currently include our two outside directors and Tom Jurewicz.

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Compensation Policy

In February 2013, our board of directors approved our compensation policy (following the recommendation of our compensation committee), which was further approved by our shareholders in April 2013.

According to the Companies Law, the compensation of our directors and officers must be approved in accordance with our compensation policy, unless certain procedural and substantive requirements are met.

Subject to any extraordinary circumstances stipulated in the Companies Law, the compensation of our officers (who do not also serve as directors), including options, other share-based compensation, procurement of insurance coverage and indemnification, is subject to the approval of the compensation committee and board of directors. The compensation of our directors and chief executive officer is also subject to shareholder approval.

The renewal of our officers’ compensation package (including our chief executive officer) may be approved by our compensation committee (without requiring the approval of our board of directors and shareholders) if the compensation committee has determined that the renewed package is not materially different from his or her previous package.

Compensation of Our Officers

We maintain written employment agreements or consultancy agreements with our officers. The employment and consultancy agreements are mostly unlimited in term and may be terminated by us upon a six-month prior notice. If we terminate the employment or consultancy agreements, we are required to pay the usual severance pay in accordance with applicable law. In certain cases, we may be required to pay additional severance pay equal to salary and benefits during a period of up to six months and acceleration of RSUs and options granted but not yet vested. The agreements with our officers provide for annual base salary or fees and other benefits such as vacation, sick leave, provision of an automobile, insurance contributions, and non-compete and confidentiality agreements.

Compensation of Our Non-Employee Directors

Our non-employee directors, currently including Mel Keating, the chairman of our board of directors, Tom Jurewicz and Harel Kodesh, receive a compensation package, as approved in accordance with the Companies Regulations (Reliefs in Transactions with Related Parties) 2000 in the same amounts and on such terms payable to our outside directors, in accordance with the Companies Regulations (Rules for the Payment of Remuneration and Expenses of Outside Directors) 2002, referred to as the Outside Directors Regulations, as follows:

(a) Cash Compensation — an annual total compensation of $20,000 consisting of the annual payment (Gmul Shnati), payable in quarterly installments in accordance with the Outside Directors Regulations and per meeting payment (Gmul Hishtatfut), which shall be paid following each meeting in accordance with the Outside Directors Regulations; and

(b) RSUs Compensation — 30,000 RSUs to be granted to each non-employee director upon his or her initial appointment to the board of directors (and every three years thereafter), under the same terms of the RSUs granted to the outside directors. The RSUs shall vest and become exercisable in equal monthly installments over a period of 36 months following the date of grant.

 The grant of the RSUs is made under the terms set forth in our 2007 Award Plan and in accordance with our standard grant letter. In the event of a change of control pursuant to which (i) any shareholder holding less than 25% of the outstanding share capital of the company on the date of grant (except for the three shareholders) shall hold at least 50% of the outstanding share capital of the company;  or (ii) a merger or a sale of 50% or more of the company’s activities shall be effected (each of (i) and (ii), referred to herein as a “Change of Control”), then all outstanding RSUs previously granted, shall be automatically vested.

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 Compensation of the Chairman of the Board of Directors

On April 11, 2013, our shareholders approved, following the approval of our compensation committee and board of directors, in accordance with the Companies Law, a compensation package for Mr. Keating similar to the compensation package for the non-employee directors, with the exception that the number of RSUs granted to Mr. Keating shall be 45,000 RSUs which shall be granted following the shareholders’ approval and shall vest and become exercisable in equal monthly installments over a 36 month period, beginning on March 1, 2013.

It was further resolved by the shareholders, that any chairman of the board appointed from time to time, other than Mr. Keating, shall be entitled to the compensation generally payable to our non-employee directors.

Compensation of Our Outside Directors

In September 2012, our shareholders approved, following the approval of our audit committee and our board of directors, the compensation payable to our outside directors, in accordance with the Companies Regulations (Rules for the Payment of Remuneration and Expenses of Outside Directors) 2002, as follows:

(a) Cash Compensation — an annual total compensation of $20,000 consisting of the annual payment (Gmul Shnati ), payable in quarterly installments in accordance with the Outside Directors Regulations and per meeting payment (Gmul Hishtatfut), which shall be paid following each meeting in accordance with the Outside Directors Regulations; and

(b) RSUs Compensation — 30,000 RSUs to be granted to each outside director upon his or her initial appointment to the board of directors (and every three years thereafter). The RSUs shall vest and become exercisable in equal monthly installments over a period of 36 months following the date of grant.

The grant of the RSUs is made under the terms set forth in our 2007 Award Plan and in accordance with our standard grant letter. In the event of a Change of Control, then all outstanding RSUs previously granted, shall be automatically vested.

Board Practices

Pursuant to our articles of association, directors are elected at a general meeting of our shareholders by a vote of the holders of a majority of the voting power represented at the meeting. Additional directors may be elected between general meetings by a majority of our directors. Our board is comprised of five persons, four of which have been determined to be independent within the meaning of the applicable NASDAQ requirements. Two of these independent directors also serve as outside directors mandated under Israeli law and subject to additional criteria to help ensure their independence (See “Outside Directors under the Companies Law” below). Each director, except for the outside directors, holds office until the next annual general meeting of shareholders, when, subject to any law, such director may be reappointed for an additional term of service. Officers are appointed by our board of directors.

Under the Companies Law, a person who lacks the necessary qualifications and the ability to devote an appropriate amount of time to the performance of his or her duties as a director shall not be appointed to serve as a director of a publicly traded company. While determining a person’s compliance with such provisions, the company’s special requirements and its scope of business shall be taken into account. Where the agenda of a shareholders meeting of a publicly traded company includes the appointment of directors, each director nominee is required to submit a declaration to the company confirming that he or she has the necessary qualifications and he or she is able to devote an appropriate amount of time to performance of his or her duties as a director. In the declaration, the director nominee shall specify his or her qualifications and confirm that the restrictions set out in the Companies Law do not apply.

In addition, each director nominee must include in his or her declaration a statement, the content of which shall be that he or she was not convicted for certain criminal or securities laws offenses provided under the Companies Law. Any person nominated to serve as an office holder of a publicly-traded company shall also comply with such disclosure requirements.

Furthermore, under the Companies Law, a person shall not be appointed as a director or an office holder of a publicly-traded company (i) if a court has ordered that due to the severity and circumstances of an offense committed by a nominee, such nominee is not fit to serve as a director or an office holder of a public company; or (ii) the administrative enforcement committee mandated under the Israeli Securities Law, 1969, referred to as the Securities Law, imposed on such nominee restrictions with respect to serving as a director or office holder, as applicable, of a publicly-traded company for a certain period of time.

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Under the Companies Law, if a director or office holder ceases to comply with any of the requirements provided in the Companies Law, such director must notify the company immediately, and his or her term of service shall terminate on the date of the notice.

Outside Directors under the Companies Law

Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are required to appoint at least two outside directors.

The Companies Law provides that a person may not be appointed as an outside director if such person is a relative of the controlling shareholder, or if such person or the person’s relative, partner, employer, another person to whom he was directly or indirectly subject, or any entity under the person’s control, has, as of the date of the person’s appointment to serve as outside director, or had, during the two years preceding that date, any affiliation with any of the following:

● the company;

● the company’s controlling shareholder;

● a relative of the controlling shareholder;

● any entity controlled by the company or by the controlling shareholder; or

● if the company has no controlling shareholder or a shareholder holding 25% or more of the voting rights — a person that at the time of appointment is the chairman of the board of directors, the chief executive officer or the most senior financial officer of the company, or a shareholder holding 5% or more of the outstanding shares or voting rights of the company.

The term “affiliation” includes:

● an employment relationship;

● a business or professional relationship maintained on a regular basis;

● control; and

● tenure as an office holder.

No person may serve as an outside director if: (a) the person’s position or other business activities create, or may create a conflict of interest with the person’s responsibilities as an outside director or may otherwise interfere with the person’s ability to serve as an outside director; (b) at the same time such person serves as a director of another company on whose board of directors, a director of the other company serves as an outside director; (c) the person is an employee of the Israel Securities Authority or of an Israeli stock exchange; (d) such person or such person’s relative, partner, employer or anyone to whom such person is directly or indirectly subordinate, or any entity under such person’s control, has business or professional relations with any person or entity he or she should not be affiliated with, as described in the preceding paragraph, unless such relations are negligible; or (e) such person received compensation, directly or indirectly, in connection with his or her service as a director, other than as permitted under the Companies Law and the regulations promulgated thereunder.

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If, at the time of election of an outside director, all other directors who are not controlling shareholders of such company or their relatives, are of the same gender, the outside director to be elected must be of the other gender. Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:

(1) a majority of the shareholders who are not controlling shareholders and who do not have a personal interest in the appointment (other than a personal interest which does not stem from an affiliation with a controlling shareholder), present and voting at the meeting, voted in favor of the appointment; or

(2) the non-controlling shareholders or shareholders who do not have a personal interest in the appointment (other than a personal interest which does not stem from an affiliation with a controlling shareholder) who were present and voted against the election, hold no more than two percent of the voting rights at the company.

Pursuant to the Companies Law, all outside directors must have financial and accounting expertise or professional qualifications, and at least one outside director must have financial and accounting expertise. The terms “financial and accounting expertise” and “professional qualifications” have been defined in regulations promulgated under the Companies Law.

If an outside director ceases to comply with any of the requirements provided in the Companies Law with respect to the appointment of outside directors, such outside director must notify the company immediately, and his or her term of service shall terminate on the date of such notice.

Outside directors are elected for a three-year term and may be re-elected for two additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred:

(a) the reappointment of the outside director has been proposed by one or more shareholders holding together one percent or more of the voting rights in the company, and the appointment was approved at the general meeting of the shareholders by a simple majority, provided that: (i) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment (other than a personal interest which does not stem from an affiliation with the controlling shareholder) and abstentions are disregarded; and (ii) the total number of shares which voted for the appointment held by shareholders who do not have a personal interest in the appointment (other than a personal interest which does not stem from an affiliation with a controlling shareholder) and/or who are not controlling shareholders, exceed two percent of the voting rights in the company; or

(b) the reappointment of the outside director has been proposed by the board of directors and the appointment was approved by such special majority required for the initial appointment of an outside director.

At present, Brian Crynes and Carla Corkern serve as our outside directors. Mr. Crynes is to hold office until September 4, 2015 and Ms. Corkern is to hold office until April 10, 2016. In accordance with the Israeli Companies Regulations (Alleviation for Public Companies Whose Shares are Listed on a Stock Exchange Outside of Israel) 2000, referred to as the Alleviation Regulations, Israeli companies whose shares are listed on a stock exchange outside of Israel, such as our company, may re-appoint an outside director for additional terms not exceeding three years each, beyond the three three-year terms generally applicable, provided that, if an outside director is being re-elected for an additional term or terms beyond the three three-year terms: (i) the audit committee and board of directors must determine that, in light of the outside director’s expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the company’s benefit; (ii) the outside director must be re-elected by the special majority required for the initial appointment and subject to the provisions stipulated in the Companies Law; and (iii) the term during which the nominee has served as an outside director and the reasons given by the audit committee and board of directors for extending his or her term of service must be presented to the shareholders prior to approval of the reappointment.

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

An outside director is entitled to compensation as provided in regulations promulgated under the Companies Law and is otherwise prohibited from receiving any compensation, directly or indirectly, in connection with services provided as an outside director. For more information about the compensation of our outside directors, see “Compensation of Our Outside Directors” above.

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Independent Directors under the Companies Law

Pursuant to the Companies Law, a public company, such as BluePhoenix, may include in its articles of association provisions relating to corporate governance. Such provisions may include the number of directors which shall be independent of management. Alternatively, a company may adopt the proposed standard provision included in a supplement to the Companies Law, under which a majority of the directors are to be independent, or, if the company has a controlling shareholder or a 25% or more shareholder, that at least one-third of the directors serving on the board be independent. An “independent director” is defined as a director who meets all of the following:

● 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.

The Alleviation Regulations provide that a director in a company whose shares are listed in a stock exchange outside of Israel, such as BluePhoenix, who meets the criteria of an independent director under the relevant non-Israeli rules relating to independence standards for audit committee membership and who meets certain non-affiliation criteria, which are less stringent than those applicable to outside directors, would be deemed an “independent” director pursuant to the Companies Law provided he or she has not served as a director for more than nine consecutive years. For these purposes, ceasing to serve as a director for a period of two years or less is not deemed to sever the consecutive nature of such director’s service. In accordance with the Alleviation Regulations, a company whose shares are listed in a stock exchange outside of Israel may extend the term of service of its independent directors beyond nine years, for additional terms of service, each of which shall be no more than three years.

As of the date of this prospectus, our articles of association have not yet been amended to include these provisions of the Companies Law relating to corporate governance.

Qualifications of Other Directors under the Companies Law

Under the Companies Law, the board of directors of a publicly traded company is required to make a determination as to the minimum number of directors who must have financial and accounting expertise according to criteria that is defined in regulations promulgated under the Companies Law. In accordance with the Companies Law, the determination of the board should be based on, among other things, the type of the company, its size, the volume and complexity of its activities and the total number of directors serving on the board. Based on the aforementioned considerations, our board determined that the number of directors with financial and accounting expertise in our company shall not be less than two.

Audit Committee

The Companies Law requires public companies to appoint an audit committee, comprised of at least three directors, and which shall include all of the company’s outside directors. The majority of the members of the audit committee must be independent directors. The Companies Law further stipulates that the following may not serve as members of the audit committee: (a) the chairman of the board of directors; (b) any director employed by or providing services on an ongoing basis to the company, to the controlling shareholder of the company or an entity controlled by the controlling shareholder of the company; (c) a director whose main income derives from the controlling shareholder; and (d) the controlling shareholder or any relative of the controlling shareholder.

In addition, under applicable NASDAQ rules, we are currently required to have a majority of our board members independent and to maintain an audit committee, whose members are independent of management. Our outside directors, as well as Messrs. Tom Jurewicz and Harel Kodesh, qualify as independent directors under the applicable NASDAQ rules and those of the Securities and Exchange Commission. We have established an audit committee, consisting of Tom Jurewicz and our two outside directors, Brian Crynes and Carla Corkern. The board has determined that Tom Jurewicz is an “audit committee financial expert” as defined by applicable SEC regulations.

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Under the Companies Law, the responsibilities of the audit committee include: (a) identifying flaws in the management of a company’s business and making recommendations to the board of directors as to how to correct them; (b) with respect to certain actions involving conflicts of interests and with respect to certain related party transactions, deciding whether such actions are material actions and whether such transactions are extraordinary transactions, for the purpose of approving such actions or transactions; (c) reviewing and deciding whether to approve certain related party transactions and certain transactions involving conflicts of interest, when such authority with respect to such transactions is granted by law to the audit committee; (d) reviewing the comptroller’s work program; (e) examining the company’s internal control structure and processes, the performance of the comptroller and whether the comptroller has at his or her disposal the tools and resources required to perform his or her duties, considering, inter alia, the special needs of the company and its size; (f) examining the external auditor’s scope of work, as well as the external auditor’s fees and providing the corporate organ responsible for determining the external auditor’s fees with its recommendations; and (g) providing for arrangements as to the manner in which the company deals with employee complaints with respect to deficiencies in the administration of the company’s business, and protection to be provided to such employees.

In accordance with the Sarbanes-Oxley Act and NASDAQ requirements, our audit committee is directly responsible for the appointment, compensation and oversight of our independent auditors. In addition, the audit committee is responsible for assisting the board in monitoring our financial statements and the effectiveness of our internal controls. We have adopted a formal audit committee charter that we have implemented, embodying these responsibilities. The audit committee reviews and reassesses the adequacy of the audit committee charter on an annual basis.

Our board of directors authorized our audit committee to act as committee for review of financial statements under the Companies Regulations (Provisions and Terms with Respect to Procedures for Approval of Financial Statements), 2010. Under the regulations, the committee for review of financial statements is required to make recommendations to our board of directors with respect to various issues related to the financial statements, at a reasonable time prior to the approval the financial statements by the board of directors.

Comptroller

Under the Companies Law, the board of directors is required to appoint a comptroller, nominated by the audit committee. The role of the comptroller is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Companies Law, the comptroller may be an employee of the company but not an office holder, or an interested party (defined as a holder of 5% or more of the voting rights in the company or of its issued share capital, the chief executive officer of the company or any of its directors, or a person who has the authority to appoint the company’s chief executive officer or any of its directors), or a relative of an office holder or of an interested party. In addition, the company’s external auditor or its representative may not serve as the company’s comptroller.

Approval of Certain Transactions under the Companies Law

The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s position in the company and his or her personal affairs; (ii) avoiding any competition with the company; (iii) avoiding exploiting any business opportunity of the company in order to receive a personal advantage; and (iv) revealing to the company any information or documents relating to the company’s affairs that the office holder has received due to his position as an office holder. Each person listed in the table under “Directors and Senior Management” above is an office holder.

Under the Companies Law, arrangements regarding the compensation of directors require the approval of the audit committee, the board of directors and shareholder approval, except in certain circumstances prescribed in regulations promulgated under the Companies Law.

The Companies Law requires that an office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an “extraordinary transaction” as defined under the Companies Law, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants, siblings and parents and the spouses of any of the foregoing.

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In addition, the office holder must also disclose any interest held by any corporation in which the office holder owns 5% or more of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager. An “extraordinary transaction” is defined as a transaction conducted outside the ordinary course of business, a transaction deviating from otherwise acceptable market terms or a transaction which is likely to have a material impact on the company’s profitability, assets or liabilities.

Following the disclosure by the office holder of his or her interest in the transaction, the transaction is required to be approved by such entities prescribed under the Companies Law, provided that the transaction is not adverse to the company’s interest. If the transaction is an extraordinary transaction, the company must receive any approval stipulated by its articles of association, the approval of the audit committee and the approval of the board of directors. In some circumstances, shareholder approval is also required. A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may generally not be present at this meeting or vote on this matter unless the majority of the board members or members of the audit committee, as applicable, have a personal interest in such matter and in such case, the matter is required to also be approved by the shareholders of the company.

The Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, including a shareholder holding 25% or more of the voting rights in the company if no other shareholder owns more than 50% of the voting rights in the company. If two or more shareholders are interested parties in the same transaction, their shareholdings are combined for the purposes of calculating percentages. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, as well as any engagement by a public company with a controlling shareholder or with the controlling shareholder’s relative, directly or indirectly, with respect to the provision of services to the company, and if such person is also an office holder or an employee of such company, with respect to such person’s terms of compensation, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval must include at least a majority of the shareholders who have no personal interest in the transaction and are voting on the subject matter or, alternatively, the total shares held by those who have no personal interest in the transaction who vote against the transaction must not represent more than two percent of the voting rights in the company. In certain cases provided in regulations promulgated under the Companies Law, shareholder approval is not required. The Israeli Minister of Justice may determine different percentages. Transactions that are for a period of more than three years generally need to be brought for approval in accordance with the above procedure every three years. A “Controlling Shareholder” for this purpose is defined as a person or entity that has the ability to control the company’s affairs. A person or entity shall be presumed to have the ability to control the company’s affairs if (i) it holds 50% or more of any controlling means in the company; or (ii) it holds 25% or more of the voting rights in the company, if no other person holds more than 50% of the voting rights.

The approvals of the board of directors and shareholders are required for a private placement of securities (or a series of related private placements (i) during a 12-month period offered to the same offeree, its representative, relative or an entity controlled by any of them, and if the offeree is an entity — any of its controlling shareholder, controlling shareholder’s relative or an entity controlled by any of the foregoing; or (ii) during a 12-month period and in which the consideration is paid with the same asset, while different securities of the same company would be considered as the same asset; or (iii) that are part of one continuous transaction or transactions conditioned one upon each other) in which:

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

● a person would become, as a result of such transaction, a controlling shareholder of the company.

Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his power in the company including, among other things, voting in a general meeting of shareholders on the following matters:

● any amendment to the articles of association;

● an increase of the company’s authorized share capital;

● a merger; or

● approval of interested party transactions which require shareholder approval.

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

For information concerning personal interests of certain of our office holders and our principal shareholders in certain transactions with us, see “Principal Shareholders and Related Party Transactions” below.

Exculpation, Insurance and Indemnification of Directors and Officers

Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend or any other distribution by the company.

Office Holders Insurance

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

● a breach of his duty of care to us or to another person;

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

● a financial obligation imposed on him or her in favor of another person.

In addition, our articles of association provide that, subject to the provisions of the Companies Law and the Securities Law, we may enter into a contract to insure an office holder for (i) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of a proceeding instituted against such office holder in relation to (A) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 of the Securities Law; or (B) administrative infringements pursuant to the provisions of Chapter H’4 of the Securities Law; or (C) infringements pursuant to the provisions of Chapter I’1 of the Securities Law; and (ii) payments made to the injured parties of such infringement under Section 52(54)(a)(1)(a) of the Securities Law.

Indemnification of Office Holders

Our articles of association provide that, subject to the provisions of the Companies Law and the Securities Law, we may indemnify an office holder to the fullest extent permitted by the Companies Law and the Securities Law, with respect to the following liabilities, expenses and payments, provided that such liabilities, expenses and payments were incurred by such office holder in his or her capacity as our office holder:

(i)  a financial obligation imposed on an office holder in favor of another person by a court judgment, including a compromise judgment or an arbitrator following liabilities, expenses;

(ii)  reasonable litigation expenses, including legal fees, incurred by an office holder as a result of Criminal Inquiry or an investigation or proceeding instituted against such office holder by a competent authority, which inquiry or investigation or proceeding has ended without the filing of an indictment and without an imposition of financial liability in lieu of a criminal proceeding, or has ended in the imposition of a financial obligation in lieu of a criminal proceeding without the filing of an indictment for an offence that does not require proof of mens rea or in connection with financial sanction (the phrases “proceeding that has ended without the filing of an indictment” and “financial obligation in lieu of a criminal proceeding” shall have the meanings ascribed to them in Section 260(a)(1a) of the Companies Law;

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(iii) expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted against him or her in relation to (a) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 of the Securities Law; or (b) administrative infringements pursuant to the provisions of Chapter H’4 of the Securities Law; or (c) infringements pursuant to the provisions of Chapter I’1 of the Securities Law;

(iv)  reasonable legal expenses, including attorney’s fees, which the office holder incurred or with which the office holder was charged by a court of law, in a proceeding brought against the office holder, by us or on our behalf or by another person, or in a criminal prosecution in which the office holder was acquitted, or in a criminal prosecution in which the office holder was convicted of an offense that does not require proof of mens rea (criminal intent); and

(v) payments to an injured party of infringement under Section 52(54)(a)(1)(a) of the Securities Law.

Subject to the provisions of the Companies Law and the Securities Law, we may undertake to indemnify an office holder in advance with respect to (i) financial obligations as specified in paragraph (i) above, provided, that the undertaking is limited to categories of events which, in the opinion of our board of directors can be foreseen, based on our actual activities at the time the undertaking to indemnify was given, and in such amounts set by our board of directors as reasonable; and (ii)  expenses, fees and payments as specified in paragraphs (ii), (iii), (iv) and (v) above. Subject to the provisions of the Companies Law and the Securities Law, we may also undertake to indemnify an office holder retroactively for expenses, fees and payments as specified above.

We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies Law and our articles of association, as described above. For more information, see “ Principal Shareholders and Related Party Transactions — Indemnification of Office Holders” below.

Limitations on Exemption, Insurance and Indemnification

The Companies Law provides that a company may not indemnify an office holder, enter into an insurance contract that would provide coverage for any monetary liability, or exempt an office holder from liability, with respect to any of the following:

● a breach by the office holder of his duty of loyalty, 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, civil fine or financial sanction levied against the office holder.

In addition, the Companies Law provides that a company may not indemnify or insure an office holder for a proceeding instituted against him or her pursuant to the provisions of Chapter H’3, H’4 and I’1 of the Securities Law.

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

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

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Employees

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

	2012		2011		2010
Technical Experts		49		94		186
Research and Development		33		43		54
Sales, General and Administrative		26		43		60
Total		108		180		300
In Israel		19		59		101
In Europe		67		97		156
In the United States		22		24		43

As of September 30, 2013, the number of total employees was 97, 38 of which were technical experts, 34 in research and development and 25 in sales, general and administrative.

The numbers of employees indicated in the table above include expert consultants who we train for the implementation of our modernization tools and methodologies.

The decrease in the number of employees in 2012 compared to 2011 was mainly attributable to the sale of activities and subsidiaries. In addition, we continued with our effort to reduce costs which included, among others, dismissal of employees. The decrease in the number of employees in 2011 compared to 2010 was attributable to the implementation of our cost saving plan, which included, among others, dismissal of a significant amount of employees.

With respect to our employees in Israel, we are subject to various Israeli labor laws and labor practices, and to administrative orders extending certain provisions of collective bargaining agreements between the Histadrut (Israel’s General Federation of Labor) and the Coordinating Bureau of Economic Organizations (the Israeli federation of employers’ organizations) to all employees in Israel or in certain industries.

For example, mandatory cost of living adjustments, which compensate Israeli employees for a portion of the increase in the Israeli consumer price index, are determined, from time to time, on a nationwide basis. Israeli law also requires the payment of severance benefits upon the termination, resignation (in some instances) or death of an employee. We meet this requirement, inter alia, by contributing on an ongoing basis towards “managers’ insurance” and pension funds. In addition, Israeli employers and employees are required to pay specified percentages of wages to the National Insurance Institute. Other provisions of Israeli law and regulations govern matters such as the length of the workday, minimum wages, other terms of employment and restrictions on discrimination. We are also subject to the labor laws and regulations of other jurisdictions in the world where we have employees.

Share Ownership

The following presents information regarding the ownership of our ordinary shares by the persons listed in the table under “Directors and Senior Management,” as of September 30, 2013. The percentage of outstanding ordinary shares is based on 10,766,126 ordinary shares outstanding as of September 30, 2013 (excluding 69,404 ordinary shares held by BluePhoenix).

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
Mel Keating(2)		*		*			75,034		—
Matt Bell(3)		208,332		1.9	%		41,660		166,672
Rick Rinaldo(4)		*		*			4,166		—
Brian Crynes(5)		*		*			11,662		—
Carla Corkern(6)		*		*			5,831		—
Thomas J. Jurewicz(7)		*		*			9,163		—
Harel Kodesh(8)		*		*			11,662		—
All directors and officers as a group (7 persons)		325,850		3.0	%		159,178		166,672

* Less than 1%.

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(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 of September 30, 2013 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. RSUs that are exercisable within 60 days of September 30, 2013 are deemed outstanding and beneficially owned by the person holding the RSUs 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. Keating was granted RSUs, of which: (i) 65,034 RSUs are currently convertible into ordinary shares; and (ii) 45,000 RSUs are convertible into ordinary shares in 36 monthly installments, each of 1,250 RSUs, commencing in April 2013.

(3)

Mr. Bell was granted options to purchase 300,000 ordinary shares, exercisable under the following terms: (i) options to purchase 50,000 ordinary shares currently exercisable; and (ii) options to purchase 250,000 ordinary shares, which are exercisable in 30 monthly installments, of 8,333 each, commencing in October 2012. The exercise price of all of these options is $1.80 and they all expire in April 2022. In addition, Mr. Bell was granted 75,000 RSUs which are convertible into ordinary shares in 36 monthly installments, each of 2,083 RSUs, commencing in March 2012.

(4) Mr. Rinaldo was granted 25,000 RSUs, convertible into ordinary shares in 12 monthly installments, each of 2,083 RSUs, commencing in October 2013.

(5) Mr. Crynes was granted 30,000 RSUs, convertible into ordinary shares in 36 monthly installments, each of 833 RSUs, commencing in September 2012.

(6) Ms. Corkern was granted 30,000 RSUs, convertible into ordinary shares in 36 monthly installments, each of 833 RSUs, commencing in April 2013.

(7) Mr. Jurewicz was granted 30,000 RSUs, convertible into ordinary shares in 36 monthly installments, each of 833 RSUs, commencing in December 2012.

(8) Mr. Kodesh was granted 30,000 RSUs, convertible into ordinary shares in 36 monthly installments, each of 833 RSUs, commencing in September 2012.

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

In 1996, we adopted two option plans. One of these option plans was terminated after all options granted under it had been exercised and the other 1996 plan was renamed the BluePhoenix 2003 Employee Share Option Plan. Pursuant to our 2003 Employee Share Option Plan, as amended, we reserved 1,050,000 ordinary shares for issuance to the directors, officers, consultants and employees of the Company and its subsidiaries. As of September 30, 2013, options to purchase 29,174 ordinary shares are available for future award under the plan. The exercise price of the options granted under the 2003 option plan ranges from $1.80 to $24.00.

Our board of directors administers our 2003 option plan in accordance with the principle guidelines approved by the board. Under the 2003 option plan, as amended, options to purchase our ordinary shares may be granted to our and our subsidiaries’ directors, officers, consultants and employees. Our board of directors is empowered, among other things, to designate the grantees, dates of grant, the exercise price of the options and the terms of exercise of the options. In accordance with the Companies Law, grants that require the approval of our compensation committee or shareholders, are also approved by the compensation committee and shareholders, as applicable. Unless determined otherwise by the board, the options generally vest over a two or three-year period. Unvested options are forfeited shortly following termination of employment, unless otherwise agreed. Under the 2003 option plan, the grantee is responsible for all personal tax consequences of the grant and the exercise of the options. Each option granted under the 2003 option plan is exercisable during a term of ten years from the date of grant of the option. The 2003 option plan will expire on August 6, 2017, except as to options outstanding on that date.

In July 2007, we adopted an award plan, referred to as the 2007 Award Plan, under which our board of directors may grant conditional rights to receive BluePhoenix ordinary shares (RSUs) to our and our subsidiaries’ directors, officers, consultants and employees. Our board of directors approved the issuance of the shares under the 2007 Award Plan and award agreements. As of September 30, 2013, we granted 1,478,925 RSUs under the plan (excluding RSUs that were granted and canceled). Our board of directors administers the plan and is empowered, among other things, to designate the grantees, dates of grant and the terms of RSUs, including the vesting schedule, all of which in accordance with the principle guidelines approved by the board. In accordance with the Companies Law, grants that require the approval of our compensation committee or shareholders, are also approved by the compensation committee and shareholders, as applicable. Unvested RSUs are forfeited shortly following termination of employment, unless otherwise agreed. Under the 2007 Award Plan, the grantee is responsible for all personal tax consequences of the grant and the sale of the shares. The plan will expire in July 2017.

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PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The following table presents information regarding the ownership of our ordinary shares at September 30, 2013 by each person known to be the beneficial owner of 5% or more of our ordinary shares and as adjusted to reflect the sale of ordinary shares in this offering. Options to purchase ordinary shares that are currently exercisable or exercisable within 60 days of September 30, 2013 and restricted stock units vested within 60 days of September 30, 2013 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. Except where we indicated otherwise, we believe, based on information furnished by these owners, that the beneficial owners of our shares listed below have sole investment and voting power with respect to the shares.

	Shares Beneficially Owned Prior to this Offering					Beneficially Owned Following this Offering
Name and Address	Number of Ordinary Shares Owned		Percent of Total  Shares(1)			Number of Ordinary Shares Owned		Percent of Total  Shares
Prescott Group Capital Management, LLC (2)		2,599,531		23.9	%	3,224,531	(6)	28.1	%
Columbia Pacific Opportunity Fund, LP(3)		4,267,054		39.6	%	4,267,054		37.5	%
Lake Union Capital Management, LLC(4)		1,978,329		18.4	%	1,978,329		17.4	%
All directors and officers as a group (7 persons)(5)		325,850		3.0	%	325,850		2.9	%

(1) Percentages in the above table are based on 10,766,126 ordinary shares outstanding as of September 30, 2013 and do not include 69,404 ordinary shares held by us. Pursuant to Israeli law, these shares do not confer upon the company any voting rights.

(2) The address of Prescott Group Capital Management LLC is 1924 S. Utica Ave., Suite 1120, Tulsa, Oklahoma 74104. Based on Amendment No. 5 to Schedule 13D filed on September 12, 2012, by Prescott Group Capital Management, L.L.C., referred to as Prescott Capital, Prescott Group Aggressive Small Cap, L.P. and Prescott Group Aggressive Small Cap II, L.P., referred to together, as the Small Cap Funds, beneficially own 2,497,188 ordinary shares. The number of ordinary shares beneficially owned by Prescott Capital includes 102,343 ordinary shares underlying warrants exercisable as of September 30, 2013 that are beneficially owned by Prescott Capital. Prescott Capital, as the general partner of the Small Cap Funds, and Mr. Phil Frohlich, as managing member of Prescott Capital, may also be deemed to beneficially own the 2,497,188 ordinary shares held by the Small Cap Funds. Prescott Capital and Mr. Frohlich disclaim beneficial ownership of the ordinary shares held by the Small Cap Funds, except to the extent of their pecuniary interest therein. By virtue of his position with Prescott Capital and the Small Cap Funds, Mr. Frohlich has the sole power to vote and dispose of the 2,497,188 ordinary shares owned by the Small Cap Funds.

(3)

The address of Columbia Pacific Opportunity Fund, LP is c/o Columbia Pacific Advisors, LLC, 1910 Fairview Avenue East, Suite 500, Seattle, Washington 98102. Based on Amendment No. 8 to Schedule 13D filed on June 24, 2013, by Columbia Pacific Advisors, LLC, Columbia Pacific Advisors, LLC has the sole power to vote or to direct the vote of, and to dispose of or to direct the disposition of the 4,304,994 ordinary shares, of which 4,267,054 shares are held in the portfolio of Columbia Pacific Opportunity Fund, LP and 37,940 shares are held in the portfolio of Columbia Pacific Partners Fund, Ltd., established by Columbia Pacific Advisors LLC on April 1, 2013. Messrs. Alexander B. Washburn, Daniel R. Baty and Stanley L. Baty serve as the managing members of Columbia Pacific Advisors, LLC, which is primarily responsible for all investment decisions regarding the investment portfolios of Columbia Pacific Opportunity Fund, L.P. and Columbia Pacific Partners Fund, Ltd. Each of Columbia Pacific Opportunity Fund, L.P., Columbia Pacific Partners Fund, Ltd., Alexander B. Washburn, Daniel R. Baty and Stanley L. Baty disclaims beneficial ownership over the shares, except to the extent of their pecuniary interest therein. Mr. Brandon D. Baty is a member of Columbia Pacific Advisors, LLC. The reporting persons identified in Amendment No. 7 to Schedule 13D filed on April 15, 2013, by Columbia Pacific Advisors, LLC, determined that they may seek to influence material business decisions relating to the future of our company. The reporting persons indicated that they will monitor developments at our company on a continuing basis and may communicate with members of management and the board of directors, potential members of management or potential board members, other shareholders or others on matters related to us.

(4)

The address of Lake Union Capital Management LLC is 601 Union Street, Suite 4616, Seattle, WA, 98101. Based on Amendment No. 3 to Schedule 13D filed on September 21, 2012, by Michael Self, Lake Union Capital Fund LP, Lake Union Capital TE Fund, LP and Lake Union Capital Management, LLC, Lake Union Capital Fund LP, referred to as the Partnership, may be deemed to be the beneficial owner of and has shared voting and dispositive power with respect to 1,561,512 ordinary shares. Lake Union Capital TE Fund, LP, referred to as the TE Partnership, has shared voting and dispositive power with respect to 416,817 ordinary shares, Lake Union Capital Management, LLC, referred to as the Investment Manager, has shared voting and dispositive power with respect to the 1,978,329 ordinary shares owned beneficially by private investment vehicles, including the Partnership and the TE Partnership (collectively, the Funds), for which the Investment Manager serves as investment manager, referred to as the Funds. Michael Self, in his capacity as a managing member of the Investment Manager, has shared voting and dispositive power with respect to the 1,978,329 ordinary shares owned beneficially by the Funds.

(5)	Includes options to purchase ordinary shares exercisable within 60 days of September 30, 2013 and restricted share units vested within 60 days of the date hereof.
(6)	The number of ordinary shares beneficially owned by Prescott Capital includes 625,000 shares from this offering (but excludes any anti-dilution shares that may be issued, as described below in “Plan of Distribution.”)

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Our previous major shareholders as reported in our annual reports for the past three years include (i) Arik Kilman, who held 355,622 of our ordinary shares as of March 20, 2011, constituting 5.7% of our then outstanding ordinary shares; and (ii) our three major shareholders that entered into transactions with us pursuant to which we issued to them ordinary shares which increased their shareholding in the company. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — How We Have Financed Our Business — Agreements with our Three Major Shareholders.”

All of our ordinary shares have equal voting rights. Under our two buy-back programs (as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” above), two of our subsidiaries purchased ordinary shares, and as of September 30, 2013, BluePhoenix holds 69,404 of our ordinary shares. Under applicable Israeli law, so long as the shares are held by BluePhoenix, they do not confer upon their holder any rights.

As of September 30, 2013, there were ten record holders of our ordinary shares. Of these record holders, eight holders had mailing addresses in the United States owning an aggregate 99.7% of our outstanding ordinary shares.

Related Party Transactions

Transaction with our Three Major Shareholders

In March 2012, we entered into a series of transactions with our three major shareholders, as amended on April 15, 2012 and on September 5, 2012. The transaction and any amendments thereto were approved by our audit committee, board of directors and shareholders. For additional information about this transaction, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — How We Have Financed our Business — Agreements with our Three Major Shareholders.”

Payment of a Bonus to our CEO in connection with SDC Transaction

In connection with the various transactions entered between us and one of our customers, we granted in June 2010, to Arie Kilman, who served at that time as our chief executive officer, a bonus of $150,000, which was approved by our audit committee and the board of directors.

Indemnification of Office Holders

Since July 2003, we have entered into indemnification agreements with our office holders covering acts performed in their capacity as office holders or employees of our company. In December 2011, our shareholders approved an amendment to those indemnification agreements previously amended in 2005, following an additional amendment to the Companies Law. Pursuant to the amended indemnification agreements, we undertake to indemnify each office holder to the maximum extent permitted by law in respect of the following for any act or omission taken or made by the office holder in his or her capacity as an office holder of our company:

a) any financial obligation imposed on the office holder in favor of another person by a court judgment, including a compromise judgment or an arbitrator’s award approved by court;

b) 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) or in connection with financial sanction (the phrases “proceeding that has ended without the filing of an indictment” and “financial obligation in lieu of a criminal proceeding” shall have the meanings ascribed to such phrases in Section 260(a)(1a) of the Companies Law);

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c) expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted against such office holder in relation to (i) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 of the Securities Law; or (ii) administrative infringements pursuant to the provisions of Chapter H’4 of the Securities Law; or (iii) infringements pursuant to the provisions of Chapter I’1 of the Securities Law;

d) 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;

e) payments to an injured party of infringement under Section 52(54)(a)(1)(a) of the Securities Law.

Subject to the provisions of the Companies Law and the Securities Law, we may undertake to indemnify an office holder, in advance, with respect to (i) financial obligations as specified under paragraph (a) above, provided, that the undertaking is limited to categories of events which, in the opinion of our board of directors can be foreseen, based on the company’s actual activities at the time the undertaking to indemnify is given, and in amounts set by our board of directors as reasonable; and (ii) expenses, fees and payments as specified in paragraphs (b) - (e) above. Subject to the provisions of the Companies Law and the Securities Law, we may also undertake to indemnify an office holder retroactively for expenses, fees and payments as specified above.

The indemnification also applies to any action taken by the office holder in respect of an act performed in his or her capacity as an office holder or an employee of one of our subsidiaries or as a director or observer at board of directors’ meetings of one of our affiliates. Our undertaking for indemnification is limited to up to 50% of our net assets, measured in accordance with our balance sheet published as of the end of the last fiscal year prior to the time that notice of the claim for indemnification is submitted to us .

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

· 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 or reckless 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, civil fine, financial sanction or levied 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.

In addition, we may not indemnify any office holder for a proceeding instituted against such office holder pursuant to the provisions of Chapter H’3, H’4 and I’1 of the Securities Law.

Our undertaking for indemnification is limited to such events specified in the indemnification agreement and determined by our board of directors to be foreseeable in light of the company’s operations.

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Exemption of Office Holders from Liability

Pursuant to our current indemnification agreements with our directors and officers, as previously approved by shareholders, we exempt our directors and officers, to the fullest extent permitted by law, from any responsibility or liability for damages caused as a result of a breach of such person’s duty of care to us or our subsidiaries, subject to certain exceptions where the exemption from liability is prohibited.

In connection with the transaction with the three shareholders, our audit committee, board of directors and shareholders approved the release of our officers and directors, from any and all liabilities, costs, payments and obligations whatsoever, arising in connection with the loan agreements entered into between us and third parties, the sale of AppBuilder and the transaction with the three shareholders, as well as the indemnification of our directors and officers in respect thereof, to the fullest extent permitted under our standard indemnification agreement. 

Office Holders Insurance

We procured an insurance policy covering our directors’ and officers’ liability, as well as a run-off policy for seven years for former directors and officers of our company and our former subsidiary, Mainsoft Corporation. Our subsidiaries participate in the premium payments of the insurance, on a proportional basis. The total premium we paid during 2012 was approximately $96,500.

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DESCRIPTION OF SHARE CAPITAL

Our current authorized share capital consists of 17,500,000 ordinary shares, par value NIS 0.04 per share.

As of September 30, 2013, 10,766,126 ordinary shares were issued and outstanding. As of such date, there were outstanding options for the purchase of an aggregate of 444,839 ordinary shares, at a weighted average exercise price of $4.30 per share. Such options were granted under our share option plans. In addition, there were outstanding warrants to purchase 102,343 ordinary shares at an exercise price of $1.5634.

All of our outstanding ordinary shares are validly issued, fully paid and non-assessable and have equal rights. Our ordinary shares are not redeemable and do not have any preemptive rights.

The description below is a summary of the material provisions of our Articles of Association and of related material provisions of the Companies Law.

Our company share capital consists of ordinary shares. Our articles of association do not restrict in any way the ownership of our ordinary shares by nonresidents, except that these restrictions may exist with respect to citizens of countries that are in a state of war with Israel.  Our number with the Israeli Registrar of Companies is 52-004306-8.

Transfer of Shares

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

Modification of Class Rights

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

Dividend Rights and Liquidation Rights

Our board of directors is authorized to declare dividends, subject to the provisions of the Companies Law. Dividends, if declared, shall be paid to the holders of ordinary shares according to their rights and interests in our profits. Dividends stemming from our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of the end date of the most recent financial statements or as accrued over a period of two years, whichever is higher. Alternatively, if we do not have sufficient profits or other surplus, then permission to effect a distribution can be granted by order of an Israeli court. In any event, our board of directors is authorized to declare dividends, provided there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of the company, unless the company’s articles of association require otherwise. Our articles of association provide that our board of directors may declare and pay dividends without any further action of our shareholders. Dividends may be paid in cash or in kind. We may pay the dividend as an allotment of shares or a distribution of assets. If we decide to issue dividends by an allotment of shares at a price lower than the nominal value of those shares, we must convert a portion of our profits or any other source of equity to share capital in an amount equal to the difference between the nominal value of the shares and the price paid in the dividend. If dividends remain unclaimed for seven years from the date we declared the dividend, they lapse and revert back to us. In case of liquidation, and upon satisfying liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their holdings. This right may be affected by the grant of a preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.

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Redemption Provisions

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

Voting, Shareholder Meetings and Resolutions

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

Under the Companies Law and in accordance with our articles of association, we must hold an annual general meeting once a year with a maximum period of fifteen months between the meetings. All other meetings of shareholders other than annual general meetings are considered special general meetings. Our board of directors may, whenever it deems appropriate, and shall, within 21 days after receiving a written demand from one director or from one or more shareholders representing at least 10% of the outstanding share capital and 1% of the voting power, call a special general meeting. The quorum required for a general meeting of shareholders consists of two or more holders present in person or by proxy, holding or representing at least 35% of the voting power. A meeting adjourned for a lack of a quorum generally is postponed to the same day in the following week at the same time and place or to another later time if such time is specified in the original notice convening the general meeting or if we give notice to the shareholders of another time at least 72 hours before the date fixed for the adjourned meeting. At the reconvened meeting, if a quorum is not present within half an hour from the time appointed for holding the meeting, the required quorum will consist of two shareholders present in person or by proxy.

Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority, except in certain circumstances provided for under the Companies Law, which require a majority of at least 75% of the shares present at the meeting. In accordance with the Companies Law, all shareholders meetings require prior notice of at least 21 days. In some instances specified in regulations promulgated under the Companies Law, a 35-day prior notice is required to be given of a shareholders meeting.

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

· any amendment to the articles of association;

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

· a merger; or

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

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

Election of Directors

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

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Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law

Mergers

The Companies Law includes provisions that allow a merger transaction and generally requires that each company that is a party to a merger approve the transaction by its board of directors and a vote of the majority of its shares voting on the proposed merger at a shareholders’ meeting called on at least 21 days prior notice. In determining whether a majority has approved the merger, shares held by the other party to the merger or any person holding at least 25% of the other party to the merger are excluded from the vote. The Companies Law does not require court approval of a merger other than in specified situations. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 30 days have elapsed from the date of the merger approval by the shareholders of each of the merging companies; and (ii) 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israel Registrar of Companies.

Tender Offers

The Companies Law also provides that an acquisition of shares of a public company on the open market must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company. The rule does not apply if there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser becomes a 45% shareholder, unless there already exists a shareholder holding at least 45% interest in the company. These rules do not apply if the acquisition is made by way of a merger as opposed to a tender offer. Regulations adopted under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisitions of any level of control of the company, or the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public. The Companies Law also provides (subject to certain exceptions with respect to shareholders who held more than 90% of a company’s shares or of a class of shares as of February 1, 2000) that if following any acquisition of shares, the acquirer holds 90% or more of the company’s shares or of a class of shares, the acquisition must be made by means of a tender offer for all the target company’s shares or all the shares of the class, as applicable. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer before the acquisition. If, however, the tender offer to acquire 95% is not successful, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company.

Exchange Controls

For additional information regarding Exchange Controls, see the discussion under “Item 10.D. Additional Information — Exchange Controls” of our Form 20-F for 2012.

Taxation

Israeli Taxation

The following is a description of the material tax consequences regarding the ownership and disposition of ordinary shares acquired in this offering.  To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.

The summary does not address all of the tax consequences that may be relevant to all purchasers of our ordinary shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our ordinary shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.

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Disposition of our Ordinary Shares

Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The Tax Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.

Israeli Resident Individuals

Capital Gain

As of January 1, 2012, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares listed on a stock exchange, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “Significant Shareholder” (that is, a person who holds, directly or indirectly, alone or together with another, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director) at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%.

Dividend Income

Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares (other than bonus shares or share dividends) at 25%, or 30% if the recipient of such dividend is a Significant Shareholder, at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the period of receiving benefit as an Approved Enterprise, Privileged Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investment Law or within 12 years after such period.

Israeli Resident Corporations

Capital Gain

Under Israeli current tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company is the general corporate tax rate. The corporate tax rate from 2012 is 25% and as of January 2014, is 26.5%.

Dividend Income

Generally, Israeli resident corporations are exempt from Israeli corporate tax on the receipt of dividends paid on shares of Israeli resident corporations. However, dividends distributed from taxable income accrued during the period of benefit of an Approved Enterprise or Privileged Enterprise are taxable at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investment Law or within 12 years after that period.

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Non-Israeli Residents

Capital Gain

Israeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (currently 25% and as of 2014, 26.5%), if generated by a company, or at the rate of 25% if generated by an individual (for any asset other than shares that are listed on a stock exchange — 20% with respect to the portion of the gain generated up to December 31, 2011) or 30% by an individual who is a Significant Shareholder (for any asset other than shares that are listed on a stock exchange — 25% with respect to the portion of the gain generated up to December 31, 2011), if generated from the sale of assets purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 48% for an individual in 2012 and 50% as of 2014).

        Individuals whose income exceeds 811,560 NIS are subject to additional income tax of 2% on the portion of the taxable income above NIS 811,560.

Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel, such as NASDAQ, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange outside of Israel, and (iii) such shareholders are not subject to the Inflationary Adjustment Law. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (a) has a controlling interest of 25% or more in such non-Israeli corporation, or (b) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.

Furthermore, shareholders that are not Israeli residents (individuals and corporations) are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of shares which are not publicly traded on the Tel Aviv stock exchange, among other things, that (i) such shares were purchased by the non-Israeli resident on or after January 1, 2009, and (ii) such gains are not derived through a permanent establishment that the non-Israeli resident maintains in Israel.

In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, to which we refer as the U.S.-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless (i) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding such sale, exchange or disposition, (ii) the shareholder, being an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the applicable taxable year; or (iii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel. In such case, the sale, exchange or disposition of such shares would be subject to Israeli tax.  Under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to significant limitations in U.S. laws applicable to foreign tax credits.

Dividend Income

Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on ordinary shares at the rate of 25% or 30% (if the dividend recipient is a Significant Shareholder at the time of distribution or at any time during the preceding 12-month period) or 15% if the dividend is distributed from income attributed to our Approved Enterprise or Privileged Enterprise, which tax is to be withheld at source. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a nominee company (whether the recipient is a Significant Shareholder or not), unless a reduced rate is provided under an applicable tax treaty.

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For example, under the U.S.-Israel Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterprise, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends generated by our Approved Enterprise are subject to a withholding tax rate of 15% for such U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from an Approved Enterprise, a Privileged Enterprise or Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a dividend are entitled to claim a deduction for the withheld tax or alternatively a credit against U.S. federal income tax, subject to significant limitations.

A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.

United States Federal Income Tax Considerations

The discussion below describes the material U.S. federal income tax consequences to a U.S. holder from the purchase, ownership and disposition of ordinary shares.  A U.S. holder for this purpose is a beneficial owner of ordinary shares that is:

· an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;

· a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the law of the United States or of any state or the District of Columbia;

· an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or

· a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or a trust in existence on August 20, 1996 that has a valid election in effect under applicable Treasury regulations to be treated as a United States person.

               This discussion is not a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase, hold or dispose of ordinary shares. This summary considers only U.S. holders that purchase our ordinary shares in the offering and hold such ordinary shares as capital assets.

               This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, to which we refer as the Code, current and proposed Treasury regulations, and administrative and judicial decisions as of the date of this prospectus supplement, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular shareholder based on the shareholder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to U.S. holders that are subject to special treatment, including U.S. holders that:

· are broker-dealers or insurance companies;

· have elected mark-to-market accounting;

· are tax-exempt organizations;

· are financial institutions or financial services entities;

· are partnerships or other entities treated as partnerships for U.S. federal income tax purposes or partners thereof or members therein, S corporations or other pass-through entities, including hybrid entities;

· hold ordinary shares as part of a securities lending transaction, straddle, hedge, conversion or other integrated or risk-reduction transaction with other investments;

· own directly, indirectly or by attribution at least 10% of our voting power; or

· have a functional currency that is not the U.S. dollar.

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In addition, this discussion does not address any U.S. federal non-income tax consequences, any aspect of state, local or non-U.S. tax laws, or the possible application of the U.S. federal estate or gift tax or any state inheritance, estate or gift tax.

Each prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of our ordinary shares.

Taxation of Dividends Paid on Ordinary Shares

Subject to the discussion below under “Tax Consequences if “We Are a Passive Foreign Investment Company,” a U.S. holder will be required to include in gross income as a dividend the amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from the amount paid, on the date the distribution is received, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Distributions in excess of earnings and profits will be applied against and will reduce, on a share-by-share basis, the U.S. holder’s basis in the ordinary shares and, to the extent in excess of that basis, will be treated as gain from the sale or exchange of ordinary shares subject to the U.S. federal income tax treatment described in the next section.  Because we may not account for our income in a manner that would permit us readily to calculate our earnings and profits in accordance with U.S. federal income tax principles, U.S. holders should expect all distributions to be reported to them as dividends.

If we are not a PFIC in the year in which a dividend is paid and the preceding year, and subject to certain limitations, including minimum holding period requirements, the dividend paid to non-corporate U.S. holders may be “qualified dividend income” taxable at a current rate of 20%.  Dividends that fail to meet the requirements for treatment as qualified dividend income, and dividends taxable to corporate U.S. holders, are taxed at ordinary income rates. In addition, under the Patient Protection and Affordable Care Act, certain taxpayers must pay an additional 3.8 percent tax on dividend income to the extent certain threshold amounts of income are exceeded. See “New Tax on Investment Income” in this Item below.

The amount of a distribution paid to a U.S. holder in a foreign currency will be the U.S. dollar value of the foreign currency calculated by reference to the spot exchange rate on the day the U.S. holder receives the distribution. A U.S. holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars after receipt will have foreign exchange gain or loss, taxable as ordinary income or loss, based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.

Dividends on our ordinary shares will be foreign source passive income (or in some cases, general category income) for U.S. foreign tax credit purposes U.S. holders will have the option of claiming the amount of any Israeli income taxes withheld at source either as a deduction from gross income or as a credit against their U.S. federal income tax liability.  The amount of foreign income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder.

Taxation of the Disposition of Ordinary Shares

Subject to the discussion below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other taxable disposition of our ordinary shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder’s basis in the ordinary shares, which is usually the cost to the U.S. holder of the shares, and the amount realized on the disposition. Capital gain from the sale, exchange or other disposition of ordinary shares held more than one year is long-term capital gain and is eligible for a reduced rate of taxation in the case of non-corporate taxpayers. The deductibility of capital losses is subject to limitations. Gain or loss recognized by a U.S. holder on the sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.

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Tax Consequences if We Are a Passive Foreign Investment Company

               We will be a passive foreign investment company, or  “PFIC”, if 75% or more of our gross income in a taxable year, including our pro rata share of the gross income of any corporation in which we are considered to own 25% or more of the shares by value (subject to certain exceptions in the case of a U.S. corporation), is passive income. Alternatively, we will be considered to be a PFIC if at least 50% of our assets in a taxable year, ordinarily determined based on the quarter-end average fair market value of our assets over the taxable year and including the pro rata share of the assets of any corporation in which we are considered to own 25% or more of the shares by value (subject to certain exceptions in the case of a U.S. corporation), produce or are held for the production of passive income. 

               If we were a PFIC at any time during which a U.S. holder holds our ordinary shares, and a U.S. holder did not make, as described below, a timely election, if available, either to treat us as a qualified electing fund or to mark our shares to market, any excess distributions we pay to a U.S. holder would be taxed as described below. Excess distributions are amounts paid on shares in a PFIC in any taxable year that exceed 125% of the average distributions paid on those shares in the shorter of:

· the three previous years; and

· the U.S. holder’s holding period for ordinary shares before the taxable year of the distribution.

Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary shares. A U.S. holder would then be required to include in gross income for the current taxable year, the amounts allocated to the current taxable year and to each year prior to the first year in the U.S. holder’s holding period in which we were a PFIC.  Further, a U.S. holder would be required to pay tax on amounts allocated to each other prior taxable year at the highest rate in effect for that year on ordinary income, and the tax for each such year would be subject to an interest charge at the rate applicable to deficiencies for income tax.

The entire amount of gain realized or treated as realized by a U.S. holder upon the sale or other disposition of ordinary shares (generally whether or not the disposition is a taxable transaction) will also be treated as an excess distribution and will be subject to tax as described in the preceding paragraph.

U.S. holders who purchase and hold ordinary shares during a period when we are a PFIC will generally be subject to these rules, even if we cease to be a PFIC in later years, subject to certain limited exceptions.

               The special PFIC rules described above will not apply to a U.S. holder if that U.S. holder makes an election to treat us as a qualified electing fund, to which we refer as a QEF, in the first taxable year in which the U.S. holder owns ordinary shares, provided we comply with specified reporting requirements.  We do not intend to comply with those reporting requirements and accordingly, a U.S. holder will not be entitled to elect to treat us as a QEF.

A U.S. holder of PFIC shares that are publicly traded may elect to mark the stock to market annually, recognizing as ordinary income or loss each year in which the company meets the PFIC gross income test or PFIC asset test, an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the U.S. holder’s adjusted tax basis in the PFIC shares. Losses would be allowed only to the extent of net mark-to-market gain previously included in income by the U.S. holder under the election for prior taxable years. Gain or loss recognized from the sale or exchange of ordinary shares would generally be ordinary income or loss unless we do not meet the PFIC gross income or PFIC asset test in the year of sale in which case  the gain or loss recognized would be a capital gain or loss. If a mark-to-market election is made, then the excess distribution rules described above  would not apply for periods covered by the election.

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The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than  de minimis  quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. We expect our ordinary shares will continue to be listed on the NASDAQ and, accordingly, provided the ordinary shares are regularly traded, a U.S. holder would be entitled to make the mark-to-market election if we are a PFIC.

We do not believe that we are a PFIC or that we will be a PFIC in the future. However, the tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination.   Because we expect to hold following this offering a substantial amount of cash or cash equivalents, and because the calculation of the value of our assets may be based in part on the value of our ordinary shares, which may fluctuate after this offering and may fluctuate considerably given that market prices of technology companies historically often have been volatile, we can give no assurance that we will not be a PFIC in the future.

New Tax on Investment Income

For taxable years beginning after December 31, 2012, a U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. holder’s net investment income generally will include its dividends on our ordinary shares and net gains from dispositions of our ordinary shares, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business that consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our ordinary shares.

Information Reporting and Backup Withholding

U.S. holders generally are subject to information reporting requirements for dividends and sales proceeds paid in the United States or through certain U.S.-related financial intermediaries on ordinary shares. Dividends and sales proceeds paid in the United States to a U.S. holder on ordinary shares are subject to backup withholding unless the U.S. holder provides the applicable IRS Form W-9 or establishes an exemption.

Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. or non-U.S. holder’s U.S. federal income tax liability, and a taxpayer generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed the taxpayer’s U.S. federal income tax liability by filing a refund claim with the IRS, provided in each case that required information is furnished to the IRS.

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PLAN OF DISTRIBUTION

We are selling 625,000 shares of our ordinary shares directly to Prescott Group Aggressive Small Cap Master Fund, G.P. (the “investor”) and reserving an additional amount of up to1,517,459 ordinary shares pursuant to additional adjustment and anti-dilution rights granted to the investor as detailed below. We have entered into a securities purchase agreement, dated as of November 7, 2013, with such investor relating to the sale of these ordinary shares (the “purchase agreement”).  The ordinary shares issued in connection with this offering are subject to anti-dilution provisions in certain circumstances, including upon the occurrence of any issuance of ordinary shares or securities convertible into ordinary shares at a price below $4.00 (the “investment price per share”). Prescott Group Aggressive Small Cap Master Fund, G.P. is affiliated with Prescott Capital, which beneficially owns approximately 23.9% of our ordinary shares as of September 30, 2013.

On the closing date, we will issue 625,000 ordinary shares (the “investment shares”) to the investors and we will receive proceeds (before expenses) in the amount of $2.5 million.

Under the purchase agreement, we have granted the investor certain additional rights for the issuance of shares as follows (such additional shares are referred to in this prospectus as the “additional shares”):

·   In the event that on the 15th trading day (the “evaluation date”) following our release of earnings for the third fiscal quarter of fiscal 2013 (the “earnings release date”), the volume weighted average price of the ordinary shares for the period from the earnings release date and until the evaluation date, as reported by Bloomberg Financial L.P. (“VWAP”) is lower than 90% of the investment price per share (i.e. $4.00), then we shall issue to the investor, for no additional consideration other than payment of their nominal value, additional ordinary shares in an amount that will increase the investment shares to a number equal to $2.5 million divided by the VWAP.

·   From and after the closing date of the purchase agreement and until  the earlier of  (i) the second anniversary of the closing date, or (ii) the consummation of  a Qualified Financing (defined below), if we, in one transaction or a series of related transactions, sell or issue ordinary shares or securities exercisable or convertible into ordinary shares for a price per share less than $4.00 (each a “Dilutive Issuance”), then immediately following and conditional upon the completion of the Dilutive Issuance, we shall issue to the investor, for no additional consideration other than payment of their nominal value, additional ordinary shares in an amount that will increase the aggregate  number of ordinary shares issued to the investor in connection with the purchase agreement  to a number equal to $2.5 million divided by the price per share under the Dilutive Issuance; provided, however, that in no case shall the total number of ordinary shares issued to the investor in connection with the purchase agreement exceed, in the aggregate, 19.9% of our outstanding shares as of the date of the purchase agreement (i.e. we shall in no case be obligated to issue more than 2,142,459 ordinary shares).  For purposes of the aforesaid, a “Qualified Financing” shall mean the consummation of a transaction or series of related transactions in which we issue shares or securities convertible into shares securities of any kind in consideration for an aggregate amount of at least US $5,000,000.

We estimate that the expenses of this offering payable by us will be approximately $245,000.

The ordinary shares were offered directly to the investors without a placement agent, underwriter, broker or dealer.

We currently anticipate that the closing of the sale of such ordinary shares will take place on or about November 14, 2013.

The transfer agent for our common stock is American Stock Transfer & Trust Company, LLC. Our common stock is traded on The NASDAQ Global Market under the symbol “BPHX.”

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EXPENSES

We are paying substantially all of the expenses of registering the ordinary shares under the Securities Act and of compliance with blue-sky laws, including registration and filing fees, printing and duplication expenses, administrative expenses and our legal and accounting fees. We estimate the expenses payable by us to be approximately $245,322, which include the following categories of expenses:

SEC registration fee	$	322
Legal fees and expenses	$	200,000
Accounting fees and expenses	$	10,000
Miscellaneous expenses	$	35,000
Total	$	245,322

LEGAL MATTERS

The validity of the ordinary shares being offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Herzog, Fox & Neeman, with a business address at Asia House, 4 Weizmann St., Tel Aviv, Israel 64239. Certain other legal matters relating to United States law will be passed upon by Cooley LLP, with a business address at 500 Boylston St, Boston, MA 02116.

EXPERTS

The financial statements as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 incorporated by reference in this Prospectus and in the Registration Statement have been so incorporated in reliance on the report of Ziv Haft, Certified Public Accountants (Isr.), BDO Member Firm, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The offices of Ziv Haft are located at Amot Insurance House, B Building, 48 Menachem Begin St., Tel Aviv, Israel 6618001.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in this prospectus whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the certain of our assets are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may be difficult to collect within the United States.

We have irrevocably appointed BluePhoenix Solutions USA Inc. as our agent to receive service of process in any action against us in any United States federal or state court arising out of this offering or any purchase or sale of securities in connection with this offering. The address of BluePhoenix Solutions USA Inc. is 601 Union Street Suite 4616, Seattle Washington 98101.

We have been informed by our legal counsel in Israel, Herzog Fox & Neeman, that it may be difficult to initiate an action with respect to United States securities law in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws, reasoning that Israel is not the most appropriate forum to hear such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law may be proved as a fact by expert witnesses, which can be a time-consuming and costly process. Certain matters of procedure may also be governed by Israeli law.

Subject to certain time limitations and legal procedures, Israeli courts may enforce a United States judgment in a civil matter which is non-appealable, including a judgment based upon the civil liability provisions of the Securities Act and the Exchange Act and including a monetary or compensatory award in a non-civil matter in favor of an injured party, provided that, among other things:

·   the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;

·   the judgment may no longer be appealed;

·   the obligation imposed by the judgment is enforceable according to the rules relating to the enforcement of judgments in Israel and the substance of the judgment is not contrary to public policy; and;

·   the judgment is executory in the state in which it was given.

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Even if these conditions are met, an Israeli court will not declare a foreign civil judgment enforceable if:

·   the judgment is executory in the state in which it was given.

·   the judgment was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases);

·   the enforcement of the judgment is likely to prejudice the sovereignty or security of the State of Israel;

·   the judgment was obtained by fraud;

·   the opportunity given to the defendant to bring its arguments and evidence before the court was not reasonable in the opinion of the Israeli court;

·   the judgment was rendered by a court not competent to render it according to the laws of private international law as they apply in Israel;

·   the judgment is contradictory to another judgment that was given in the same matter between the same parties and that is still valid; or

·   at the time the action was brought in the foreign court, a lawsuit in the same matter and between the same parties was pending before a court or tribunal in Israel.

If a foreign judgment is enforced by an Israeli court, it may be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to issue a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rates.

DISCLOSURE OF COMMISSION POSITION

ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Under the Companies Law, an Israeli company may not exempt an office holder (as defined in the Companies Law and including executive officers and directors),  from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend or any other distribution by the company.  We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies Law and our articles of association.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed a Registration Statement on Form F-1 with the SEC for the shares being offered pursuant to this prospectus. This prospectus does not include all of the information contained in the Registration Statement. You should refer to the Registration Statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract, agreement or other document.

68

We are required to file annual reports and other information with the SEC. You can read our SEC filings, including the Registration Statement, over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the public reference facilities maintained by the SEC, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

We are subject to certain of the informational requirements of the Exchange Act. As a “foreign private issuer,” we are exempt from the rules under the Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchases and sales of ordinary shares. In addition, we are not required to file quarterly reports or to file annual and current reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we are required to file with the SEC, within four months after the end of each fiscal year, an annual report on Form 20-F containing financial statements that will be examined and reported on, with an opinion expressed by an independent accounting firm. We also furnish quarterly reports on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC allows us to “incorporate by reference” information into this prospectus. This means that we can disclose important information to you by referring you to another document filed by us with the SEC. Information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by this prospectus or by information we file with the SEC in the future.

The following documents are incorporated by reference:

(a) Our Annual Report on Form 20-F for the fiscal year ended December 31, 2012 filed with the SEC on April 30, 2013; and

(b) Our Reports on Form 6-K furnished to the SEC on May 30, 2013 and August 22, 2013.

We will provide without charge to any person (including any beneficial owner) to whom this prospectus has been delivered, upon oral or written request, a copy of any document incorporated by reference in this prospectus but not delivered with the prospectus (except for exhibits to those documents unless a document specifically states that one of its exhibits is incorporated into the document itself). Such requests should be directed to Rick Rinaldo, CFO, c/o BluePhoenix Solutions Ltd., 601 Union Street Suite 4616, Seattle Washington, 98101. Our corporate Web site address is http://www.bphx.com. The information on our website is not intended to be a part of this prospectus.

69

BLUEPHOENIX SOLUTIONS LTD.

Table of Contents

	Page
Condensed Consolidated Unaudited Interim Financial Statements:
Consolidated Unaudited Interim Balance Sheets		F-2
Consolidated Unaudited Interim Statements of Operations		F-3
Condensed Consolidated Statements of Comprehensive Loss		F-4
Consolidated Unaudited Interim Statements of Changes in  Equity		F-5
Consolidated Unaudited Interim Statements of Cash Flows		F-6
Notes to Condensed Unaudited Interim Consolidated Financial Statements		F-7

BluePhoenix Solutions Ltd.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2013		December 31, 2012
	Unaudited
ASSETS
Current Assets:
Cash and cash equivalents	$	1,862	$	2,560
Restricted cash		33		33
Trade accounts receivable, net		2,408		2,445
Other current assets		805		581
Assets held for sale		—		791
Total Current Assets		5,108		6,410
Non-Current Assets:
Property and equipment, net		487		562
Goodwill		12,501		12,501
Intangible assets and other, net		162		277
Total Non-Current Assets		13,150		13,340
TOTAL ASSETS	$	18,258	$	19,750
LIABILITIES AND EQUITY
Current Liabilities:
Short-term bank credit and others	$	149	$	217
Trade accounts payable		992		1,256
Deferred revenues		1,089		712
Other current liabilities		866		950
Liabilities held for sale		—		467
Total Current Liabilities		3,096		3,602
Non-Current Liabilities
Accrued severance pay, net		398		408
Loans from banks and others		223		281
Derivative liabilities — warrants		334		370
Total Non-Current Liabilities		955		1,059
Commitments and contingencies (Note 4)
Total Equity		14,207		15,089
TOTAL LIABILITIES AND EQUITY	$	18,258	$	19,750

F-2

BluePhoenix Solutions Ltd.

CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Six month ended
	June 30,
	2013				2012	*
	Unaudited
Revenues	$	4,561		$	4,887
Cost of revenues		2,178			4,227
Gross profit		2,383			660
Research and development costs		696			264
Selling, general and administrative expenses		3,115			4,676
Gain on sales of subsidiaries and Appbuilder		(786	)		(245	)
Total operating expenses		3,025			4,695
Operating loss		(642	)		(4,035	)
Financial expenses, net		42			2,460
Other income		—			580
Loss before taxes		(684	)		(5,915	)
Provision for taxes		51			137
Net loss from continued operations		(735	)		(6,052	)
Net loss from discontinued operations		399			1,164
Net loss		(1,134	)		(7,216	)
Net result attributable to noncontrolling interests		221			141
Loss attributed to BluePhoenix shareholders	$	(1,355	)	$	(7,357	)
Loss per share:
From continued operation — basic and diluted	$	(0.09	)	$	(0.95	)
From discontinued operation — basic and diluted	$	(0.04	)	$	(0.18	)
Attributed to the shareholders	$	(0.13	)	$	(1.13	)
Shares used in per share calculation:
Basic and diluted		10,668			6,520

* Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

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

F-3

BluePhoenix Solutions Ltd.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

	Six months ended June 30,
	2013				2012*
				Unaudited
Net loss	$	(1,134	)	$	(7,216	)
Other comprehensive income		—			—
Total comprehensive loss		(1,134	)		(7,216	)
Comprehensive result attributable to the non-controlling interests		221			141
Comprehensive loss attributable to BluePhoenix shareholders	$	(1,355	)	$	(7,357	)

F-4

BluePhoenix Solutions Ltd.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except shares)

	Share Capital					Additional			Accumulated other			Cost of company
		Number of Shares		Par value		paid in capital			comprehensive loss			shares held by subsidiaries			Accumulated deficit			Noncontrolling interest			Total
Balance as of December 31, 2011		6,310,978	$	56		$	126,544		$	(1,537	)	$	(9,455	)	$	(100,764	)	$	751		$	15,595
Net loss																(11,428	)		351			(11,077	)
Sale of subsidiary																			(1,013	)		(1,013	)
Stock based compensation							1,702															1,702
Conversion of loans and derivatives to equity		3,678,392		36			9,564															9,600
Exercise of warrants		76,758		(0	)		282															282
Vested RSUs		563,125		5			(2,744	)					2,739									(0	)
Balance as of December 31, 2012		10,629,253		97			135,348			(1,537	)		(6,716	)		(112,192	)		89			15,089
Net loss (unaudited)																(1,355	)		221			(1,134	)
Stock based compensation (unaudited)							252															252
Vested RSUs (unaudited)		71,725		1			(1	)					—									—
Balance as of June 30, 2013 (unaudited)		10,700,978	$	98		$	135,599		$	(1,537	)	$	(6,716	)	$	(113,547	)	$	310		$	14,207

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

F-5

BluePhoenix Solutions Ltd.

CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS

(In thousands)

	Six months ended
	June 30,
	2013			2012
	Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,134	)	$	(7,216	)
Adjustments to reconcile net loss to net cash provided by operating activities (including discontinued operation):
Depreciation and amortization		204			1,200
Decrease in accrued severance pay, net		(11	)		(34	)
Stock-based compensation		252			965
Change in fair value of derivatives and discount amortization		(36	)		1,979
(Gain) loss on sales of subsidiaries and Appbuilder		(414	)		462
Loss on sale of property and equipment		—			12
Changes in operating assets and liabilities:
Decrease in trade receivables		233			710
Increase in other current assets		(62	)		(885	)
Decrease in trade payables		(313	)		(695	)
Decrease in other current liabilities and deferred revenues		(59	)		(193	)
Net cash used in operating activities		(1,340	)		(3,695	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		—			4,031
Purchase of property and equipment		(9	)		(60	)
Proceeds from sale of property and equipment		—			41
Proceeds from sales of subsidiaries and Appbuilder		800			2,849
Net cash provided (used) by investing activities		791			6,861
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank credit and convertible notes, net		(149	)		(1,484	)
Repayment of long term loan		—			(3,487	)
Net cash used in financing activities		(149	)		(4,971	)
NET CASH DECREASE IN CASH AND CASH EQUIVALENTS		(698	)		(1,805	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		2,560			3,997
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,862		$	2,192

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

F-6

BluePhoenix Solutions Ltd.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS — Unaudited

Note 1 – Summary of Significant Accounting Policies:

A. 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 information technology ("IT") modernization solutions.

The Company develops and markets unique enterprise legacy lifecycle IT modernization solutions and provides tools and professional services to selected customers. The Company manages its business in various international markets through several entities, including its wholly-owned subsidiaries located in: USA, UK, Italy, Romania and Israel.

B. Accounting Principles:

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

C. Recently Issued Accounting Pronouncements:

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1, 2013, did not have an impact on the Company’s consolidated financial statements.

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our financial statements upon adoption.

D. Unaudited interim consolidated financial statements:

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for the annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended

F-7

BluePhoenix Solutions Ltd.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 1 – Summary of Significant Accounting Policies (Cont.):

December 31, 2013. The interim financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 20-F for the year ended December 31, 2012.

Note 2 – Goodwill:

	June 30,			December 31,
	2013			2012
	Unaudited			Audited
	(in thousands)
Balance as of January 1.	$	54,316		$	56,053
Accumulated impairment losses at the beginning of the period		(41,815	)		(41,815	)
		12,501			14,238
Goodwill related to the sale of subsidiaries		—			(1,737	)
Balance at end of period	$	12,501		$	12,501

F-8

BluePhoenix Solutions Ltd.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 3 – Intangible Assets, net

	Useful life years		June 30, 2013		December 31, 2012
			Unaudited		Audited
			(in thousands)
Original amount:
Technology		5	$	46,266	$	46,266
Customer related intangible assets		5–8		4,968		4,968
				51,234		51,234
Accumulated amortization:
Technology				46,266		46,239
Customer related intangible assets				4,806		4,718
				51,072		50,957
			$	162	$	277

The estimated future amortization of the intangible assets as of June 30, 2013 is as follows:

	(in thousands)
H2 2013		81
2014		81
	$	162

* Amortization of intangible assets amounted to $115,000 and $1,532,000 for the six months ended June 30, 2013, and the year ended 2012 respectively.

Note 4 – Commitments and contingencies:

A. Commitments:

Chief Scientist. One of the Company’s subsidiaries has entered into agreements with the OCS; this subsidiary is 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 June 30, 2013, the contingent liability that was not recognized amounted to $252,000.

Ministry of Production in Italy. In July 2007, the Company’s subsidiary, I-Ter, received an amount of $585,000 from the Ministry of Production in Italy for I-Ter's Easy4Plan product. Easy4Plan is a workflow management tool designed for ISO9000 companies. 36.5% of the funds received constitute a grant, and the remaining 63.5%, is a 10-year loan to be repaid by I-Ter in annual installments until September 2018. The loan bears a minimal annual interest of 0.87% and is linked to the euro. As of June 30, 2013 the remaining loan balance was $234,000.

F-9

BluePhoenix Solutions Ltd.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

B. Contingencies:

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 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.

Note 5 – Discontinued Operation:

A. In May 2012, the Company completed the sale of the Company 51% share holdings in Liacom Systems Ltd., referred to as Liacom, for an aggregate consideration of $1.75 million. This sale was part of the Company strategic plan to focus on the legacy modernization business. The proceeds from the sale were used to repay loans. Liacom met the definition of a component. Accordingly, the results of operations in the statement operations and prior period’s results have been reclassified accordingly. As part of the sale, the company realized goodwill in the amount of $1.3 million based on the relative fair value of Liacom and the portion of the reported unit to be retained. The capital loss recorded upon sale of Liacom amounted to $703,000.  

B. In November 2012, the Company announced the initiation of the sale of the operations of BridgeQuest, Inc. and its relevant subsidiary, which was completed in February 2013. Total consideration for Bridgequest Inc. was $6,500. In addition, as part of the agreement, the Company expected to receive additional amounts upon collection of existing account receivables of BridgeQuest collected by the purchaser following the transaction. BridgeQuest met the definition of a component. Accordingly, the results of operations in the statement of operations and prior periods' results have been reclassified accordingly. As the transaction was completed February 2013, assets and liabilities associated with BridgeQuest were presented as held for sale in the December 31, 2012 balance sheet as the initiation of the sale was in November 2012.

F-10

BluePhoenix Solutions Ltd.
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

The following is the composition from discontinued operation:

	Six months ended June 30,
	2013			2012
Revenues	$	—		$	7,122
Cost of revenues		16			6,071
Gross profit		(16	)		1,051
Research and development costs		—			652
Selling, general, and administrative expenses		2			845
Loss on realization of shareholdings		372			703
Operating loss		(390	)		(1,149	)
Financial expenses , net		9			3
Profit before provision for  income taxes		(399	)		(1,152	)
Provision for income taxes		—			12
Net loss	$	(399	)	$	(1,164	)

Herein are the following major classes of assets and liabilities associated with BridgeQuest as of December 31, 2012:

	December 31, 2012
Assets of discontinued operation:
Account receivable	$	544
Other assets	$	247
	$	791
Liabilities of discontinued operation:
Account payable	$	467

F-11

625,000 Ordinary Shares

BLUEPHOENIX SOLUTIONS LTD.

PROSPECTUS

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 6. Indemnification of Directors and Officers.

Under the Israeli Companies Law, 1999, referred to herein as the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt an office holder in advance from his liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend or any other distribution by the company.

Office Holders Insurance

Our articles of association provide that, subject to the provisions of the Companies Law and the Israeli Securities Law, 1968, referred to as the Securities Law, we may enter into a contract for insurance of all or a part of the liability of any of our office holders imposed on the office holder in respect of an act performed in his or her capacity as an office holder, in respect of each of the following:

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

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

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

In addition, our articles of association provide that, subject to the provisions of the Companies Law and the Securities Law, we may enter into a contract to insure an office holder for (i) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of a proceeding instituted against such office holder in relation to (A) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 of the Securities Law; or (B) administrative infringements pursuant to the provisions of Chapter H’4 of the Securities Law; or (C) infringements pursuant to the provisions of Chapter I’1 of the Securities Law; and (ii) payments made to the injured parties of such infringement under Section 52(54)(a)(1)(a) of the Securities Law.

We procured an insurance policy covering our directors’ and officers’ liability, as well as a run-off policy for seven years for former directors and officers of our former subsidiary, Mainsoft Corporation. Our subsidiaries participate in the premium payments of the insurance, on a proportional basis. The total premiums we paid during 2012 were $96,500.

Indemnification of Office Holders

Our articles of association provide that, subject to the provisions of the Companies Law and the Securities Law, we may indemnify an office holder to the fullest extent permitted by the Companies Law and the Securities Law, with respect to the following liabilities, expenses and payments, provided that such liabilities, expenses and payments were incurred by such office holder in his or her capacity as our office holder:

(i)  a financial obligation imposed on an office holder in favor of another person by a court judgment, including a compromise judgment or an arbitrator’ award approved by court;

(ii)  reasonable litigation expenses, including legal fees, incurred by an office holder as a result of Criminal Inquiry or an investigation or proceeding instituted against such office holder by a competent authority, which inquiry or investigation or proceeding has ended without the filing of an indictment and without an imposition of financial liability in lieu of a criminal proceeding, or has ended in the imposition of a financial obligation in lieu of a criminal proceeding without the filing of an indictment for an offence that does not require proof of mens rea or in connection with financial sanction (the phrases “proceeding that has ended without the filing of an indictment” and “financial obligation in lieu of a criminal proceeding” shall have the meanings ascribed to them in Section 260(a)(1a) of the Companies Law;

II-1

(iii) expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted against him or her in relation to (a) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 of the Securities Law; or (b) administrative infringements pursuant to the provisions of Chapter H’4 of the Securities Law; or (c) infringements pursuant to the provisions of Chapter I’1 of the Securities Law;

(iv)  reasonable legal expenses, including attorney’s fees, which the office holder incurred or with which the office holder was charged by a court of law, in a proceeding brought against the office holder, by us or on our behalf or by another person, or in a criminal prosecution in which the office holder was acquitted, or in a criminal prosecution in which the office holder was convicted of an offense that does not require proof of mens rea (criminal intent); and

(v) payments to an injured party of infringement under Section 52(54)(a)(1)(a) of the Securities Law.

Subject to the provisions of the Companies Law and the Securities Law, we may undertake to indemnify an office holder in advance with respect to (i) financial obligations as specified in paragraph (i) above, provided, that the undertaking is limited to categories of events which, in the opinion of our board of directors can be foreseen, based on our actual activities at the time the undertaking to indemnify was given, and in such amounts set by our board of directors as reasonable; and (ii)  expenses, fees and payments as specified in paragraphs (ii), (iii), (iv) and (v) above. Subject to the provisions of the Companies Law and the Securities Law, we may also undertake to indemnify an office holder retroactively for expenses, fees and payments as specified above.

We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies Law and our articles of association, as described below.

Limitations on Exemption, Insurance and Indemnification

The Companies Law provides that a company may not indemnify an office holder, enter into an insurance contract that would provide coverage for any monetary liability, or exempt an office holder from liability, with respect to any of the following:

· a breach by the office holder of his duty of loyalty, 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, civil fine or financial sanction levied against the office holder.

In addition, the Companies Law provides that a company may not indemnify or insure an office holder for a proceeding instituted against him or her pursuant to the provisions of Chapter H’3, H’4 and I’1 of the Securities Law.

Under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our compensation committee (and prior to December 2012, by our audit committee) and our board of directors and, with respect to members of the board of directors, by our shareholders.

We have issued to our office holders indemnification letters, pursuant to which we may indemnify our directors and officers, in their capacity as office holders or employees of the company, for expenses incurred by them in connection with claims that fall into one or more of the categories of events listed in the indemnification letters.  The indemnification letters further provide for exemption of our office holders, to the fullest extent permitted by law, from any liability for damages caused as a result of a breach of the office holder’s duty of care to us.

II-2

In connection with the transactions with our three major shareholders entered into in 2012, our audit committee and board of directors (and with respect to the directors — also our shareholders) have approved the release of our officers and directors, from any and all liabilities, costs, payments and obligations whatsoever, arising in connection with the loan agreements entered into between us and third parties, the sale of AppBuilder and the transactions with the three shareholders, as well as the indemnification of our directors and officers in respect thereof, to the fullest extent permitted under our standard indemnification letter. 

Item 7. Recent Sales of Unregistered Securities.

Set forth below are the sales of all securities of the registrant sold by the registrant within the past three years (i.e., since the start of 2010, up to the date of this registration statement) which were not registered under the Securities Act:

· In August, 2010, we issued warrants to purchase 3,000 ordinary shares to Liolios Group, Inc., with an exercise price of $7.20 per share.  These warrants were issued in reliance on Section 4(2) of the Securities Act for transactions not involving any public offering;

· During July and August 2012, we issued 3,350,534 ordinary shares to Lake Union, Prescott and Columbia, in reliance on Section 4(2) of the Securities Act for transactions not involving any public offering;

· In September 2012, we issued 327,858 ordinary shares to Lake Union, Prescott and Columbia, in reliance on Section 4(2) of the Securities Act for transactions not involving any public offering.

Item 8. Exhibits and Financial Statement Schedules.

(a) The following exhibits are filed herewith:

Number	Exhibit Title
1.1	Securities Purchase Agreement dated as of November 7, 2013, by and among Registrant and Prescott Group Aggressive Small Cap Master Fund, G.P.
3.1	English translation of the Memorandum of Association as amended on July 23, 2003 and December 30, 2009(1)
3.2	Articles of Association as amended on September 5, 2012
4.1	Form of Ordinary Shares Purchase Warrant dated as of October 12, 2009(3)
4.2	Registration Rights Agreement dated as of October 12, 2009, among the Registrant and the purchasers signatory thereto (3)
5.1*	Opinion of Herzog, Fox & Neeman
10.1	Securities Purchase Agreement dated as of October 12, 2009, among the Registrant and the purchasers identified therein (3)
10.2	Form of Indemnification Letter as approved by the shareholders on December 20, 2011 between the Registrant and its office holders (2)
10.3#	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, February 21, 2010 and November 6, 2012
10.4	The 2007 Award Plan adopted by the Registrant on July 8, 2007, as amended on July 24, 2011 and on April 9, 2012 (2)
10.5	Assignment and Assumption Agreement dated March 19, 2012, among the Registrant, the lenders signatory thereto, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.6	Amendment of Loan Agreement dated March 19, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.7	Amendment No. 1 to Purchase and Amendment to Loan Agreement dated April 15, 2012 among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (5)
10.8	Loan Agreement dated March 19, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.9	Amendment No. 1 to the Bridge Loan Agreement, dated as of September 5, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (5)
10.10	Loan and Security Agreement, dated as of October 2, 2013 by and between Comerica Bank and the Registrant.
21.1	List of Subsidiaries
23.1*	Consent of Herzog, Fox & Neeman (included in Exhibit 5.01)
23.2	Consent of Ziv Haft Certified Public Accountants (Isr.) BDO Member Firm, independent public registered firm
24.1#	Powers of Attorney (included in the signature page)

# Previously filed.

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(1) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 25, 2010.

(2) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 17, 2012.

(3) Incorporated by reference to the Registrant’s Report on Form 6-K filed with the Securities and Exchange Commission on October 13, 2009.

(4) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 23, 2003.

(5) Incorporated by reference to the Registrant’s Registration Statement on Form F-3 filed with the Securities and Exchange Commission on December 26, 2012.

(b) Financial Statement Schedules

All schedules have been omitted because the information required to be set forth therein is not applicable or has been included in the Consolidated Financial Statements and notes thereto.

Item 9. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

          (1)     For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

          (2)     For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, Washington, on this 8th day of November, 2013.

BLUEPHOENIX SOLUTIONS LTD.
By:	/s/ Rick Rinaldo
Name:	Rick Rinaldo
Title:	Chief Financial Officer

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.

Name	Title	Date
Principal Executive Officer:
/s/ Matt Bell	Chief Executive Officer	November 8, 2013
Matt Bell
Principal Financial Officer and Principal Accounting Officer:
/s/ Rick Rinaldo	Chief Financial Officer	November 8, 2013
Rick Rinaldo
Directors:
*	Chairman of the Board
Melvin L. Keating	of Directors	November 8, 2013
*	Director	November 8, 2013
Brian Crynes
*	Director	November 8, 2013
Harel Kodesh
*	Director	November 8, 2013
Thomas Jurewicz
*	Director	November 8, 2013
Carla Corkern
* By: /s/ Rick Rinaldo		November 8, 2013
By: Rick Rinaldo
Attorney-in Fact
Authorized Representative in the United States:
BLUEPHOENIX SOLUTIONS USA Inc.
/s/ Rick Rinaldo		November 8, 2013
By: Rick Rinaldo
Chief Financial Officer

EXHIBIT INDEX

Number	Exhibit Title
1.1	Securities Purchase Agreement dated as of November 7, 2013, by and among Registrant and Prescott Group Aggressive Small Cap Master Fund, G.P.
3.1	English translation of the Memorandum of Association as amended on July 23, 2003 and December 30, 2009(1)
3.2	Articles of Association as amended on September 5, 2012
4.1	Form of Ordinary Shares Purchase Warrant dated as of October 12, 2009(3)
4.2	Registration Rights Agreement dated as of October 12, 2009, among the Registrant and the purchasers signatory thereto (3)
5.1	Opinion of Herzog, Fox & Neeman
10.1	Securities Purchase Agreement dated as of October 12, 2009, among the Registrant and the purchasers identified therein (3)
10.2	Form of Indemnification Letter as approved by the shareholders on December 20, 2011 between the Registrant and its office holders (2)
10.3#	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, February 21, 2010 and November 6, 2012
10.4	The 2007 Award Plan adopted by the Registrant on July 8, 2007, as amended on July 24, 2011 and on April 9, 2012 (2)
10.5	Assignment and Assumption Agreement dated March 19, 2012, among the Registrant, the lenders signatory thereto, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.6	Amendment of Loan Agreement dated March 19, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.7	Amendment No. 1 to Purchase and Amendment to Loan Agreement dated April 15, 2012 among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (5)
10.8	Loan Agreement dated March 19, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (2)
10.9	Amendment No. 1 to the Bridge Loan Agreement, dated as of September 5, 2012, among the Registrant, Lake Union Capital Management, LLC, Prescott Group Capital Management, LLC and Columbia Pacific Opportunity Fund, LP (5)
10.10	Loan and Security Agreement, dated as of October 2, 2013 by and between Comerica Bank and the Registrant.
21.1	List of Subsidiaries
23.1	Consent of Herzog, Fox & Neeman (included in Exhibit 5.1)
23.2	Consent of Ziv Haft Certified Public Accountants (Isr.) BDO Member Firm, independent public registered firm
24.1#	Powers of Attorney (included in the signature page)

# Previously filed.

(1) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 25, 2010.

(2) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 17, 2012.

(3) Incorporated by reference to the Registrant’s Report on Form 6-K filed with the Securities and Exchange Commission on October 13, 2009.

(4) Incorporated by reference to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 23, 2003.

(5) Incorporated by reference to the Registrant’s Registration Statement on Form F-3 filed with the Securities and Exchange Commission on December 26, 2012.

EX-1.1

Exhibit 1.1

SECURITIES PURCHASE AGREEMENT

Dated as of November 7, 2013

by and among

BLUEPHOENIX SOLUTIONS LTD.

and

THE PURCHASERS LISTED IN EXHIBIT A

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT dated as of November 7, 2013 (this “Agreement”) by and among BluePhoenix Solutions Ltd., an Israeli company (the “Company”), and each of the purchasers whose names are set forth on Exhibit A attached hereto (each a “Purchaser” and collectively, the referred to herein as the “Purchaser”).

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to a registration statement filed with the United States Securities and Exchange Commission (the "Commission") file No. 333-191394 on  Form F-1 under the Securities Act of 1933 (the "Registration Statement"), the Company desires to issue and sell to each Purchaser, and each Purchaser desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Purchaser agrees as follows:

ARTICLE I

PURCHASE AND SALE OF ORDINARY SHARES

Section 1.1Purchase and Sale of Ordinary Shares.  (a) Upon the following terms and conditions, the Company shall issue and sell to the Purchasers, and the Purchasers shall purchase  (in the amounts set forth as Exhibit A hereto) from the Company, 625,000 ordinary shares of the Company, par value NIS 0.04 per share (the “Ordinary Shares”, and the Ordinary Shares purchased pursuant to the terms hereof, the “Shares”) at a price per share equal to $4.00 ("Price Per Share") amounting to an aggregate purchase price of US $2,500,000 (the “Purchase Price”).

Section 1.2Closing.  The closing of the purchase and sale of the Shares to be acquired by the Purchasers from the Company under this Agreement, shall take place at the offices of the Company at 601 Union Street, Suite 4616 Seattle, Washington (the “Closing”) at 10:00 a.m., PST or such other location as mutually agreed by the Parties on (i) the second business day after the Registration Statement has been declared effective by the Commission (the "Condition Precedent"), or (ii) any later date after the occurance of the Condition Precedent which was mutually agreed in writing between the Parties (the “Closing Date”).  Subject to the Condition Precedent and the fulfillment or waiver of all of the other conditions set forth in Article IV hereof, at the Closing the Company shall (x) deliver or cause to be delivered to the Purchaser the Shares  and, concurrently,  the Purchaser shall deliver the Purchase Price by wire transfer to the Company.

Section 1.3Longstop Date.In the event that the Condition Precedent is not fulfilled by December 31, 2013 (or any extension thereof, as may mutually be agreed upon in writing by the Parties), the Company may, by written notice, terminate this  Agreement and in such case shall not incur any liability due to such termination.

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ARTICLE II

REPRESENTATIONS AND WARRANTIES

Section 2.1Representations and Warranties of the Company.  The Company hereby represents and warrants to the Purchasers, as of the date hereof and the Closing Date, as follows:

(a)Organization and Good Standing.  The Company is a company duly incorporated or otherwise organized and validly existing under the laws of the State of Israel and has the requisite power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted.  Each subsidiary of the Company subsidiary listed on the Registration Statement ("Subsidiary")  is duly qualified to do business and is in good standing (if applicable) in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary except for any jurisdiction(s) (alone or in the aggregate) in which the failure to be so qualified will not have a Material Adverse Effect.  For the purposes of this Agreement, “Material Adverse Effect” means any material adverse effect on the business, operations, properties or financial condition of the Company and its Subsidiaries taken as a whole (other than effects resulting from conditions affecting the Company’s or its Subsidiaries’ markets generally or from general economic conditions) and/or any condition, circumstance or situation that would prohibit or otherwise materially interfere with the ability of the Company to perform any of its obligations under the Transaction Documents (as defined in Section 2.1(b) below)) in any material respect.

(b)Power; Authorization; Enforcement.  The Company has the requisite power and authority to enter into and perform its obligations under this Agreement, and to issue and sell the Shares and, insofar as applicable, the Additional Shares (as defined in Section 3.4 herein) in accordance with the terms hereof.  The execution, delivery and performance of this Agreement and any other documents and agreements executed in connection with the transactions contemplated hereunder (the "Transaction Documents") by the Company and the consummation by it of the transactions contemplated thereby have been duly and validly authorized by all necessary action, and, except as set forth on Schedule 2.1(b), no further consent or authorization of the Company, its board of directors or shareholders is required.  When executed and delivered by the Company, each of the Transaction Documents shall constitute a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by applicable bankruptcy, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies; and (iii) insofar as indemnification provisions may be limited by applicable law.

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(c)Issuance of Securities.  The Shares and the Additional Shares (if any) (collectively referred to herein as the "Securities") are duly authorized, and when issued and  paid in accordance with the terms hereof, shall be duly and validly issued, fully paid, non-assessable, and free and clear of all liens.

(d)No Conflicts.  The execution, delivery and performance of the Transaction Documents by the Company, the performance by the Company of its obligations and the consummation by the Company of the transactions contemplated hereby and thereby (including the issuance of the Securities as contemplated hereby) do not and will not (i) violate any provision of the Company’s memorandum or articles of association as amended to date, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement or obligation to which the Company is a party or by which the Company's properties or assets are bound, or (iii) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected, except, with respect to clauses (ii) and (iii) above for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect.

(e)SEC Documents, Financial Statements.  The Company has filed the Registration Statement and all reports, schedules forms, statements and other documents required to be filed in the last 12 months by the Company under the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (the “Securities Act”) and the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (the "Exchange Act"), all of the foregoing including filings incorporated by reference therein being referred to as the “SEC Documents”).  At the times of its filing, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the the Securities Act, as applicable. As of their respective dates, the financial statements of the Company included in the Registration Statement  have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company and its Subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

(f)No Material Adverse Change.  Since the filing of the date of the latest audited financial statements included within the Registration Statement, the Company has not experienced or suffered any Material Adverse Effect, except as disclosed as disclosed in its SEC Documents.

(g)No Undisclosed Liabilities.  Except as disclosed in the SEC Documents, since the filing of the Registration Statement the Company has not incurred any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) other than those incurred in the ordinary course of the Company’s or its Subsidiaries respective businesses or which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect.

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(h)Actions Pending.  Except as set forth in the SEC Documents, there is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the Company, threatened against or involving the Company or any of its respective properties or assets, which individually or in the aggregate, would reasonably be expected, if adversely determined, to have a Material Adverse Effect.  There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any officers or directors of the Company in their capacities as such, which individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(i)Compliance with Law.  The business of the Company has been and is presently being conducted in accordance with all applicable federal, state, local and foreign governmental laws, rules, regulations and ordinances, except as set forth in the SEC Documents or such that, individually or in the aggregate, the noncompliance therewith could not reasonably be expected to have a Material Adverse Effect.

(j)Taxes.  Except for matters that would not, individually or in the aggregate, have or reasonable expected to have a Material Adverse Effet, the Company has prepared and filed all material federal, state, foreign and other tax returns required by law to be filed by it, has paid or made provisions for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been and are reflected in the financial statements of the Company and the Subsidiaries for all current taxes and other charges to which the Company or any Subsidiary is subject and which are not currently due and payable.  The Company has no knowledge of any additional assessments, adjustments or contingent tax liability of any nature whatsoever, whether pending or threatened against the Company for any period, nor of any basis for any such assessment, adjustment or contingency, which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(k)Disclosure.  All disclosure furnished by or on behalf of the Company to the Purchaser regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.  The Company acknowledges and agrees that the Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 2.2 hereof.

(l)Transactions with Affiliates.  Except as set forth in the SEC Documents  , none of the officers or directors of the Company or, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of 5% other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.

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(m)Investment Company Act Status.  The Company is not, and as a result of and immediately upon the Closing will not be, an “investment company” or, to the Company’s knowledge, a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

(n)Title to Assets.  The Company and the Subsidiaries have valid land use rights for all real property that is material to their respective businesses and good and marketable title in all personal property owned by them that is material to their respective businesses, in each case free and clear of all liens, except for liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries.  Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in compliance, except as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

(o)Accounting Controls.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities.  The Company’s certifying officers have evaluated the effectiveness of the Company’s controls and procedures in accordance with Item 15 of Form 20-F for 2012 (such date, the “20-F”).  The Company presented in the Form 20-F the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of as of December 31, 2012.  Since such date, there have been no significant changes in the Company’s internal controls (as such term is defined in Rule 13a-15(e) of the Exchange Act) or, to the Company’s knowledge, in other factors that could significantly affect the Company’s internal controls.

(p)Certain Registration Matters. The Company has prepared and filed the Registration Statement in conformity with the requirements of the Securities Act. At the time the Registration Statement and any amendments thereto become effective, the Registration Statement and any amendments thereto will conform in all material respects to the requirements of the Securities Act and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.  The Company is eligible to register the Shares under Form F-1 promulgated under the Securities Act.

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(q)Listing and Maintenance Requirements.  The issuance and sale of the Securities under the Transaction Documents does not contravene the rules and regulations of the Nasdaq Global Market, and no approval of the shareholders of the Company thereunder is required for the Company to issue and deliver to the Purchasers the Securities contemplated by Transaction Documents.

(r)Application of Takeover Protections.  The Company has no knowledge of any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Articles of Association or the laws of the state of Israel that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.

(s)No Additional Agreements.  Except as set forth in Schedule 2.1(s), the Company does not have any agreement or understanding with any Purchaser with respect to the transactions contemplated by the Transaction Documents other than as specified in the Transaction Documents.

(t)Foreign Corrupt Practices Act.  Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of any of the Company has, directly or indirectly, (i) used any funds, or will use any proceeds from the sale of the Shares, for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on their behalf of which the Company is aware) which is in violation of law, or (iv) has violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder.

(u)Money Laundering Laws. The operations of the Company is and has been conducted at all times in compliance with the applicable money laundering statutes of the United States and the state of Israel, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

(v)OFAC. Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, Affiliate or person acting on behalf of the Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the sale of the Securities, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other person or entity, towards any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or any other country sanctioned by OFAC or for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

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(w)Acknowledgment Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby.  The Company further acknowledges that no  Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities.

(x)Regulation M Compliance.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company.

Section 2.2Representations, Warranties and Agreements of the Purchasers.  Each of the Purchasers hereby represents, warrants and agrees to the Company as follows as of the date hereof and as of the Closing Date:

(a)Organization and Standing of the Purchasers.  Each Purchaser is a corporation, limited liability company or partnership duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b)Authorization and Power.  Each Purchaser has the requisite power and authority to enter into and perform its obligations under the Transaction Documents and to purchase the Securities being sold to it hereunder.  The execution, delivery and performance of the Transaction Documents by each Purchaser and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Purchaser or its board of directors, shareholders, or partners, as the case may be, is required.  When executed and delivered by the Purchasers, the other Transaction Documents shall constitute valid and binding obligations of each of the Purchasers enforceable against such Purchaser in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

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(c)No Conflict.  The execution, delivery and performance of the Transaction Documents by the Purchaser and the consummation by the Purchaser of the transactions contemplated thereby and hereby do not and will not (i) violate any provision of the Purchaser’s charter and organizational documents, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Purchaser is a party or by which the Purchaser’s respective properties or assets are bound, or (iii) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Purchaser or by which any property or asset of the Purchaser are bound or affected, except, with respect to clauses (ii) or (iii) (other than with respect to federal and state securities laws) for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, materially and adversely affect the Purchaser’s ability to perform its obligations under the Transaction Documents.

(d)Acquisition for Own Account.  Each Purchaser is purchasing the Securities solely for its own account and not with a view to, or for sale in connection with, public sale or distribution thereof.  Each Purchaser does not have a present intention to sell any of the Securities, nor a present arrangement (whether or not legally binding) or intention to effect any distribution of any of the Securities to or through any person or entity.

(e)Experience. Each Purchaser acknowledges that it (i) has such knowledge and experience in financial and business matters such that Purchaser is capable of evaluating the merits and risks of Purchaser’s investment in the Company, (ii) is able to bear the financial risks associated with an investment in the Securities and (iii) has been given full access to such records of the Company and the Subsidiaries and to the officers of the Company and the Subsidiaries as it has deemed necessary or appropriate to conduct its due diligence investigation.

(f)General.  Each Purchaser understands that the Securities are being offered and sold in reliance upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of such Purchaser to acquire the Securities.

(g)No General Solicitation.  Each Purchaser acknowledges that the Securities were not offered to such Purchaser by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, Internet website or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such Purchaser was invited by any of the foregoing means of communications.  Each Purchaser, in making the decision to purchase the Securities, has relied upon independent investigation made by it and has not relied on any information or representations made by third parties.

(h)Accredited Investor.  Each Purchaser is an “accredited investor” (as defined in Rule 501 of Regulation D), and such Purchaser has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Securities.  Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act and such Purchaser is not a broker-dealer or an “associated person” of a broker-dealer.  Each Purchaser acknowledges that an investment in the Securities is speculative and involves a high degree of risk.

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(i)Certain Fees.  No Purchaser has employed any broker or finder or incurred any liability for any brokerage or investment banking fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in connection with the Transaction Documents or the transactions contemplated thereby.

(j)No Trading.  Each Purchaser has not directly or indirectly, nor has any person acting on behalf of or pursuant to any understanding with such Purchaser, engaged in any transactions in the securities of the Company (including, without limitations, any Short Sales involving the Company’s securities) since the time that such Purchaser was first contacted by the Company regarding the consummation of this transaction.  Such Purchaser covenants that neither it nor any person or entity acting on its behalf or pursuant to any understanding with it will engage in any transactions in the securities of the Company (including Short Sales) prior to the time that the transactions contemplated by this Agreement are announced in a press release pursuant to  Section 3.3 hereof. For purposes of this Section 2.2(k), “Short Sales” shall include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, swaps and similar arrangements (including on a total return basis), and sales and other transactions through non-US broker dealers or foreign regulated brokers.

ARTICLE III

COMPANY COVENANTS

The Company covenants with each Purchaser as follows, which covenants are for the benefit of each Purchaser and their respective  permitted assignees.

Section 3.1Other Agreements.  The Company shall not enter into any agreement in which the terms of such agreement would restrict or impair the right or ability to perform of the Company under any Transaction Document.

Section 3.2Use of Proceeds.  The Company may use the net proceeds from the sale of the Securities hereunder for working capital purposes and as described under the section titled "Use of Proceeds" in the Registration Statement.

Section 3.3Disclosure of Information.  The Company shall, after 9:00 a.m. (New York City time) on the Trading Day immediately following the date of this Agreement, issue a press release disclosing the material terms of the transactions contemplated hereunder and, within one Trading Day of the date hereof, a Report of Foreign Private Issuer on Form 6-K, disclosing the material terms of the transactions contemplated hereby, and filing the Transaction Documents as exhibits thereto.

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Section 3.4Dilutive Issuances and Issuance of Additional Shares.

(a)In the event that on the 15th Trading Day (the "Evaluation Date") following the Company’s release of earnings for the third fiscal quarter of fiscal 2013 (the “Earnings Release Date”), the volume weighted average price of the Ordinary Shares for the period from the Earnings Release Date and until the Evaluation Date,  as reported by Bloomberg Financial L.P. ("VWAP") is lower than 90% of the Price Per Share (i.e. $4.00, then the Company shall issue to the Purchasers, for no additional consideration other than payment of their nominal value, additional Ordinary Shares in an amount that will increase the  respective Shares issued to each Purchaser hereunder to a number equal to the Purchase Price paid by the Purchaser divided by the VWAP (such additional shares, the “Adjustment Shares”). For the purposes of this Agreement a “Trading Day” means any day during which the Nasdaq Global Market shall be open for business.

(b)From and after the Closing Date until  the earlier of  (i) the second anniversary of the Closing Date, or (ii) to the consummation of  a Qualified Financing (defined below) (the "Protection Period"), if the Company, in one transaction or a series of related transactions, sells or issues Ordinary Shares or securities exercisable or convertible into Ordinary Shares for a price per share less than the Price Per Share (each a “Dilutive Issuance”), then immediately following and conditional upon the completion of the Dilutive Issuance, the Company shall issue to the Purchasers, for no additional consideration other than payment of their nominal value, additional Ordinary Shares in an amount that will increase the aggregate  Shares issued to each Purchaser hereunder to a number equal to the Purchase Price paid by such  Purchaser divided by the price per share under the Dilutive Issuance (such additional shares, the “Anti-Dilution Shares” and together with the Adjustment Shares, the “Additional Shares”); provided, however, that in no case shall the Additional Shares and the Shares,  exceed, in the aggregate, 19.9% of the outstanding shares in the Company as of the date hereof [i.e. the Company shall in no case be obligated to issue more than a total of  2,142,459 Ordinary Shares hereunder.    For purposes of this Agreement, a “Qualified Financing” shall mean the consummation by the Company of a transaction or series of related transactions in which the Company issues shares or securities convertible into shares securities of any kind  in consideration for an aggregate amount of at least US $5,000,000.

(c)Notwithstanding the foregoing, this Section 3.4 shall not apply in respect of an Exempt Issuance.  “Exempt Issuance” means the issuance of (a) Ordinary Shares or options to employees, officers or directors of the Company, in either case, pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, (b) securities upon the exercise of any securities exercisable or exchangeable for or convertible into Ordinary Shares issued and outstanding on, or contractually obligated by the Company to issue as of, the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities, or (c) securities issued pursuant to any preemptive rights, registration rights, anti-dilution rights rights of first refusal or similar rights or any other outstanding options, warrants, scrip, rights to subscribe to, call or commitments of any character whatsoever relating to, or securities or rights convertible into, any share capital of the Company  as currently detailed in the SEC Documents.

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(d)In the event the Purchasers are entitled to the issuance  of any Additional Shares, certificates for the Additional Shares so issued shall be dated the date of the occurance of the applicable event triggering such issuance  (the "Triggering Event")  and delivered to the Purchaser within a reasonable time, not exceeding seven (7) Trading Days after such exercise (such date, the “Delivery Date”) or, at the request of the Purchasers, issued and delivered to the Depository Trust Company (“DTC”) account on the Purchaser’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) within a reasonable time, not exceeding seven (7) Trading Days after the occurance of the Triggering Event, and the Purchasers shall be deemed for all purposes to be the holder of the Additional Shares so purchased as of the date of such exercise.  Notwithstanding the foregoing to the contrary, the Company or the Transfer Agent shall only be obligated to issue and deliver the shares to the DTC on a holder’s behalf via DWAC if such exercise is in connection with a sale and the Company and the Transfer Agent are participating in DTC through the DWAC system.

Section 3.5Reservation of Shares.  Until the end of the Protection Period, the Company shall take all action necessary to at all times have authorized and reserved for the purpose of issuance of the aggregate number of Ordinary Shares needed to provide for the issuance of the Additional Shares, as currently reflected in the Registration Statement.

Section 3.6 Listing of Ordinary Shares.  The Company hereby agrees to use commercially reasonable efforts to maintain the listing of the Ordinary Shares on the NASDAQ Global Market.

Section 3.7Certain Transactions and Confidentiality. Each Purchaser covenants that neither it, nor any Affiliate acting on its behalf or pursuant to any understanding with it will execute any purchases or sales, including Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described in Section 3.4.Each Purchaser covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company pursuant to the initial press release as described in Section 3.4, such Purchaser will maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents and the Disclosure Schedules.

Section 3.8Acknowledgment of Dilution.  The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding Ordinary Shares, which dilution may be substantial under certain market conditions.  The Company further acknowledges that its obligations under the Transaction Documents, including, without limitation, its obligation to issue the Shares and Additional Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other shareholders of the Company.

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ARTICLE IV

CONDITIONS

Section 4.1Conditions Precedent to the Obligation of the Company to Close and to Sell the Shares.  The obligation hereunder of the Company to close and issue and sell the Shares to the Purchasers at the Closing is subject to the satisfaction of the Condition Precedent and to the satisfaction or waiver, at or before the Closing of the conditions set forth below.  These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

(a)Accuracy of the Purchasers’ Representations and Warranties.  The representations and warranties of the Purchasers shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality, which shall be true and correct in all respects) as of the date when made and as of the Closing Date as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects  (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of such date.

(b)Performance by the Purchasers.  Each Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchasers at or prior to the Closing Date.

(c)Delivery of Purchase Price.  The Purchasers shall have delivered to the Company the Purchase Price for the Shares to be purchased by the Purchasers.

(d)Delivery of Transaction Documents.  The Transaction Documents shall have been duly executed and delivered by the Purchasers to the Company.

Section 4.2Conditions Precedent to the Obligation of the Purchasers to Close and to Purchase the Shares.  The obligation hereunder of the Purchasers to purchase the Shares and consummate the transactions contemplated by this Agreement is subject to the the satisfaction of the Condition Precedent and satisfaction or waiver, at or before the Closing, of each of the conditions set forth below.

(a)Accuracy of the Company’s Representations and Warranties.  Each of the representations and warranties of the Company in this Agreement and the other Transaction Documents shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Closing Date as though made at that time, except for representations and warranties that are expressly made as of a particular date, which shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of such date.

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(b)Performance by the Company.  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.

(c)Material Adverse Effect.  No Material Adverse Effect shall have occurred from the date hereof until the Closing Date.

ARTICLE V

INDEMNIFICATION

Section 5.1Company Indemnity.  Subject to the provisions of this Section 5.1, the Company will indemnify and hold each Purchasers and its directors, officers, shareholders, members, managers, partners, employees and agents (and any other persons with a functionally equivalent role of a persons holding such titles notwithstanding a lack of such title or any other title), each person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, managers, partners or employees (and any other persons with a functionally equivalent role of a persons holding such titles notwithstanding a lack of such title or any other title) of such controlling persons (each, a “Purchaser Party”) harmless from any and all losses, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents.  If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the reasonable fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel.  The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents.

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ARTICLE VI

MISCELLANEOUS

Section 6.1Fees and Expenses.  At the Closing, the Company has agreed to reimburse the Purchasers up to an aggregate maximum amount of $5,000 for its fees and expenseses in conection with the transaction contemplated hereunder.  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.

Section 6.2Specific Performance; Consent to Jurisdiction; Venue.

(a)The Company and the Purchasers acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement or the other Transaction Documents were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement or the other Transaction Documents and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.

(b)All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  The parties agree that venue for any dispute arising under this Agreement will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue.  The parties irrevocably consent to personal jurisdiction in the state and federal courts of the state of New York.  The Company and each Purchaser consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing in this Section 6.2 shall affect or limit any right to serve process in any other manner permitted by law.  THE PARTIES HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.  If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

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Section 6.3Entire Agreement.  This Agreements contain the entire understanding and agreement of the parties with respect to the matters covered hereby and, except as specifically set forth herein, neither the Company nor any Purchaser make any representation, warranty, covenant or undertaking with respect to such matters, and they supersede all prior understandings and agreements with respect to said subject matter, all of which are merged herein.  For the avoidance of doubt, nothing herein shall be deemed as derogating in any manner whatsoever from the undertakings of the Purchasers pursuant to the non-disclosure agreements entered into between Prescott Group Capital Management L.L.C and the Company in October 2013.

Section 6.4Notices.  Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon (i) hand delivery at the address designated below, (ii) delivery by telecopy or facsimile at the number designated below or (iii) delivery by e-mail at the e-mail address designated below (in each case, if delivered on a business day during normal business hours where such notice is to be received), or, in each case, the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the third business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:

If to the Company:    BluePhoenix Solutions Ltd. 601 Union Street, Suite 4616 Seattle, Washington Attention: Rick Rinaldo Tel. No.: (206) 395-4152

If to Purchasers: Prescott Group Capital  Management, L.L.C, 1924 S. Utica Ave., Suite 1120, Tulsa, Oklahoma 74104 Attention: Matt Dunham Tel. No.: [___________] Fax No.: [__________]

Any party hereto may from time to time change its address for notices by giving written notice of such changed address to the other party hereto pursuant to the provisions of this Section 6.4.

Section 6.5Amendments and Waivers.  No provision of this Agreement may be amended or waived except in a written instrument signed by the Company and Purchasers.  Any amendment or waiver effected in accordance with this Section 6.5 shall be binding upon the Purchasers (and their permitted assigns) and the Company.  No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

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Section 6.6Headings.  The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

Section 6.7Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.  After the Closing, the assignment by a party to this Agreement of any rights hereunder shall not affect the obligations of such party under this Agreement.

Section 6.8No Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 6.9Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction.  This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.

Section 6.10Survival.  The representations and warranties of the Company and the Purchasers shall survive the execution and delivery hereof and the Closing hereunder for the applicable statute of limitations period.

Section 6.11Counterparts.  This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart.

Section 6.12Severability.  The provisions of this Agreement are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement and this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of such provision, had never been contained herein, so that such provisions would be valid, legal and enforceable to the maximum extent possible.

Section 6.13Further Assurances.  From and after the date of this Agreement, upon the request of the Purchasers or the Company, the Company and the Purchasers shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

BLUEPHOENIX SOLUTIONS LTD.
By:	/s/ Matt Bell
	Name: Matt Bell
	Title:   CEO

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR PURCHASERS FOLLOW]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

	Prescott Group Aggressive Small Cap Master Fund, G.P.
	By:	/s/ Phil Frohlich
		Name: Phil Frohlich
		Title: Manager
	Investment Amount:  $2,500,000.00
	Number of Ordinary Shares:  625,000
	Tax ID No.:	[Tax ID No.]
	ADDRESS FOR NOTICE
	c/o:	Prescott Group Capital Management, LLC
	Street:	1924 South Utica, Suite 1120
	City/State/Zip:	Tulsa, OK 74104
	Attention:	Matt Dunham
	Tel:	918 747 3412
	Fax:	918 742 7303
	DELIVERY INSTRUCTIONS
	(if different from above)
DTC Instructions:	c/o:
TD Ameritrade	Street:
DTC # 0188	City/State/Zip:
Further credit:	Attention:
Prescott Group Aggressive Small Cap Master Fund	Tel:

EXHIBIT A

LIST OF PURCHASERS

Investment Amount and Number of

Names of Purchasers	Shares Purchased
Prescott Group Aggressive Small Cap Master Fund, G.P.	$2,500,000.00 investment and 625,000 shares

EX-3.2

Exhibit 3.2

THE COMPANIES LAW, 1999

A PUBLIC COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

OF

BLUEPHOENIX SOLUTIONS LTD.

PART A: DEFINITIONS AND INTERPRETATION

1. Definitions

In these Articles, the following terms shall have the meaning appearing opposite them, unless another interpretation is expressly stated herein:

"Alternate Director"	As defined in Part E below;
"Articles" or "these Articles"	These Articles of Association, as amended from time to time by the General Meeting;
"Board" or "Board of Directors"	The Board of Directors of the Company elected or properly appointed in accordance with the provisions of these Articles; any committee of the Board of Directors to the extent that any of the authorities of the Board of Directors are delegated to it; any person authorized by the Board of Directors, to the extent so authorized, for the purposes of any matter or class of matters;
"business day"	A day on which customer services are provided by a majority of the commercial banks in Israel;
"Companies Law"	The Companies Law, 5759 – 1999, as amended from time to time, or any other law which shall replace it, and any regulations promulgated thereunder;
"Companies Ordinance"	The Companies Ordinance [New Version] 5743 – 1983, as amended from time to time, or any other law which shall replace it  and any regulations promulgated thereunder;
"Company"	BluePhoenix Solutions Ltd.;

"Extraordinary Transaction" A transaction which is not in the ordinary course of business of the Company; a transaction which is not on market terms or a transaction liable to have a material affect on the profitability of the Company, its assets or its liabilities; an arrangement between the Company and an Officer regarding the terms of his office and engagement, including the grant of a release from liability, insurance, and an undertaking to indemnify or an indemnity according to the indemnity permit;

"General Manager"	The person holding this title and any person having the authority of a General Manager, whatever his title;
"Memorandum"	The Memorandum of Association of the Company as amended from time to time;
"Office" or "the Offices of the Company"	The registered office of the Company at the relevant time;
“Officer”	An Office Holder, as such term is defined in the Companies Law;
"Register"	The shareholders register together with any additional shareholders register that the Company may maintain outside Israel;
"security"	Share, debenture, capital note, security, certificate or right entitling membership or participation in the Company or a claim from it (if issued in series), a certificate or right entitling the holder to acquire a security of the Company, in each case whether the security is in name form or bearer form including a debenture or option convertible into shares;
"Securities Law"	The Securities Law, 5728 – 1968, as amended from time to time, or any other law which shall replace it, and any regulations promulgated thereunder;
"simple majority"	A majority of those present and voting at a General Meeting or meeting of the Board of Directors. The vote of any person present at a meeting as aforesaid who does not vote or abstains from voting with respect to any matter on the agenda shall not be included in the number of votes cast;
"transaction"	A contract or an agreement or a unilateral decision to bestow a right or some other benefit;
"Year" or "Month"	According to the Gregorian calendar;

2. Interpretation

2.1 Subject to the provisions of Article 1 above, and unless the context expressly requires some other interpretation, the terms defined in the Companies Law or in the Companies Ordinance, as the case may be, shall bear the same meaning in these Articles; words in the singular shall include the plural and, vice versa; masculine terms shall include the feminine gender, and words indicating individuals shall include corporations.

2.2 Any Article in these Articles which provides for an arrangement which differs in whole or in part from any provision in the Companies Law, the Companies Ordinance or any other provisions of any law, which can be stipulated against, amended or added to, in whole or with regard to specific matters or within specific limitations, in accordance with any law, shall be considered a stipulation against the provision of the Companies Law or Companies Ordinance, as the case may be, even if the actual stipulation is not specified in the said Article, and even if it is expressly stated in the Article (in whatever form) that the effectiveness of the Article is subject to the provisions of any law.

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2.3 In the event of a contradiction between any Article and the provisions of any law that may not be stipulated against, amended or added to, the provisions of the said law shall prevail, provided that nothing thereby shall nullify or impair the effectiveness of these Articles or any other Article therein.

2.4 In interpreting any Article or examining its effectiveness, the interpretation shall be given to that Article which is most likely to achieve its purpose as appearing therefrom or as appearing from the other Articles included within these Articles.

PART B: THE COMPANY, ITS OBJECTS AND THE SHARE CAPITAL

3.  The Company and its Objects

3.1 The Company is a public Company.

3.2 The objects of the Company shall be as specified in the Memorandum.

3.3 The Company may contribute reasonable amounts for any suitable purpose or categories of purpose even if such contributions do not fall within business considerations of the Company. The Board of Directors may determine the amounts of the contributions, the purpose or category of purposes for which the contribution is to be made, and the identity of the recipients of any contribution.

3.4 The Company may at any time undertake any kind of business activity which is permitted to the Company under the terms of these Articles, expressly or by implication, and may refrain from these activities, whether or not the Company has commenced that kind of business activity, all in the absolute discretion of the Board of Directors.

4. Limited Liability

The liability of the shareholders of the Company for the indebtedness of the Company shall be limited as follows:

4.1 If the shares of the Company have a nominal value, the liability of each shareholder for the indebtedness of the Company is limited to payment of the nominal value of the shares of that shareholder.

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4.2 If at any time the Company shall issue shares with no nominal value, the liability of the shareholders shall be limited to payment of the amount which the shareholders should have paid to the Company in the respect of each share according to the conditions of issue.

5. Share Capital

The authorized share capital of the Company is NIS 700,000 (Seven hundred thousand New Israeli Shekels) divided into 17,500,000 ordinary shares of NIS 0.04 nominal value each.

6. Changes in the Share Capital

6.1 The General Meeting of the Company may, from time to time, increase the share capital of the Company or change the class of authorized shares (whether issued or not), by creating new shares, whether or not all of the shares that have been resolved to be issued have in fact been issued at such time, and whether or not all of the shares which have been issued at such time have been paid in full. Such increase or change in share capital shall be in such amount and divided into shares and shall be made subject to such terms and conditions and with such rights and preferences as specified in the resolution creating the shares, and if no such directions are included within the resolution, as the Board of Directors shall determine, and in particular, the shares may be issued with preferred or subordinated rights (or without rights) to dividends, voting, repayment of capital or with respect to any other matters.

6.2 Unless the resolution authorizing the increase in share capital provides otherwise, the new shares shall be issued subject to all of the provisions of these Articles which apply to the existing share capital of the Company.

6.3 The General Meeting may, from time to time, cancel any of its unissued authorized share capital, unless there is any outstanding obligation on the part of the Company, including a conditional obligation, to issue the shares.

6.4 Subject to the provisions of any law and the provisions of these Articles, the Company shall be entitled, from time to time, to cancel any issued share capital.

7. Rights attached to the Shares and Issuance of Shares

7.1 Unless these Articles provide otherwise, all of the shares shall carry equal rights for all purposes, and each share shall vest in the holder thereof:

(a) The right to receive an invitation to and to participate in each General Meeting of the Company, annual or special, and the right to one vote in respect of each share that he holds in every vote at each General Meeting of the Company in which he participates (whether in person or by proxy, including through a written ballot), provided that the share is owned by the shareholder on the record date specified in the resolution to convene the General Meeting;

(b) The right to receive dividends (if and to the extent distributed), the right to receive bonus shares (if and to the extent distributed), in each case in accordance with the nominal value of the shares (without taking into account any premium paid in connection with such shares) that the holder holds in relation to the total nominal value of the shares outstanding, all on the date upon which it is resolved to distribute the dividend or bonus shares or other distribution (as the case may be) or at such later date as shall be provided in the resolution in question and in accordance with the number of shares the holder holds on the said date;

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(c) The right to participate in the distribution of any surplus assets of the Company upon liquidation in accordance with the nominal value of each share in relation to the total nominal value of the shares outstanding.

The provisions of these Articles with respect to General Meetings shall apply to all meetings of any class of shareholders, mutatis mutandis.

7.2 The unissued shares forming part of the authorized share capital of the Company shall at all times be under the control of the Board of Directors.  Without prejudice to any special rights granted to the current shareholders of the Company prior to such date, if any, the Company (acting through the Board of Directors) may issue shares, whether included within the original capital of the Company or as a result of an increase in capital, with rights that are superior or inferior to the outstanding shares, or may issue shares which are preferred or subordinated with regard to distributions, voting rights, the right to repayment of capital or in connection with any other matter, all as the Company shall determine from time to time.

7.3 The Company may issue redeemable securities upon such terms as the Board of Directors shall determine.  The Board of Directors may attach to redeemable securities the attributes of shares, including voting rights and the right to participate in profits.

7.4 The Board of Directors may pay brokerage, underwriting or agents fees in connection with any issue of securities of the Company, in such a manner as the Board of Directors shall determine, and subject to the provisions of any law.

7.5 In the event of an issuance of shares or other securities by the Company, the Company will have no obligation to offer such shares or other securities to the Company's shareholders first.

7.6 If at any time the share capital is divided into different classes of shares, the General Meeting may, unless the terms of issue of that class of shares provide otherwise, amend, convert, expand, add to or otherwise alter the rights, preferences, limitations and directions relating to those shares (or which do not relate at such time to one of the classes), provided that the holders of the class of shares that have been issued and whose rights will be affected thereby agree thereto at a meeting of the holders of the shares of the said class.

The special rights of the holders of any shares or class of shares that have been issued, including shares issued with preferred rights or other special rights, shall not be deemed to have been altered or impaired as a result of the creation or issue of additional shares of equal rank or as a result of the cancellation of authorized share capital of the same class which have not yet been issued, unless it is otherwise specified in the conditions of issue of those shares.

The consolidation or division of the share capital of the Company shall not be deemed to amend the rights attached to the shares which are the subject of such consolidation or division.

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8. Shareholders

8.1 Unless otherwise specified in any law or in these Articles, the Company shall be entitled to treat the registered holder of any share, including a shareholder registered as holding a share on trust, as the absolute owner, and accordingly shall not, except as ordered by a court of competent jurisdiction, or as required under any law, be bound to recognize any equitable or other claim to, or interest in, such share of any other person.

8.2 The Company will be entitled, in accordance with its absolute discretion, to transfer and to pay any amount (in any manner of payment that it selects), any asset of any sort, including bonus shares, to shareholders of the Company whose shares are not registered in their name in the Register, by executing such transfer to a Registration Company or to members of the stock exchange on which the shares of the Company are traded or to a trustee that the Company shall appoint for such matter. As long as the Company has acted based upon information that appears to have been provided to the Company by the shareholders thereof (including information provided by a Registration Company or a member of the stock exchange), the Company shall not be responsible for any unpaid amount or any asset that was not transferred to such shareholder, and the Company shall be deemed as if it has paid the said amounts and transferred the said assets, as the case may be, in full, on the date such amounts or assets were transferred to such Registration Company, member of the stock exchange or trustee.

8.3 The Board of Directors of the Company may, from time to time, settle procedures in connection with determining the identity of shareholders and in connection with the manner in which any right, benefit, asset or amount should be transferred to or distributed among them, including, without limitation, with respect to the distribution of dividends or bonus shares, and with respect to the grant of any right, asset or other benefit to the shareholders of the Company in their capacity as such. Any amounts, bonus shares, rights or property of any kind that are transferred to a shareholder (including to his agent, attorney or to any other person that the shareholder directs) whose identity has been authenticated in accordance with the procedures as aforesaid shall be deemed settlement in full and release of the indebtedness of the Company towards any person claiming a right to such payment, transfer, distribution or grant of right, as the case maybe.

PART C: THE SHARES

9. Share Certificates

9.1 Share certificates shall be signed by two directors of the Company, or by any other person authorized by the Board of Directors, alongside the name of the Company.

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9.2 Each shareholder whose name appears in the Register shall be entitled to receive one share certificate in respect of the shares registered in his name, or, if the Board of Directors so authorizes (and after payment of the amount which the Board of Directors shall determine from time to time) a number of share certificates, each one in respect of one or more of these shares.  Each share certificate shall indicate the name of the shareholder, the number of shares in respect of which it has been issued, and any additional information as shall be determined by the Board of Directors.

9.3 A certificate in respect of a share registered in the names of two or more persons shall be delivered to such person as all of the registered shareholders of that share shall direct, and in the absence of agreement, to the person whose name appears first on the Register from among the names of the joint owners.

9.4 If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors may think fit.

9.5 The Company shall not issue shares other than shares that are paid in full. Shares shall be deemed to have been paid in full if the full amount of the nominal value and any premium thereon has been paid, in accordance with the terms of issue of the shares.

9.6 The Company may issue bearer shares or exchange a bearer certificate for a bearer share certificate.

10. Transfer of Shares

10.1 A transfer of shares shall be effected by way of delivery of a share transfer deed in the form set forth below, which shall include all of the details and bear the signature of the transferor and the transferee and of the witnesses to their signatures.

10.2 The transferor shall be deemed to have remained a shareholder until the name of the transferee is registered in the Register in respect of the share that is transferred.

10.3 The Company is entitled to require payment for the registration of a transfer of shares in the Register (including registration of a transfer of shares registered in the name of a Registration Company to the names of the owner of those shares) in such amount as the Board of Directors shall determine from time to time.

10.4 The Board of Directors or any other person authorized thereto by the Board of Directors for such purpose, is entitled:

(a) to refuse to recognize a share transfer unless the certificate of the transferred shares is being presented, and the transferor provides any additional details necessary to prove his or her entitlement to transfer the shares. The share transfer deeds that are registered shall remain with the Company.  Any share transfer deed that the Board of Directors refuses to register shall be returned to the person delivered it to the Company, at his request;

(b) to refuse to recognize any share transfer until receipt of payment in respect of registration of the transfer.

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10.5 The share transfer deed shall be substantially in the form set forth below, or in such regular or customary form as shall be approved by the Board of Directors:

"The undersigned, I.D. Number/Company Number ______________ (hereinafter "the Transferor") in consideration for the payment of NIS ________ that has been paid to me by ___________, whose address is at ________________________, (hereinafter "the Transferee") hereby transfer to the Transferee ________ shares of NIS ________ each, numbered from __ until ________ inclusive, in BluePhoenix Solutions Ltd., so that the Transferee shall hold the same in accordance with the terms upon which the undersigned held the shares immediately prior to signature of this deed;

and the Transferee, agrees to receive the abovementioned shares upon the abovementioned terms.

IN WITNESS WHEREOF the parties have executed this deed, the ________ day of ______________.

Transferor	Transferee
Witness to the signature of Transferor	Witness to the signature of Transferee"

10.6 Notwithstanding other provisions of these Articles, the Company shall amend the Register by order of the court, or if the Board of Directors is satisfied that the legal requirements for the assignment or transmission of the right to shares are fulfilled.

10.7 The provisions of this Article shall apply also a transfer of a right to a share held by a number of holders jointly, mutatis mutandis.

10.8 The Company may destroy share transfer deeds seven years after registration of the transfer, and share certificates that have been cancelled three years after cancellation, and there shall be a presumption that all share transfer deeds and certificates that have been destroyed were in full force and that the transfers and cancellations and the registrations that were effected based thereon were lawfully carried out.

11. Decedents' Shares

Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title), shall be registered as a member in respect of such share, or may, transfer such share.

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12. Receivers and Liquidators

The Company may recognize the receiver or liquidator of any corporate member in winding-up or dissolution, or the receiver or trustee in bankruptcy of any member, as being entitled to the shares registered in the name of such member.  The receiver or liquidator of a corporate member in winding-up or dissolution, or the receiver or trustee in bankruptcy of any member, upon producing such evidence as the Board of Directors deems sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a member in respect of such shares, or may, subject to the regulations as to transfer herein contained, transfer such shares.

PART D – GENERAL MEETINGS

13. Annual General Meeting

The Company shall hold an Annual General Meeting once every year and no later than fifteen months following the last Annual General Meeting held. The Agenda for the Annual Meeting shall be determined by the Chairman of the Board of Directors in accordance with the instructions of the Board of Directors and shall include, inter alia, discussing the Financial Statements, any matter to be discussed at such meeting according to these Articles or any law, and any other matter that the Board of Directors may determine. To the extent required, the agenda may include appointment of directors, appointment of an auditor, receipt of report from the Board of Directors regarding the fees of the auditor in connection with the audit and any other matter that may require the convening of a Special Meeting.

14. Special Meeting

All General Meetings other than Annual General Meetings shall be called "Special Meetings".  The Board of Directors may, whenever it deems fit, and it shall, within 21 days after receiving a demand in writing by shareholders or directors, as provided in the Companies Law, convene a Special Meeting, at such time and place, as may be determined by the Board of Directors.  Any such demand must state the purpose for which the meeting is to be convened, be signed by the petitioners, and deposited at the Office.

15. Record Date

Notwithstanding any provision of these Articles to the contrary, and to allow the Company to determine the shareholders entitled to notice of, or to vote at, any General Meeting, or to express consent to or dissent from any corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of, or to take or be the subject to, any other action, the Board of Directors may fix, a record date, which shall not be more than forty (40) days (or any longer period permitted under the Companies Law), nor less than four (4) days before the date of such meeting or other action. A determination of holders of record entitled to notice of or to vote at a meeting shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

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16. Convening the Meeting

16.1 The time and place of each General Meeting shall be determined by the Board of Directors or by the Chairman thereof.  If no location for the convening of the meeting is specified by the Board of Directors or by the Chairman of the Board of Directors, the meeting shall convene at the Offices of the Company.

16.2 The Board of Directors may, in its absolute discretion, resolve to enable persons entitled to attend a General Meeting to do so by simultaneous attendance and participation at the principal meeting place and a satellite meeting place or places anywhere in the world and the shareholders present in person, by proxy or by written ballot at satellite meeting places shall be counted in the quorum for and entitled to vote at the General Meeting in question, and that meeting shall be duly constituted and its proceedings valid, provided that the Chairman of the General Meeting is satisfied that adequate facilities are available throughout the General Meeting to ensure that all shareholders attending at the meeting place are able to:

(a) participate in the business for which the meeting has been convened;

(b) hear all persons who speak (whether by the use of microphones, loudspeakers audio-visual communications equipment or otherwise) at the principal meeting place and any satellite meeting place, and

(c) be heard by all other persons so present in the same way.

The Chairman of the General Meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place.

16.3 Unless otherwise expressly directed by a court of competent jurisdiction, the provisions of these Articles shall apply, with such changes as required in the circumstances, to the convening, conduct and proceedings of a General Meeting convened by order of a court of competent jurisdiction and of a General Meeting lawfully convened other than by the Board of Directors, and to any vote at such meeting.

16.4 The Company shall not be required to give notice under Section 69(b) of the Companies Law.

17. Proceedings at General Meetings

17.1 No discussion shall be commenced at a General Meeting unless a quorum is present at the commencement of the meeting.

Other than where a different rule is provided in these Articles or by any law or by a court of competent jurisdiction, a quorum shall be two or more shareholders present in person or by proxy or by written proxy, who hold an aggregate of at least 35% (thirty five percent) of the voting rights in the Company.

17.2 If within an hour from the time set for the General Meeting no quorum is present, the meeting shall automatically be adjourned to the same day and same time one week thereafter (unless such day shall fall on a public holiday either in Israel or the United States, in which case the General Meeting will be adjourned to the first day, not being Friday, Saturday or Sunday, which follows such public holiday), at the same place fixed for the original meeting (with no need for any notice to the shareholders) or until such other later time if such time is specified in the original notice convening the General Meeting, or if the Company gives notice to the shareholders no less than 72 hours before the date fixed for the adjourned meeting.

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17.3 If at an adjourned meeting there is no quorum present half an hour after the time set for the meeting, any two shareholders present in person or by proxy, shall constitute a quorum.

17.4 Notwithstanding any other provision in these Articles, if the convening of a Special Meeting is demanded other than by resolution of the Board of Directors of the Company, the adjourned meeting shall take place only if there are present at least two shareholders holding voting rights in an amount no less than the amount required in order to convene the original meeting. If there is no quorum as aforesaid at the adjourned meeting, the meeting shall not be adjourned to another date and all of the proposed resolutions on the agenda shall be deemed to have been rejected by the meeting.

17.5 The Chairman of the Board of Directors of the Company shall act as Chairman of every General Meeting of the Company. If there is no Chairman of the Board of Directors and the Board of Directors has not determined that another individual shall act as Chairman of the meeting as aforesaid, or if the proposed Chairman is not present fifteen minutes after the time set for the meeting, or if that person does not wish to act as Chairman of the meeting, the shareholders present at the meeting shall in person or by their proxies elect a shareholder or a proxy present at the meeting to act as Chairman of the meeting.

17.6 The Chairman of the meeting may, with the consent of a meeting at which a quorum is present, postpone the meeting from time to time and from place to place, and he must postpone the meeting as aforesaid if the meeting directs him to do so. At a resumption of the meeting that has been adjourned as aforesaid, only those matters which were on the agenda of the original meeting and the discussion of which was not completed or commenced, shall be discussed.  Notwithstanding anything in these Articles to the contrary, if a meeting is adjourned for twenty-one (21) days or more, a notice shall be given of the adjourned meeting as in the case of an original meeting. Except as aforesaid, no shareholder shall be entitled to receive any notice of an adjournment or of the business to be transacted at the adjourned meeting.

17.7 At any General Meeting, a resolution, in respect of any business put to a vote at the meeting shall be decided by a poll.  Such poll shall be held in the manner and at the time and place as the Chairman of the General Meeting directs (including the use of ballots or tickets), whether immediately or after an interval or postponement, or in any other way, and, subject to the other provisions of these Articles and the Companies Law, the results of the poll shall be deemed to be a resolution of the General Meeting. The holding of a poll shall not prevent the continued business of the General Meeting.

17.8 Unless specified otherwise under any law, each resolution of the General Meeting (including a resolution with respect to the amendment, alteration or addition to these Articles or replacement thereof) shall be carried by a simple majority.

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17.9 The announcement by the Chairman that a resolution has been carried unanimously or by a certain majority or has been rejected shall be prima facie evidence of that fact. An announcement as aforesaid and a notification to this effect that has been recorded in the minute books of the Company shall be prima facie evidence of the matter stated therein and there shall be no need to prove the number of votes or the proportion of the votes cast in favor or against the proposed resolution.

18. Voting

18.1 Each share shall entitle the holder thereof to one vote for a share which held by him and to which a voting right is attached without regard to the nominal value of that share, unless the terms of issue of the share provide otherwise.

18.2 A corporation which is a shareholder may authorize an officer in the corporation to be its representative at any meeting of the Company. A person authorized as aforesaid shall be entitled to use, on behalf of the corporation that he represents, the same powers which the corporation itself could have used if it was an individual shareholder.

18.3 A shareholder who is a minor and a shareholder who has been declared legally incompetent by a court of competent jurisdiction may vote only through his guardian, and the said guardian may vote by proxy.

18.4 In the case of joint owners of a share, the vote of the principal joint owner shall be accepted by the Company, whether given in person or by proxy, and the vote of the remaining joint owners shall not be accepted. For the purpose of this Article, the principal joint owner shall be deemed to be the shareholder whose name first appears in the Register with respect to the relevant shares.

19. Voting by Proxy

19.1 A shareholder may appoint a proxy to vote in his place and the proxy need not be a shareholder in the Company. The appointment of a proxy shall be in writing signed by the person making the appointment or by an attorney authorized for this purpose, and if the person making the appointment is a corporation, by a person or persons authorized to bind the corporation.

19.2 The document appointing the proxy to vote (the "Appointment") and power of attorney (if any) pursuant to which the Appointment has been signed, or a copy thereof certified to the satisfaction of the Board of Directors, shall be deposited in the Office (or at such other place in Israel or abroad as the Board of Directors may direct from time to time) or at the location set for the meeting not less than 2 (two) hours (or not less than 24 (twenty four) hours with respect to a meeting to be held outside of Israel), before the time of the meeting, or shall be delivered by hand to the Chairman at the commencement of the meeting, provided that the Chairman of the meeting may waive this requirement for any meeting. Any question that may be raised concerning the eligibility of an Appointment will be decided by the Chairman of the meeting and his decision will be final.

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19.3 A shareholder holding more than one share may appoint more than one proxy, subject to the following provisions:

(a) The Appointment shall indicate the class and number of shares in respect of which it is given;

(b) If the number of the shares of any class specified in the Appointments that have been given by one shareholder exceeds the number of shares of that class held by him, all of the Appointments given by that shareholder shall be void;

(c) If only one proxy is appointed by the shareholder and the Appointment does not indicate the number and class of shares in respect of which it is given, the Appointment shall be deemed to have been given with respect to all of the shares owned by the shareholder at the time for determining the entitlement to participate and vote at the meeting (if the Appointment is given for a specific meeting) or in respect of all of the shares held by the shareholder at the date of depositing the Appointment with the Company or on the date of delivery to the Chairman of the meeting, as the case may be. In the event that an Appointment is given with respect to a number of shares less than the number of shares held by the shareholder, the shareholder shall be deemed to have abstained from voting with respect to the remainder of the shares that he owns and the Appointment shall be valid with respect to the number of shares specified therein.

19.4 Each appointment of a proxy, whether for a specific meeting or otherwise, shall, to the extent that the circumstances permit, be substantially in the following form:

"I, ________ (I.D. Number/Company Number ________) of ____________________, in my capacity as shareholder of BluePhoenix Solutions Ltd., hereby appoint ________, (I.D. Number/Company Number ______________) of ____________________, or in his/her absence, ______________, (I.D. Number/Company Number ______________) of ______________, to vote on my behalf and in my name with respect to ________ Class __ shares held by me at the (annual/special) meeting of the Company that shall be held on the ___ day of ________, and at any adjournment of such meeting.

In witness whereof I have signed hereon this ___ day of ________.

____________________

Name and Signature"

19.5 A vote cast pursuant to an Appointment appointing a proxy shall be valid notwithstanding the death of the person making the Appointment or the cancellation of the power of attorney or the transfer of the share in respect of which the vote is cast as aforesaid, unless notice in writing of the death, cancellation or transfer as aforesaid has been received in the Offices of the Company or by the Chairman of the meeting, by the time of the vote.

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19.6 Subject to the provisions of the Companies Law and any other regulations that may be enacted form time to time pursuant thereto, the Board of Directors is entitled, from time to time, at its absolute discretion, to determine which resolutions may also be approved at the general meeting or any other type of meeting (whether applying generally or applying one-time only) by proxy and to change the said matters determined by the General Meeting and also to determine from time to time any administrative provisions with respect to any matter connected with the proxies or position papers.

Should the Board of Directors formulate procedures and matters as specified above, such procedures and matters will be brought to the attention of the shareholders such that they will be available for review by the shareholders at any reasonable time at the Office or at any other place or in any other manner to be determined by the Board of Directors.

19.7 Subject to the provisions of any law, resolutions approved by a General Meeting, at which the shareholders are entitled to vote by proxy, will not be invalidated if the Company, in error:

(a) did not send to the shareholders a proxy, notice of convening the General Meeting or a notice regarding the possibility of voting at that General Meeting by way of proxy or if it did not send any position paper or any other document to the shareholders;

(b) sent documents and notices late or to an incorrect address;

(c) did not count the shareholders votes or counted the votes as said but in an incorrect or imprecise manner, provided that such counting of votes did not result in a change of the resolutions passed at the General Meeting or in the derogation of the validity of the General Meeting or of the validity of the passed resolution had the votes for such resolution been counted precisely.

(d) did not act in accordance with the provisions of the law or procedures prescribed by the Board of Directors with regard to voting by way of proxies and the sending of position papers.

20. Powers of the General Meeting

The Company's decisions on the following matters shall be adopted by the General Meeting in accordance with the required majority provided by with any law and any provision of these Articles:

20.1 Changes in the Articles.

20.2 Changes in the Memorandum with respect to the Company's name and its purposes only.

20.3 Appointment of the Company's auditor and the termination of his service.

20.4 Appointment of directors, including outside directors, and the termination of their service, all as provided in these Articles.

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20.5 The increase and reduction of the registered share capital and a change of the rights attached to the existing shares, all in accordance with the provisions of any law.

20.6 A merger, in accordance with the provisions of any law.

20.7 Approval of acts and transactions that require the approval of the General Meeting under the provisions of any law or of these Articles.

20.8 Exercise of the powers of the Board of Directors in the events prescribed under the law.

PART E: THE BOARD OF DIRECTORS

21. Appointment and Dismissal of Directors

21.1 Until such time as the General Meeting decides otherwise, the number of members of the Board of Directors shall be set by the Board from time to time, provided, however, that such number shall be not less than three (3) and not more than six (6).

21.2 The directors will be elected by the General Meeting (whether at the Annual General Meeting or at a Special Meeting) on the agenda of which will be the appointment of directors.

21.3 For as long as the Company is required in accordance with any law, to appoint outside directors, the Company's General Meeting (whether the Annual General Meeting or Special Meeting) shall appoint any number of outside directors, on any conditions in a manner prescribed by law.

21.4 In addition to the directors who are appointed by the General Meeting as aforesaid, the Board of Directors of the Company may at its discretion appoint additional directors, provided that the number of members of the Board of Directors after such appointment shall not exceed the maximum number of directors fixed in these Articles.

21.5 Subject to the provisions of any law regarding the cessation of the service of outside directors, the General Meeting is entitled to dismiss a director, including a director that was not appointed by the General Meeting, before the completion of his service for any reason, provided that the director is given a reasonable opportunity to bring his position before the General Meeting.

21.6 Any dismissal, replacement, appointment or re-appointment of a director that was appointed by the Board of Directors shall be approved by the majority of directors present and voting at a meeting of the Board of Directors, in which the agenda includes the appointment.

21.7 An organ that is entitled to appoint a director will be entitled to determine the commencement of his service that will either be at the time of the appointment of that director or at a later time.

21.8 The service of a director that was appointed by the General Meeting will cease (if he has not been dismissed earlier by the General Meeting, as described above) at the end of the first Annual General Meeting held after the said date of appointment (without a need to give the director an opportunity to present his position).

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21.9 Subject to the provisions of any law, a director who has ceased to serve as a director is eligible to be re-appointed.

21.10 Subject to the provisions of any law, the office of a director (including the office of an Alternate Directorand) shall be vacated automatically in each of the following events:

(a) upon his death;

(b) if he is declared to be legally incompetent;

(c) if he is declared bankrupt, and if the director is a corporation, if a liquidator, receiver, special manager or trustee (in each case temporary or permanent) is appointed for the corporation or its assets within the context of a creditors scheme of arrangement or an order of stay of proceedings;

(d) if he resigns from office by written notice to the Company, to the Chairman of the Board of Directors or to the Board of Directors, in which case the office of the director shall be vacated on the date of service of notice or at such later date as specified in the notice as the effective date of resignation;

(e) if his term of office was terminated in accordance with the provisions of these Articles;

(f) if the director is convicted in a final judgment of an offence of a nature which disqualifies a person from serving as a company director;

(g) if a court of a competent jurisdiction decides to terminate his office in a decision or judgment for which no stay of enforcement granted.

21.11 Notwithstanding anything stated in these Articles, the appointment of a director or an Alternate Director, as the case may be, (together "the Appointee") shall not come into effect before the Appointee has delivered to the Company a notice in writing in which the Appointee declares that he is lawfully competent to be appointed as a director of the Company and that he agrees to be appointed as a director of the Company. The notice shall include the personal details of the appointee required by law. The form of the aforesaid notice shall be set down by the Board of Directors from time to time and may be in the form of an affidavit prepared and authenticated in accordance with the law.

21.12 If any director is not appointed, or if the appointment of any director does not come into effect, or if the office of a director becomes vacant, the remaining directors may act in any manner provided that their number does not fall below the minimum number specified in these Articles. If the number of directors falls below the minimum number as aforesaid, the directors shall not be able to act other than in emergencies, or for the purpose of convening a General Meeting, or for the purpose of the appointment of additional directors by the Board of Directors.

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22. Alternate Director

22.1 A director may at any time appoint an alternate ("the Alternate Director"), who is competent to serve as director of the Company and complies with the provisions of the Companies Law.  A person who at that time is serving as a director or an Alternate Director of another director may not serve as an Alternate Director.  The Alternate Director shall have all of the duties, rights and authorities (other than the authority to appoint an alternate for himself) which the director who appointed him has, provided, however, than an Alternate Director shall have no standing in any meeting in which the director who appointed him is present.

22.2 The appointment of an Alternate Director and the cancellation thereof shall be by a written notice to be delivered by the appointing director to the Company. The appointment and cancellation of an appointment shall come into effect on the date of delivery of the notice to the Company or at the date specified in the notice, whichever is later.

22.3 A director who appoints an Alternate Director may at any time cancel the appointment. In addition, the office of an Alternate Director shall be vacated whenever the Alternate Director notifies the Company in writing of his resignation, with effect from the date of his notice or whenever the director who has appointed the Alternate Director ceases to be a director of the Company for whatever reason.

22.4 An Alternate Director shall alone be responsible for his own acts and defaults, and he shall not be deemed the agent of the director who appointed him.

23. Reserved.

24. Chairman of the Board of Directors

24.1 The Board of Directors may appoint one of the directors (other than an Alternate Director) to act as a Chairman of the Board of Directors, remove such Chairman from office and appoint another person in his or her place. The Chairman of the Board of Directors shall not have an additional vote at meetings of the Board of Directors, but shall have a casting vote in case of even votes. An Alternate Director shall not have a casting vote.

24.2 The service of the Chairman of the Board of Directors continues even after the convening of the General Meeting at which directors are appointed or dismissed and will cease upon the occurrence of any of the following events:

(a) the completion of the period of service that was determined in the appointment resolution;

(b) where the Chairman of the Board of Directors resigns such position by a written notice to the Board of Directors.  In such a case, his service will cease on the date upon which the notice is delivered or on the date prescribed in the notice to be the effective date of the resignation, whichever is later.

(c) the Chairman of the Board of Directors ceases to serve as a director for any reason;

(d) the Chairman is dismissed by the Board of Directors.

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24.3 The Chairman of the Board of Directors may, from time to time by a written notice to the Board of Directors, appoint another director to act as a Deputy Chairman of the Board of Directors, to dismiss the Deputy Chairman and to appoint another in his place, provided that the tenure of the Deputy Chairman of the Board of Directors shall not cease even if the person who appointed him ceases to act as Chairman of the Board of Directors or as a director, unless the Board of Directors decides otherwise. If the Chairman of the Board of Directors is not present 15 minutes after the beginning of a meeting of the Board of Directors, or if he does not wish to sit as Chairman of the meeting, the Deputy Chairman or in the absence of a Deputy Chairman, any other director chosen by the Board of Directors to be the Chairman of such meeting, shall conduct the meeting and may exercise all of the authorities vested in the Chairman of the Board of Directors.

24.4 The Chairman of the Board of Directors shall have all of the powers, rights and authorities granted to him under these Articles or by law. Without prejudice to the generality of the aforesaid, the Chairman of the Board of Directors shall have all power and authority necessary in order to carry out his functions and to exercise his rights and authorities in an efficient manner, including the authority to act in the name of the Company and on its behalf in the matters referred to above and to give directions to the General Manager of the Company and to employees and consultants of the Company for this purpose.

24.5 If both the Chairman of the Board of Directors and the Deputy Chairman are absent 15 minutes after the beginning of a meeting of the Board of Directors, or they do not wish to act as Chairman, or no Chairman of the Board of Directors has been appointed for the Company, the Board of Directors shall appoint one of its members (including an Alternate Director) to be the Chairman of such meeting.

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25. Convening and Conduct of Meetings of the Board of Directors

25.1 The Board of Directors shall convene as often as the needs of the Company require and shall do so at least once every three months.

25.2 The Board of Directors shall be convened as follows:

(a) In accordance with a decision of the Chairman of the Board of Directors;

(b) At the request of two directors, but if the Board of Directors comprises up to five members, at the request of one director;

(c) By the Chairman of the Board of Directors if and when a notice or a report from the General Manager is received requiring the action of the Board of Directors or a notice from the auditor regarding substantial defects in the audit of the Company.

(d) In any other case in which it is required by law to convene a meeting of the Board of Directors.

25.3 If a meeting of the Board of Directors is convened by the Chairman of the Board of Directors or by a majority of the members of the Board of Directors, the meeting shall be convened no earlier than the next business day following delivery of a notice of the meeting to all of the members of the Board of Directors, unless the Chairman of the Board of Directors or a majority of the members of the Board of Directors determine that because of the urgent nature of any matter on the agenda, the meeting must be convened within a shorter time. In such a case, the meeting shall be convened in the manner which allows the participation of the maximum number of members of the Board of Directors in the meeting.

25.4 The Board of Directors may hold meetings using any means of communication, provided that all of directors participating can hear one another at the same time, as well as in any other manner permitted by law.  Such a meeting will be considered for the purposes of any matter, including the matters of sending notices, legal quorums and the recording of protocols, as an ordinary meeting of the Board of Directors.

25.5 Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence of a majority of the directors then in office who are lawfully entitled to participate in the meeting, but shall not be less than two.

25.6 The Board of Directors may make a decision without actually convening, provided that all of the directors entitled to participate in the discussion and vote on the matter brought for decision agree thereto.  A resolution in writing signed unanimously by all the directors then in office and lawfully entitled to vote thereon or to which all of the directors have given their unanimous written consent (by letter, e-mail, facsimile or otherwise) shall be deemed to have been adopted by a meeting of the Board of Directors duly convened and held.

25.7 Other than expressly provided in these Articles, the minutes of each meeting of the Board of Directors, shall be signed by the Chairman of the Board of Directors, or the Chairman of the meeting, as the case may be.

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25.8 At a vote of the Board of Directors, each director shall have one vote.

25.9 Resolutions of the Board of Directors shall be carried by a simple majority of the directors voting on any matter on the agenda.

25.10 Any action taken by or in accordance with a resolution of the Board of Directors or by or in accordance with a decision of a Committee of the Board of Directors or by a director acting in his capacity as director is valid and effective even if it is subsequently discovered that there was a defect in the appointment of the directors or the election of the directors or if all or one of them was disqualified, in each case as if each of the directors had been lawfully elected and as if he was fully qualified to act as director, Alternate Director or member of the said Committee, as the case may be.

26. Notice of Meetings of the Board of Directors

26.1 Notice of a meeting of the Board of Directors shall be delivered to each director verbally, by telephone, in writing or by any other means of communication. If a director has appointed an Alternate for himself, notice shall be delivered to the Alternate.

26.2 A notice convening a meeting of the Board of Directors shall include reasonable particulars of all of the matters on the agenda, as well as the place and time fixed for the meeting.

26.3 All of the directors may agree to waive prior notice of a meeting of the Board of Directors.

27. Authorities of the Board of Directors

27.1 The Board of Directors shall set the policy guidelines for the Company and shall supervise the performance and activities of the General Manager, and as part thereof it:

(a) shall determine the Company's plans of activity, the principles of financing them and the order of priority among them;

(b) shall examine the Company's financial situation and set a framework of credit which the Company may take;

(c) shall determine the organizational structure and the wage policy;

(d) may decide to issue a series of debentures;

(e) is responsible for the preparation and approval of the financial reports;

(f) shall appoint and dismiss the General Manager of the Company;

(g) shall decide on the acts and transactions that require its approval in accordance with these Articles or the Companies Law;

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(h) may allocate shares and securities convertible into shares up to the limit of the Company's registered share capital;

(i) may decide on a distribution;

(j) shall express its opinion on a special purchase offer.

27.2 Without prejudice to the generality of the aforesaid, the Board of Directors shall be entitled to use all of its authorities and powers and to carry out all the actions vested in it by law or by these Articles.

27.3 The Board of Directors may exercise any authority of the Company which has not been delegated by these Articles or by law to the General Manager or to the General Meeting, and such authority shall be deemed to have been delegated to the Board of Directors by these Articles.

27.4 The power of the Board of Directors shall be subject to the provisions of any law, and to any article that shall be adopted by the Company in General Meeting, provided that no such article shall invalidate any action taken prior thereto by the Board of Directors or pursuant to a decision thereof which would have been legally valid but for the adoption of the said article.

27.5 The General Meeting may assume the authority vested in the Board of Directors (including the authorities vested in the Board of Directors in the absence of a General Manager) for a specific matter or for a specific period of time.

27.6 For the purpose of exercising the general authorities vested in the Board of Directors and without limiting or restricting in any way whatsoever the said authorities or any of them, it is hereby expressly stated that the Board of Directors shall have the following authorities:

(a) From time to time to appoint one or more persons (whether or not that person is a member of the Board of Directors) as a General Manager or another Officer of the Company, either for a fixed period of time or for an unlimited period of time, and from time to time (bearing in mind the terms of any contract between the Company and such person or persons) to dismiss him or them from office and appoint another person or persons in his or their place.

(b) Subject to any rule of law, to fix the remuneration of the General Manager or of any other Officer from time to time (bearing in mind the terms of any contract between the Company and such person). Such remuneration may be in the form of a fixed salary, payment based on the profits or turnover of the Company or of any other company in which the Company is interested, or by way of participation in such profits, or by way of receipt of securities of the Company, or in one or more of these ways, or in any other manner which the Board of Directors deems fit.

(c) To determine the remuneration of the auditor of the Company.

27.7 For the purpose of setting the policy guidelines for the Company and supervising its activities, any director may examine the documents and records of the Company and receive copies thereof, examine the assets of the Company and receive professional advice at the expense of the Company if the Board of Directors or the court approves the covering of this expense.

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28.  Reserved.

29. Committees of the Board of Directors

29.1 The Board may delegate all or any of its powers, authorities and responsibilities (except for those powers, authorities and responsibilities which, under the Companies Law, the Board is unable to delegate) to any committee consisting of such members of the Board as the Board may, from time to time, think fit, subject to the Companies Law, widen, curtail or revoke such delegation of powers, authorities and responsibilities.

29.2 To the fullest extent permitted by law, the Board, after determining a number of shares reserved for the issuance of shares, options or warrants to the Company's employees, directors, and consultants, may delegate the power to issue such options and shares to a committee of the Board.

29.3 Any committee of the Board shall in the exercise of the power, authorities and responsibilities so delegated conform to any regulations that may be lawfully imposed on it by the Board.

29.4 The meetings and proceedings of a Committee of the Board shall be governed by the provisions herein contained for regulating the meetings and proceedings of the Board, so far as the same are applicable thereto and are not lawfully suspended or superseded by any regulations imposed by the Board.

29.5 The Board shall appoint an audit committee consisting of at least three (3) members, the members of which and the authorities, powers and responsibilities of which shall be governed by the Companies Law and any other applicable law or rule.

PART F: THE GENERAL MANAGER AND OTHER OFFICERS

30. The General Manager

30.1 The Board of Directors of the Company shall appoint one or more General Manager for the Company.  If more than one General Manager is appointed, the Board of Directors may determine that the authorities of a General Manager be divided between the General Managers.

30.2 The General Manager shall have full managerial and operational authority to carry out all of the activities which the Company may carry on by law and under these Articles and which have not been vested by law or by these Articles in any other organ of the Company. The General Manager shall be subject to the supervision of the Board of Directors.

30.3 The General Manager may, with the approval of the Board of Directors, delegate his authority to another person who is subordinate to him.

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30.4 The Board of Directors may decide to transfer any authority vested in the General Manager to the Board of Directors, in a specific instance or for a specific period of time.

31. Secretary and Officers

31.1 The Board of Directors may appoint a Secretary for the Company and determine his duties and authorities. The Secretary, if appointed, shall be subject to the Board of Directors and shall report to it.

31.2 Officers of the Company, except directors and the General Manager, will be appointed and dismissed by the Board of Directors.  The conditions of service, employment and retirement of the said Officers will be determined by the General Manager with the approval of the relevant committee of the Board of Directors, unless it is determined otherwise in any law or by the Board of Directors.

32. Personal Interest in Transactions of the Company

Any transaction which is not an Extraordinary Transaction and which is (i) a transaction with an Officer or (ii) a transaction of the Company with another person in which an Officer has a personal interest, may be approved by the same organ authorized to approve such a transaction, assuming that no party has a personal interest in it.

33. Indemnity, Insurance And Exemption of Officers

33.1 Exemption From Liability

Subject to the provisions of the Companies Law, the Company may exempt an Officer in advance from all or part of such Officer’s responsibility or liability for damages caused to the Company due to any breach of such Officer’s duty of care towards the Company to the maximum extent permitted by law. Notwithstanding, the Company shall not exempt a director in advance from its responsibility or liability towards the Company due to a breach of such director's duty of care in distribution.

33.2 Indemnification

(a)Subject to the provisions of the Companies Law and the Securities Law, the Company may indemnify an Officer to the fullest extent permitted by the Companies Law and the Securities Law, with respect to the following liabilities, expenses and payments, provided that such liabilities, expenses and payments were incurred by such Officer in such Officer's capacity as an Officer of the Company:

(i)         a financial obligation imposed on an Officer in favor of another person by a court judgment, including a compromise judgment or an arbitrator’s award approved by a court of law;

(ii)        reasonable litigation expenses, including legal fees, incurred by an Officer as a result of Criminal Inquiry or an investigation or proceeding instituted against such Officer by a competent authority, which inquiry or investigation or proceeding has ended without the filing of an indictment and without an imposition of financial liability in lieu of a criminal proceeding, or has ended in the imposition of a financial obligation in lieu of a criminal proceeding without the filing of an indictment for an offence that does not require proof of mens rea or in connection with financial sanction (the phrases "proceeding that has ended without the filing of an indictment" and "financial obligation in lieu of a criminal proceeding" shall have the meanings ascribed to such phrases in Section 260(a)(1a) of the Companies Law;

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(iii)       expenses, including reasonable litigation expenses and legal fees, incurred by and Officer as a result of a proceeding instituted against such Officer in relation to (A) infringements that may impose financial sanction pursuant to the provisions of Chapter H'3 of the Securities Law; or (B) administrative infringements pursuant to the provisions of Chapter H'4 of the Securities Law; or (C) infringements pursuant to the provisions of Chapter I'1 of the Securities Law;

(iv)      reasonable legal expenses, including attorney's fees, which the Officer incurred or with which the Officer was charged by a court of law, in a proceeding brought against the Officer, by the Company or on its behalf or by another person, or in a criminal prosecution in which the Officer was acquitted, or in a criminal prosecution in which the Officer was convicted of an offense that does not require proof of mens rea (criminal intent); and

(v)       payments to an injured party of infringement under Section 52(54)(a)(1)(a) of the Securities Law.

(b)Subject to the provisions of the Companies Law and the Securities Law, the Company may undertake to indemnify an Officer in advance with respect to (i) financial obligations as specified in Article 33.2 (a)(i), provided, that the undertaking is limited to categories of events which, in the opinion of the Board of Directors can be foreseen, based on the company’s actual activities at the time the undertaking to indemnify is given, and in amounts set by the Board of Directors as reasonable; and (ii)  expenses, fees and payments as specified in Sub-Sections 33.2 (a)(ii), (iii), (iv) and (v). Subject to the provisions of the Companies Law and the Securities Law, the Company may also undertake to indemnify an Officer retroactively for expenses, fees and payments as specified in Section 33.2.

33.3 Insurance

(a)           Subject to the provisions of the Companies Law and the Securities Law, the Company may enter into a contract to insure an Officer for all or part of the liability that may be imposed on such Officer in connection with an act performed by such Officer in such Officer’s capacity as an Officer of the Company, with respect to each of the following:

(i)        breach of his duty of care to the Company or to another person;

(ii)      breach of his duty of loyalty to the Company, provided that the Officer acted in good faith and had reasonable grounds to assume that the action in question would not prejudice the interests of the Company; and

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(iii)      a financial obligation imposed on him in favor of another person.

(b)           Subject to the provisions of the Companies Law and the Securities Law, the Company may also enter into a contract to insure an Officer for (i) expenses, including reasonable litigation expenses and legal fees, incurred by the Officer as a result of a proceeding instituted against such Officer in relation to (A) infringements that may impose financial sanction pursuant to the provisions of Chapter H'3 of the Securities Law; or (B) administrative infringements pursuant to the provisions of Chapter H'4 of the Securities Law; or (C) infringements pursuant to the provisions of Chapter I'1 of the Securities Law; and (ii) payments made to the injured parties of such infringement under Section 52(54)(a)(1)(a) of the Securities Law.

33.4 (a) The Company shall not indemnify, exculpate or insure any Officer under any of the following circumstances:

(i) a breach of duty of loyalty, except, with respect to indemnification and insurance, to the extent that the Officer acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

(ii) a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the Officer;

(iii) an act or omission committed with intent to derive illegal personal benefit; or

(iv) a fine, civil fine, financial sanction or  levied against the Officer.

(b) The Company shall not indemnify or insure any Officer for a proceeding instituted against such Officer pursuant to the provisions of Chapter H'3, H'4 and I'1 under the Securities Law.

33.5 Any amendment to the Companies Law and the Securities Law adversely affecting the right of any Officer to be indemnified or insured pursuant to this Article shall be prospective in effect, and shall not affect the Company’s obligation or ability to indemnify or insure an Officer for any act or omission occurring prior to such amendment, unless otherwise provided by the Companies Law and the Securities Law.

33.6 The provisions of this Article are not intended, and shall not be interpreted so as to restrict the Company, in any manner, in respect of the procurement of insurance and/or indemnification and/or exculpation, in favor of any person who is not an Officer, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Officer ("Person"), provided, that the Company shall not indemnify or insure a Person, for a proceeding instituted against such Person pursuant to the provisions of Chapter H'3, H'4 and I'1 of the Securities Law and shall not indemnify and shall not pay any financial sanction imposed on such Person.

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34. Signature Rights

The signature rights in the name of the Company shall be determined by the Board of Directors, generally, for a class of matters or for a specific matter. Any signature in the name of the Company shall be accompanied by the name of the Company. The authorized signatories do not have to be directors.

PART G: MINUTES, REGISTERS AND BOOKS OF ACCOUNTS

35. Minutes

35.1 The Board of Directors shall ensure that records of the following matters are duly maintained in books that shall be prepared for this purpose:

(a) The names of members of the Board of Directors who are present at any meeting of the Board of Directors and at any meeting of a Committee of the Board of Directors (including any decision of the Board of Directors or of its Committees which is adopted without actually convening).

(b) The names of the registered shareholders participating in any General Meeting.

(c) The instructions given by the Board of Directors to the Committees of the Board of Directors.

(d) The proceedings at General Meetings, meetings of the Board of Directors, and meetings of the Committees of the Board of Directors, including resolutions adopted without actually convening these meetings.

35.2 Any minute of a meeting of the Board of Directors or of any Committee of the Board of Directors or of the General Meeting of the Company which purports to be signed by the Chairman of the meeting or by the Chairman of the next following meeting shall be prima facie evidence of the matters stated therein.

36. Books and Registers of the Company

36.1 Each book, register and registration that the Company must maintain in accordance with the provisions of the Companies Law or these Articles shall be made in regular books or by electronic means, as the General Manager shall determine, provided that the persons entitled to inspect them are able to receive copies of the documents.

36.2 The Company may destroy any request for entering any change in the Register seven years after the date of the change in the Register, and there shall be a prima facie assumption that all requests for changes in the Register were valid and that any action taken by virtue or as a result thereof was lawfully taken.

36.3 Subject to any provision of law, the Company may determine the manner and form in which documents which shareholders are entitled to inspect are presented to them, and may decide that copies of documents be provided against payment.

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PART H: AUDIT

37. Auditor

37.1 At least once in each calendar year, the financial statements of the Company shall be audited by an auditor or auditors who will express their opinion as to the financial statements.

37.2 The Company shall appoint at the Annual Meeting an auditor or auditors to serve in this capacity until the following Annual Meeting, but the General Meeting may appoint an auditor to serve for a longer period, not extending beyond the end of the third Annual Meeting after the appointment.

37.3 Subject to the provisions of the Companies Law, any act of the auditor of the Company shall be valid with regard to any person acting in good faith with the Company, notwithstanding any defect in the appointment or qualification of the auditor.

37.4 The fees of the auditor shall be fixed by the Board of Directors. The Board of Directors shall report at the Annual Meeting the fees of the auditor so fixed.

37.5 The Board of Directors will notify the auditor of General Meetings and of meetings of the Board of Directors in which the financial statements audited by the auditor are presented, and the auditor shall be entitled to attend such meetings.

38. Internal Auditor

38.1 As long as the Company is a public company, the Company will have an internal auditor, to be appointed by the Board of Directors in accordance with the proposal of the Audit Committee.

38.2 The role and authorities of the internal auditor shall be as provided in the Companies Law.

PART I: RESERVES, DISTRIBUTIONS AND BONUS SHARES

39. Reserves

39.1 The Board of Directors may at any time allocate such amounts as it sees fit from the surpluses (as defined in the Companies Law) to a reserve for any purpose determined by it. Likewise, the Board of Directors may direct the management of, and the uses to which, any reserve or part thereof is put, including using of any reserve or part thereof for the business of the Company, without need to maintain such amount separate from the remaining assets of the Company.

39.2 The Board of Directors may from time to time, subject to the provisions of any law and the provisions of these Articles, change the purpose for which any capital reserve has been designated or the manner in which it is managed, to combine or split reserves and to transfer the amount of any capital reserve to the surplus account or to any other account in the accounting records of the Company. Notwithstanding the aforesaid, the Board of Directors may not transfer any amount from the share premium account other than to the share capital of the Company or for the purposes of a distribution that does not satisfy the profit test.

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40. Distribution of Dividends and Bonus Shares

40.1 Subject to these Articles, the Company may declare and pay any dividend or decide on a distribution permitted under the Companies Law.

40.2 No dividend shall bear interest or linkage against the Company.

40.3 A dividend may be paid, in whole or in part, by way of distribution of assets of any kind. A distribution of assets as aforesaid shall be made by a transfer, assignment, transfer of title, grant of a contractual or proprietary right or in any other manner as the Board of Directors directs.

40.4 If the Board of Directors decides to distribute a dividend, in whole or in part by way of an allotment of shares in the Company to those shareholders entitled to the dividend, at a price lower than the nominal value of those shares or to distribute bonus shares, the Company shall convert to share capital a portion of its profits or of its share premiums or of any other source included in the equity in its last financial statements (all as defined in the Companies Law) in an amount equal to the difference between the nominal value of the said shares and the price paid therefor.

40.5 The Board of Directors may allot from time to time bonus shares and determine the source of such distribution.  Such bonus shares shall form part of the share capital of the Company and shall be considered to be fully paid in such amount, being not less than the nominal value of the shares, as the Board of Directors shall direct. The said bonus shares shall be allotted without payment to the shareholders of the Company who would have been entitled to receive the amount converted to share capital for the purpose of distribution of the bonus shares if that amount had been distributed by way of cash dividend and in the same proportion.

40.6 The Board of Directors may decide that bonus shares shall be of the same class of shares as these shares which entitle the holders thereof to participate in the distribution of bonus shares, or that all bonus shares shall be of a single class which shall be distributed to all persons entitled thereto without taking into account the class of shares which they hold, or that bonus shares be a combination of classes of shares.

40.7 The Board of Directors may from time to time issue to the holders of the Company's securities that are convertible into the Company's shares, bonus shares or dividends as if the said securities had been converted into shares prior to the distribution in question, in each case subject to the terms of issue of the said securities.

The Board of Directors may make any arrangement and take any action necessary for the efficient and speedy implementation of the provisions of this Article, to determine the rights which the holders of convertible securities receive and the manner in which they receive these rights, and to carry out any necessary adjustment with respect to the rights of the holders, in this respect. The Board of Directors may exercise any authority granted to it in connection with the distribution of a dividend or bonus shares or rights to the shareholders in the Company, mutatis mutandis, all in the absolute discretion of the Board of Directors.

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In order to implement any resolution regarding the distribution of a dividend or bonus shares or in connection with the acquisition of securities of the Company, the Board of Directors may sign any document and effect any arrangement which is, in the opinion of the Board of Directors, necessary in order to enable or facilitate the distribution, including the issuance of certificates for partial shares or to decide that shares in the Company which entitle the holder thereof to partial shares in an amount lower than the level fixed by the Board of Directors shall not entitle the holder to participate in that distribution, or to sell the partial shares and to pay the net proceeds of sale (after deduction of the expenses of sale and any tax that shall be payable in respect of the sale) to the persons entitled thereto;

40.8 The Board of Directors may appoint a trustee or trustees ("the Trustee") to hold dividends, bonus shares or any other right (together "the Benefit") which the Company has issued or distributed to its shareholders and which was not demanded by any of the shareholders. Any action taken by the Trustee, and any agreement between the Board of Directors and the Trustee shall be valid and shall bind the shareholders in connection with the Benefit to which they are entitled and for which the Trustee has been appointed.

40.9 The Trustee shall be appointed for the purpose of exercising, collecting, receiving or depositing the Benefit, but the Trustee shall not be entitled to transfer the Benefit or part thereof or to grant any right in the Benefit or to make any use thereof.  The Trustee shall not be entitled to vote in respect of any securities of the Company which are included in the Benefit.

40.10 The Trustee shall transfer the Benefit, including any income arising thereon, less the Trustee's fee as settled by the Board of Directors, to the shareholders entitled to the Benefit as soon as possible after he receives the first written demand from the shareholders, subject to authentication of the identity of any shareholder and details of the Benefit to which he is entitled.

40.11 If the payment of the dividend is not demanded within seven (7) years from the date of the decision to distribute that dividend, the person entitled thereto shall be deemed to have waived the dividend, and ownership thereof shall return to the Company.

40.12 The Board of Directors may pay all dividends or money due in respect of shares by sending checks in the mail, and if the Benefit is, in whole or in part, an asset or a right, by sending by mail any document confirming or creating the said right. Any check or document sent to the address of the shareholder as appearing in the Register shall be dispatched at the risk of the shareholder.

40.13 The transferee of any shares shall not be entitled to any dividend or any other distribution with respect to such shares, which has been declared after the date of transfer but before registration of the transfer in the Register, and in the event of the transfer of shares which is subject to the approval of the Board of Directors, before the date of said approval.

40.14 The Board of Directors may deduct from any dividend, distribution or other amounts which are to be paid to a shareholder (including to a person who is one of the joint holders of a share) any amounts due from such a person to the Company in his capacity as shareholder.

40.15 If there is a number of persons registered as joint holders of a share, each one may give a valid receipt to the Company for any Benefit granted in respect of that share.

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41. Buy-Back

A decision regarding the acquisition of securities which have been issued by the Company and the manner in which these securities shall be dealt with by the Company shall be taken by the Board of Directors.

PART J: NOTICES

42. Notices

42.1 Subject to these Articles, any notice to shareholders of the Company shall be given in accordance with the provisions of the law.

42.2 Any written notice or other document may be served by the Company upon any shareholder either personally or by sending it by prepaid mail (air mail if sent internationally) or by cablegram, telex, facsimile or email addressed to such shareholder at his address as described in the Register or such other address as he may have designated in writing for the receipt of notices and other documents.  Such designation may include a broker or other nominee holding shares at the instruction of the shareholder.  Proof that an envelope containing a notice was properly addressed, stamped and posted shall be conclusive evidence that notice is given.  A declaration of an authorized person on behalf of the stock transfer agent of the Company or other distribution agent stating that a notice was mailed to a shareholder will suffice as proof of notice for purposes of this Article.

42.3 Any written notice or other document may be served by any shareholder upon the Company by tendering the same in person to the Secretary or the General Manager at the Offices of the Company or by sending it by any of the means provided for in Article 42.2 to the Company at its Office.

42.4 Any notice or other document referred to above shall be deemed to have been served 48 hours after it has been posted (seven days if sent internationally), or 24 hours after sent by cablegram, telex, facsimile or email.  The date of mailing, publication or other method of sending a notice and the date of the meeting shall be counted as part of the days comprising any notice period.  If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received, notwithstanding that it was received sooner than provided herein, defectively addressed or failed, in some other respect, to comply with the provisions of this Article.

42.5 All notices to be given to the shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons in named first in the Register, and any notice so given shall be sufficient notice to the holders of such share.

42.6 Any shareholder whose address is not described in the Register, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.

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42.7 Notwithstanding anything to the contrary herein, notice by the Company of a General Meeting which is published:

(i) in two daily newspapers in the State of Israel shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register (or as designated in writing for the receipt of notices and other documents) is located in the State of Israel.

(ii) in one daily newspaper in the City of New York and in one international wire service shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register (or as designated in writing for the receipt of notices and other documents) is located outside the State of Israel.

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C o n t e n t s

Part A:	Definitions and Interpretation
	1.	Definitions
	2.	Interpretation
Part B:	The Company, its Objects and the Share Capital
	3.	The Company and its Objects
	4.	Limited Liability
	5.	Share Capital
	6.	Changes in the Share Capital
	7.	Rights attached to the Shares and Issuance of Shares
	8.	Shareholders
Part C:	The Shares
	9.	Share Certificates
	10.	Transfer of Shares
	11.	Decedents' Shares
	12.	Receivers and Liquidators
Part D:	General Meetings
	13.	Annual a General Meeting
	14.	Special Meeting
	15.	Record Date
	16.	Convening the Meeting
	17.	Proceedings at General Meetings
	18.	Voting
	19.	Voting by Proxy
	20.	Powers of the General Meeting
Part E:	The Board of Directors
	21.	Appointment and Dismissal of Directors
	22.	Alternate Director
	23.	Reserved
	24.	Chairman of the Board of Directors
	25.	Convening and Conduct of Meetings of the Board of Directors
	26.	Notice of Meetings of the Board of Directors
	27.	Authorities of the Board of Directors
	28.	Remuneration of Directors
	29.	Committees of the Board of Directors
Part F:	The General Manager and Other Officers
	30.	The General Manager
	31.	Secretary and Officers
	32.	Personal Interest in Transactions of the Company
	33.	Indemnity, Insurance and Exemption of Officers
	34.	Signature Rights
Part G:	Minutes, Registers and Books of Accounts
	35.	Minutes
	36.	Books and Registers of the Company
Part H:	Audit
	37.	Auditor
	38.	Internal Auditor
Part I:	Reserves, Distributions and Bonus Shares
	39.	Reserves
	40.	Distribution of Dividends and Bonus Shares
	41.	Buy-Back
Part J:	Notices
	42.	Notices

Annex A

The Companies Law 5759-1999

Public Company Limited by Shares

ARTICLES OF ASSOCIATION

OF

BluePhoenix Solutions Ltd.

EX-5.1

EXHIBIT  5.01

Yaakov Neeman*	Nurit Dagan	Yuval Meidar	Lev Zigman	Michal Weisbert
Tuvia Erlich	Yaniv Dinovitch	Aviram Hazak	Noa Landau Bar-Ner	Liraz Cohen
Meir Linzen	Nir Raber	Aya Ben David Ashbel	Uriel Mozes	Aviv Parienty
Alan Sacks	Harriet Finn	Efrat Ben-Eliezer	Tsouriel Picard	Keren Horowitz
Yaacov Brandt	Jay K. Kupietzky	Sagit Avital-Asaf	Tamar Fefer-Solomon	Rafael Herbst
Ehud Sol	Alon Ziv	Rotem Virnik	Elad Wieder	Zvika Friedman
Janet Levy Pahima	Ofir Segev	Robert Wiseman	Ilana Berman-Nir	Hadas Waissler
Amir Seraya	Ran Hai	Michal Gutelzon	Tamar Bachar	Sarit Shainboim
Yael (Neeman) Bar-Shai	Ronen Reingold	Dan Sharot	Nir Gal	Netanel Haim
Yaacov Sharvit	Haya Ehrman	Vladi Borodovsky	Adar Ortal	Yael Hauser
Eliot Sacks	Tal Dror Schwimmer	Itai Sarfaty	Ohad Elkeslassy	Itamar Gur
Baruch Katzman	Shai Kagan	Elad Shaul	Efrat Tzur	Yehuda Hommfor
David Zailer	Chagai Vered	Gal Schwartz	Dana Kashi	Doron Hindin
Neil Wilkof	Gilad Majerowicz	Ran Kedem	Nir Miller	Amit Laufer
Mark Phillips	Yuval Navot	Ra'anan Sagi	Dikla Nassi	Rotem Shay
Adam Eytan	Irit Roth	Na’ama Babish	Chen Dekel-Zilber	Talia Blazer
Orly Gerbi	Boaz Golan	Revital Katz	Jennifer Schear	Nimrod Praver
Moshe Hardi	Michal Caspi	Eran Wagner	Yotam Blaushild	Tomer Marsha
Gilad Wekselman	Shira Margalit -Elbaz	Orit Strauss	Liran Barak	Shani Gertzman
Yossi Ashkenazi	Efri Berkovich	Dana Gal-Altbauer	Chen Moyal	Nofar Asselman
Gil White	Yehoshua Gurtler	Ronen Hausirer	Eyal Shaltieli	Tal Zohar
Anthony Leibler	Shachar Porat	Michal Haberfeld	Alon Lederman	Noy Levinson
Eldad Chamam	Amir Peres	Hen Tirosh	Michal Pereg	Maayan Clara Padlon
Ilanit Landesman Yogev	Yair Geva	Racheli Pry-Reichman	Erez Nahum	Einat Steiner
Limor Hodir	Nir Dash	Gilad Neeman	Tomer Farkash	Tom Waltner
Ory  Nacht	Itzhak Shragay	Ifat Pagis-Gelman	Maor Roth	Orly Erlich
Maya Racine Netser	Eran Lempert	Ayelet Regavim-Kahanov	Rosie M. Ron	Sigal Berger
Esther Sternbach	Tamara Tapoohi Waldman	Ariel Yosefi	Zara Gold	Eitan Ella
Roni Libster	Hanna Bilavsky	Asaf Nahum	Sahar Regev	Noa Gruman
Menachem Neeman	Saar Pauker	Tal Hamdi	Niva Dimor	Hila Dovev
Karen  L. Elburg	Orit Hipsher	Yael Chervinsky  Edan	Omer Yaniv	Amir Zeldner
Hanan Haviv	Moshe Yaacov	Gilad Shay	Nadav Yariv	Noa Leon
Liat Shaked-Katz	Daniel Lipman Lowbeer	Roi Hayun	Jenia Melkhior	Natan Rosenwasser
Ruth Dagan	Carmit Keanan	Coby Solomon	Karin Fried	Grigory Danovich
Asher Dovev	Moran Yemini	Maayan Hammer-Tzeelon	Tal Avigdory	Lior Sofer
Odelia Offer	Ofer Granot	Chen Luzzatto	Yehonatan Ohayon	Maya Rozenwax
Sharon Petel	Tal Even-Zahav	Keren Assaf	Lital Wolfovitz	Dana Comber
Moria Tam-Harshoshanim	Haim Machluf	Tseela Yurkevich	Mor Atias
Guy Katz	Ruth Bergwerk	Limor Lerner  Shechter	Reut Alcalay
Daniel Reisner	Ron Ben-Menachem	Adina Shapiro	Menachem Danishefsky

*Founding Partner

8 November 2013
File No:	10887

BluePhoenix Solutions Ltd.

8 Maskit Street

Herzliya 46120

Israel

Ladies and Gentlemen:

We have acted as special Israeli counsel to BluePhoenix Solutions Ltd., an Israeli company (the “Company”), in connection with the Registration Statement No. 333-191394 on  Form F-1 under the Securities Act of 1933 and the pre-effective amendment  filed by the Company with the Securities and Exchange Commission on the date hereof (the “Registration Statement”).  The Registration Statement relates to the sale of up to 2,142,459 ordinary shares of the Company, par value NIS 0.04 per share (“Ordinary Shares”) which consist of : (i) 625,000 Ordinary Shares to be issued to Prescott Group Aggressive Small Cap Master Fund, G.P.  and or its designated affiliates pursuant to a Securities Purchase Agreement dated as of November 7, 2013 (the "SPA"); and (ii) up to an additional 1,517,459 Ordinary Shares issuable upon exercise of certain adjustment and anti dilution rights as detailed in the SPA (the "Shares").

In so acting, we have examined such statutes, regulations, corporate records, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinion hereinafter set forth.

Asia House, 4 Weizmann St., Tel-Aviv 6423904, Israel, Tel: (972)-3-692-2020, Fax: (972)-3-696-6464, e-mail: hfn@hfn.co.il www.hfn.co.il

In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents.  As to all questions of fact material to this opinion that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company.  We have considered such questions of Israeli law as we have deemed necessary for the purpose of rendering this opinion.  We are members of the Bar of the State of Israel and, in rendering our opinion, we do not pass (expressly or by implication) on the laws of any jurisdiction other than the State of Israel. Our opinion relates only to Israeli laws.

Based upon the foregoing, we are of the opinion that the Shares registered for sale under the Registration Statement were duly authorized, validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to our firm under the heading “Legal Matters” in the prospectus contained in the Registration Statement.

Very truly yours,

/s/ Herzog, Fox & Neeman

Herzog, Fox & Neeman

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EX-10.10

Exhibit 10.10

BLUEPHOENIX  SOLUTIONS USA, INC.

LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as of October 2, 2013, by and between Comerica Bank ("Bank") and BluePhoenix Solutions USA, Inc. ("Borrower").

RECITALS

Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank.

AGREEMENT

The parties agree as follows:

1.                  DEFINITIONSANDCONSTRUCTION.

1.1           Definitions. As used in this Agreement, all capitalized terms shall have the definitions set forth on ExhibitA. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.

1.2           AccountingTerms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term "financial statements" shall include the accompanying notes and schedules.

2.                  LOANANDTERMSOFPAYMENT.

2.1           CreditExtensions.

(a)           PromisetoPay. Borrower promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

(b)           AdvancesUnderRevolvingLine.

(i)           Amount. Subject to and upon the terms and conditions of this Agreement, and after Bank receives the results of the Initial Audit (in form and substance satisfactory to Bank), Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Revolving Line or (B) the Borrowing Base. Amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time without penalty or premium prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b) shall be immediately due and payable,

(ii)           Form ofRequest. Whenever Borrower desires an Advance, Borrower willnotify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time (12:00 p.m. Pacific time for wire transfers), on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of ExhibitC. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any facsimile or telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(b) to Borrower's deposit account.

(c)           Non-Formula  Revolving Line Advances.

(i)           Subject to and upon the terms and conditions of this Agreement, Borrower may request Non-Formula  Revolving Line Advances in an aggregate outstanding amount not to exceed the Non-Formula Revolving Line. Amounts borrowed pursuant to this Section 2.l(c) may be repaid and  reborrowed  at any  time without penalty or premium prior to the Non-Formula Revolving Line Maturity Date, at which  time all Non­-Formula Revolving Line Advances under this Section 2.1(c) shall be immediately  due and payable.

(ii)          Whenever Borrower desires a Non-Formula Revolving Line Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time (12:00 p.m. Pacific time for wire transfers), on the Business Day that the Non-Formula Revolving Line Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of ExhibitC.Bank is authorized to make Non-Formula Revolving Line Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Non Formula Revolving Line Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any facsimile or telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Non­ Formula Revolving Line Advances made under this Section 2.1(c) to Borrower's deposit account.

2.2           Overadvances. If the aggregate amount of the outstanding Advances exceeds the lesser of the Revolving Line or the Borrowing Base at any time, Borrower shall immediately pay to Bank, in cash, the amount of such excess.

2.3           InterestRates.Payments.andCalculations.

(a)           InterestRates.

(i)           Advances. The Advances shall bear interest, on the outstanding daily balance thereof, on the terms set forth in the Pricing Addendum.

 (ii)          Non-FormulaRevolvingLineAdvances. The Non-Formula Revolving Line Advances shall bear interest, on the outstanding daily balance thereof, on the terms set forth in the Pricing Addendum.

(b)           Payments. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.

2.4           CreditingPayments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence and during the continuance of an Event of Default, Bank shall have the right, in its sole discretion, to immediately apply any wire transfer of funds, check, or other item of payment Bank may receive to conditionally reduce Obligations, but such applications of funds shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

2.5           Fees. Borrower shall pay to Bank the following:

(a)           Bank Expenses. (i) On the Closing Date, all Bank Expenses incurred through the Closing Date; provided, however, that Borrower's obligation to reimburse Bank for legal fees shall be limited to $5,000 so long as moderate comments to the Loan Documents are made by Borrower or any third party, and (ii)after the Closing Date, all Bank Expenses, as and when they become due.

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2.6          Term. This Agreement shall become effective on the Closing Date and, subject to Section 13.8, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.

3.                  CONDITIONS OFLOANS.

3.1           Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

(a)           this Agreement;

(b)          an officer's certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

(c)           the Pricing Addendum;

(d)           a financing statement (Form UCC-1) naming Borrower as debtor;

(e)           an intellectual property security agreement;

(f)           agreement to furnish insurance;

(g)          for each collateral location or warehouse location of Borrower or any Collateral location not owned by Borrower, a landlord subordination agreement, collateral access agreement or bailment waiver, executed by the landlord, warehouseman or bailee of such location, as applicable, together with a copy of the lease, warehouse or bailment agreement for each such location, as applicable, provided that with respect to the location with the address 601 Union Street, Suite 4616, Seattle, WA, Borrower shall be entitled to satisfy this condition within no later than 60 Business Days after the Closing Date;

(h)          payment of the fees and Bank Expenses then due specified in Section 2.5;

(i)           current SOS Reports indicating that except for Permitted Liens, there are no other security interests or Liens of record in the Collateral;

(j)           current financial statements, including audited statements for Borrower's most recently ended fiscal year, together with an unqualified opinion, company prepared consolidated and consolidating balance sheets and income statements for the most recently ended month in accordance with Section 6.2, and such other updated financial information as Bank may reasonably request;

(k)           current Compliance Certificate in accordance with Section 6.2;

(l)            a guaranty by Columbia Pacific Opportunity Fund, L.P. ("Columbia Pacific");

(m)          resolutions and incumbency certificate of Columbia Pacific, authorizing the execution of a guaranty in favor of Bank and related documents;

(n)           an Automatic Loan Payment Authorization; and

(o)           such other documents or certificates, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

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3.2           ConditionsPrecedenttoallCreditExtensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

(a)           timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and

(b)          the representations and warranties contained inArticle 5shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2.

4.                  CREATION OF SECURITY INTEREST.

4.1           Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in later-acquired Collateral.

4.2           PerfectionofSecurityInterest. Borrower authorizes Bank to file at any time financing statements, continuation statements, and amendments thereto that (i)either specifically describe the Collateral or describe the Collateral as all assets of Borrower of the kind pledged hereunder, and (ii)contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Any such financing statements may be filed by Bank at any time in any jurisdiction whether or not Division 9 of the Code is then in effect in that jurisdiction. Borrower shall from time to time endorse and deliver to Bank, at the request of Bank, all Negotiable Collateral and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfection of Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank chooses to perfect its security interest by possession in addition to the filing of a financing statement. Where Collateral is in possession of a third party bailee, Borrower shall take such steps as Bank reasonably requests for Bank to (i)obtain an acknowledgment, in form and substance satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, and (ii)obtain "control" of any Collateral consisting of investment property, deposit accounts, securities accounts, letter-of-credit rights or electronic chattel paper (as such items and the term "control" are defined in Division 9 of the Code) by causing  the securities intermediary or depositary institution or issuing bank to execute a control agreement  in form and substance satisfactory to Bank. Borrower willnot create any chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper. Borrower from time to time may deposit with Bank specific cash collateral to secure specific Obligations; Borrower authorizes Bank to hold such specific balances in pledge and to decline to honor any drafts thereon or any request by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the specific Obligations are outstanding.

4.3           RighttoInspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than twice a year (excluding the Initial Audit), unless an Event of Default has occurred and is continuing, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral.

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5.                  REPRESENTATIONSANDWARRANTIES.

Borrower represents and warrants as follows:

5.1           Due Organization and Qualification. Borrower and each Subsidiary is an entity duly existing under the laws of the jurisdiction in which it is organized and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that itbe so qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Effect.

5.2           Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's organizational documents, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.

5.3           Collateral. Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens. All Collateral is located solely in the Collateral States. The Eligible Accounts are bona fide existing obligations. The property or services giving rise to such Eligible Accounts has been delivered or rendered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. No licenses or agreements giving rise to such Eligible Accounts is with any Prohibited Territory or with any Person organized under or doing business in a Prohibited Territory. All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory for which adequate reserves have been made. Except as set forth in the Schedule, none of the Collateral is maintained or invested with a Person other than Bank or Bank's Affiliates.

5.4           IntellectualPropertyCollateral.Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. To the best of Borrower's knowledge, each of the Copyrights, Trademarks and Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made to Borrower that any part of the Intellectual Property Collateral violates the rights of any third party except to the extent such claim could not reasonably be expected to cause a Material Adverse Effect. Except as set forth in the Schedule, Borrower's rights as a licensee of intellectual property do not give rise to more than five percent (5%) of its gross revenue in any given month, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service.

5.5           Name:LocationofChiefExecutiveOffice;LocationofInventoryandEquipment. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth in the first paragraph of this Agreement. The chief executive office of Borrower is located in the Chief Executive Office State at the address indicated in Section 10 hereof. Except as disclosed in the Schedule, all inventory and Equipment of Borrower is located at the address indicated in Section 10 hereof.

5.6           Actions.Suits.  Litigation.orProceedings.Except as set forth in the Schedule, there are no actions, suits, litigation or proceedings, at law or in equity, pending by or against Borrower or any Subsidiary before any court, administrative agency, or arbitrator in which a likely adverse decision could reasonably be expected to have a Material Adverse Effect.

5.7           No Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated and consolidating financial condition as of the date thereof and Borrower's consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or in the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

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5.8           Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement.

5.9           Compliance with Laws and Regulations. Borrower  and each  Subsidiary  have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to  ERISA.  No  event  has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could reasonably be expected to have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning  of  the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U and X of the Board of Governors of the Federal Reserve System). Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower is in compliance with all environmental laws, regulations and ordinances except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower has not violated any statutes, laws, ordinances or rules  applicable  to  it,  the violation of which could reasonably be expected to have a Material Adverse Effect. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good  faith with  adequate  reserves under GAAP or where the failure to file such returns or pay such taxes could not reasonably  be expected to have a Material  Adverse Effect.

5.10         Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.

5.11         Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.

5.12         InboundLicenses. Except as disclosed on the Schedule, Borrower is not a party to, nor is bound by, any inbound license or other agreement, the failure, breach, or termination of which  could  reasonably be expected to cause a Material Adverse Effect, or that prohibits or otherwise restricts Borrower  from granting  a security interest in Borrower's interest in such license or agreement or any other property.

5.13         Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank taken together with all such certificates and written statements furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading, it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.

6.                  AFFIRMATIVECOVENANTS.

Borrower covenants that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:

6.1           Good Standing and Government Compliance. Borrower shall maintain its, and each of its Subsidiaries' organizational existence and good standing in the Borrower State, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of the jurisdiction in which Borrower is organized, if applicable. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so could reasonably be expected to have a Material Adverse Effect. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.

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6.2           FinancialStatements,Reports,Certificates. Borrower shall deliver to Bank: (i) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated and consolidating balance sheet and income statement covering Borrower's and each Subsidiaries' operations during such period, prepared in accordance with GAAP, and in a form reasonably acceptable to Bank and certified by a Responsible Officer; (ii)  as soon as available, but in any event within one hundred fifty (150) days after the end of each fiscal year of Borrower, company prepared consolidated and consolidating financial statements of Borrower, together with a balance sheet and income statement covering Borrower's and each Subsidiaries' operations during such period, prepared in accordance with GAAP, and in a form reasonably acceptable to Bank and certified by a Responsible  Officer; (iii) as soon as available, but in any event within one hundred fifty (150) days after the end of Parent's fiscal year, audited consolidated and consolidating financial  statements of Parent prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified (including no going concern comment or qualification) or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (iv) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Forms  10-Kand  10-Qfiled with the Securities and Exchange Commission; (v) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Two Hundred Fifty Thousand Dollars ($250,000) or more; (vi) promptly upon receipt, each management letter prepared by Borrower's independent certified public accounting firm regarding Borrower's management control systems; (vii) as soon as available, but in any event not later than January 31 of each year, Borrower's financial and business projections and budget for the then current or immediately  following (as applicable) year, with evidence of approval thereof by Borrower's board of directors; (viii) such budgets, sales projections, operating plans or other financial information generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time; and (ix) within thirty (30) days of the last day of each fiscal quarter, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower's Intellectual Property Collateral, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in ExhibitsA, B, and C of any Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement.

(a)           Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of ExhibitD hereto, together with aged-listings by invoice date of accounts receivable and accounts payable.

(b)           Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate certified as of the last day of the applicable month and signed by a Responsible Officer in substantially the form of Exhibit E hereto.

(c)           Immediately upon becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of a Responsible Officer setting forth details of the Event of Default, and the action which Borrower has taken or proposes to take with respect thereto.

(d)           Bank shall have a right from time to time hereafter to audit Borrower's Accounts and appraise Collateral at Borrower's  expense, provided that such audits will be conducted no more often than every six (6) months (not including the Initial Audit) unless an Event of Default has occurred and is continuing.

Borrower may deliver to Bank on an electronic basis any certificates, reports or information required pursuant to this Section 6.2, and Bank shall be entitled to rely on the information contained in the electronic files, provided that Bank in good faith believes that the files were delivered by a Responsible Officer. IfBorrower delivers this information electronically, it shall also deliver to Bank by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or .pdf file within five (5) Business Days of submission of the unsigned electronic copy the certification of monthly financial statements, the intellectual property report, the Borrowing Base Certificate and the Compliance Certificate, each bearing the physical signature of the Responsible Officer.

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6.3           Inventory;Returns. Borrower shall keep all Inventory in good and merchantable condition, free from all material defects except for  Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Closing Date. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims involving more than Two Hundred Fifty Thousand Dollars ($250,000).

6.4           Taxes. Borrower shall make, and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Bank, on demand, proof reasonably satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

6.5           Insurance.

(a)           Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as insured by the Borrower as of the date of this Agreement. Borrower shall also maintain liability and other insurance in amounts and of a type as insured by the Borrower as of the date of this Agreement.

(b)          All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All policies of property insurance shall contain a lender's loss payable endorsement, in a form reasonably satisfactory to Bank, showing Bank as an additional loss payee, and all liability insurance policies shall show Bank as an additional insured and specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason.  Upon Bank's request, Borrower shall deliver to Bank certified copies of the policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrower's option, be payable to Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest. If an Event of Default has occurred  and is continuing, all proceeds payable under any such policy shall, at Bank's option, be payable to Bank to be applied on account of the Obligations.

 6.6           Accounts. Borrower shall maintain all of its depository and operating accounts with Bank and its primary investment accounts with Bank or Bank's Affiliates (covered by satisfactory control agreements). Notwithstanding the foregoing, Borrower may maintain (a) an account with HSBC Bank ("HSBC"), provided that within sixty (60) days after the Closing Date, such account is covered by a control agreement in form and substance satisfactory to Bank in its reasonable discretion and (b) accounts with  financial  institutions  other  than  Bank  or HSBC, provided that the (i)aggregate balance of all accounts with any  one such  financial  institution  shall  not exceed $125,000 at any time and (ii) aggregate balance of all accounts at all such other financial institutions shall not exceed $225,000 at any time.

6.7             [Reserved.]

6.8             Registration ofIntellectualPropertyRights.

  (a)           Borrower shall register or cause to be registered on an expedited basis (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registrable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights.

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(b)          Borrower shall promptly give Bank written notice of any applications or registrations of intellectual property rights filed with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any.

(c)           Borrower shall (i) give Bank not less than thirty (30) days prior written notice of the filing of any applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed; (ii)prior to the filing of any such applications or registrations, execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower; (iii) upon the request of Bank, either deliver to Bank or file such documents simultaneously with the filing of any such applications or registrations; (iv) upon filing any such applications or registrations, promptly provide Bank with a copy of such applications or registrations together with any exhibits, evidence of the filing of any documents requested by Bank to be filed for Bank to maintain the perfection and priority of its security interest in such intellectual property rights, and the date of such filing.

(d)          Borrower shall execute and deliver such additional instruments and documents  from time to time as Bank shall reasonably request to perfect and maintain the perfection  and  priority  of Bank's  security interest in the Intellectual Property  Collateral.

(e)           Borrower shall use commercially reasonably efforts to (i)protect, defend and maintain the validity and enforceability of the Trademarks, Patents, Copyrights, and trade secrets, (ii)detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii)not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, delayed or conditioned.

(f)           Bank may audit Borrower's Intellectual Property Collateral to confirm compliance with Section 6.2(d) and this Section 6.8, provided such audit may not occur more often than twice per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.8 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.8.

6.9           Consent of Inbound Licensors. Prior to entering into or becoming bound by any inbound license or agreement (other than over-the-counter software that is commercially available to the public), the failure, breach, or termination of which could reasonably be expected to cause a Material Adverse Effect, Borrower shall: (i)provide written notice to Bank of the material terms of such license or agreement with a description of its likely impact on Borrower's business or financial condition; and (ii)in good faith take such actions as Bank may reasonably request to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (A) Borrower's interest in such licenses or contract rights to be deemed Collateral and for Bank to have a security interest in it that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future, and (B) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank's rights and remedies under this Agreement and the other Loan Documents, provided, however, that the failure to obtain any such consent or waiver shall not constitute a default under this Agreement.

6.10         Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

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7.                  NEGATIVECOVENANTS.

Borrower covenants and agrees that, so long as any credit hereunder shall be available and until the outstanding Obligations are paid in full or for so long as Bank may have any commitment to make any Credit Extensions, Borrower willnot do any of the following without Bank's prior written consent:

7.1           Dispositions. Convey, sell, lease, license,  transfer or otherwise dispose of (collectively, to "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, or subject to Section 6.6 of the Agreement, move cash balances on deposit with Bank to accounts opened at another financial institution, other than Permitted Transfers.

7.2           ChangeinName,Location,ExecutiveOffice,orExecutiveManagement;ChangeinBusiness; ChangeinFiscalYear;ChangeinControl. Change its name or the Borrower State or relocate its chief executive office without  twenty (20) days prior written notification to Bank; replace its chief executive officer or chief financial officer without seven (7) days prior written notification to Bank; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its fiscal year end; or have a Change in Control.

7.3           MergersorAcquisitions. Merge or consolidate, or permit any of  its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially  all of the capital stock or property  of another Person, or enter into any agreement to do any of the same, except where (i) such transactions do not in the aggregate exceed Two Hundred Fifty Thousand Dollars ($250,000) during any fiscal year, (ii)no Event  of Default has occurred, is continuing or would exist after giving effect to such transactions, (iii) such transactions do not result in a Change in Control, and (iv) Borrower is the surviving entity.

7.4           Indebtedness. Create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness, or prepay any  Indebtedness  or take any actions which impose on Borrower an obligation to prepay  any Indebtedness, except Indebtedness to Bank.

7.5           Encumbrances. Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person that Borrower in the future willrefrain from creating, incurring, assuming or allowing any Lien with respect to any of Borrower's property.

7.6           Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, other than Permitted Stock Repurchases and transfer of funds to Parent as permitted under Section 7.12 of this Agreement.

7.7           Investments. In each case, other than a Permitted Investment, directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any Subsidiary to do so, or maintain or invest any of its property with a Person other than Bank or Bank's Affiliates or permit any of its Subsidiaries to do so unless such Person has entered into a control agreement with Bank, in form and substance reasonably satisfactory to Bank, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower. Further, Borrower shall not enter into any license or agreement with any Prohibited Territory or with any Person organized under or doing business in a Prohibited Territory.

7.8           Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions existing as of the date of this Agreement and listed on the Schedule and new transactions (or amendments to existing transactions) that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person.

7.9           SubordinatedDebt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt and the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision of any document evidencing such Subordinated Debt, except in compliance with the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision affecting Bank's rights contained in any documentation relating to the Subordinated Debt without Bank's prior written consent.

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7.10         InventoryandEquipment. Store the Inventory or the Equipment with a bailee, warehouseman, or similar third party unless the third party has been notified of Bank's security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank's benefit or (b) is in possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the location set forth in Section 10, the current Schedule and such other locations of which Borrower gives Bank prior written notice.

7.11         No Investment Company; Margin Regulation. Become or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.

7.12          Transfers to Parent. Transfers of funds to Parent shall not be in excess of $750,000, during any fiscal year of Borrower.

8.                  EVENTSOFDEFAULT.

Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

8.1            PaymentDefault. If Borrower fails to pay any of the Obligations when due;

8.2           CovenantDefault.

(a)          If Borrower fails to perform any obligation under Section 6.2, 6.4, 6.5 or 6.6, or violates any of the covenants contained in Article 7 of this Agreement;

(b)          If Borrower fails or neglects to perform any obligation under Section 6.1, 6.3, 6.8, 6.9 or 6.10 and has failed to cure such default within ten (10)days after the earlier to occur of (i)Borrower's receipt of notice thereof or (ii)the date any officer of Borrower becomes aware thereof; however during such cure period no Credit Extensions will be made; or

(c)          If Borrower fails or neglects to perform or observe any other material term, provision, condition, covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within fifteen (15) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period or cannot after diligent attempts by Borrower be cured within such fifteen (15)  day  period,  and  such  default  is  likely  to  be  cured  within  a reasonable  time,  then  Borrower  shall  have an additional reasonable period (which shall not in any case exceed thirty five (35)  days)  to  attempt  to  cure such default, so long as Borrower continues to diligently attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made;

8.3           Material Adverse Change. If there occurs any circumstance or circumstances that could reasonably be expected to have a Material Adverse Effect;

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8.4           Attachment. If any material portion of Borrower's or any Subsidiary's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower or any Subsidiary is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion  of  Borrower's  or  any Subsidiary's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's or any Subsidiary's assets by the United States Government, or any department, agency, or instrumentality  thereof, or by any state, county, municipal, or governmental agency, and the same is not paid  within  ten  (10)  days  after Borrower or such Subsidiary, as applicable, receives notice thereof, provided that none of  the  foregoing  shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower or a Subsidiary, as  applicable (provided that  no  Credit  Extensions  will  be  made during such cure period);

8.5           Insolvency. If Borrower or any Subsidiary becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower or a Subsidiary of Borrower, or if an Insolvency Proceeding is commenced against Borrower or any Subsidiary and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

8.6           Other Agreements. If there is a default or other failure to perform in any agreement to which Borrower or any Subsidiary is a party with a third party or parties resulting in such third party or parties, exercising their rights against the Borrower or a Subsidiary and the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000) or that would reasonably be expected to have a Material Adverse Effect;

8.7           Subordinated Debt. If Borrower or any Subsidiary makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank;

8.8           Judgments; Settlements. If one or more (a) judgments, orders, decrees or arbitration awards requiring the Borrower and/or its Subsidiaries to pay an aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or greater shall be rendered against Borrower and/or its Subsidiaries and the same shall not have been vacated or stayed within ten (10) days thereafter (provided that no Credit Extensions will be made prior to such matter being vacated  or stayed); or (b) settlements  is agreed upon by Borrower and/or its Subsidiaries for the payment by Borrower  and/or its Subsidiaries of an aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or greater or that could reasonably be expected to have a Material Adverse Effect; or

8.9           Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document.

8.10          Guaranty. Ifany guaranty of all or a portion of the Obligations (a "Guaranty")  ceases  for  any reason to be in full force and effect, or any guarantor fails to perform any obligation  under  any  Guaranty  or  a security agreement securing any Guaranty (collectively, the ''Guaranty Documents"), or any event of default occurs under any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document, or if any of the circumstances described  in Sections 8.3 through  8.9 occur with respect to any guarantor.

9.                  BANK'SRIGHTSANDREMEDIES.

9.1           RightsandRemedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:

(a)           Declare all Obligations,  whether  evidenced by this Agreement,  by any of the other Loan Documents, or otherwise,  immediately  due and  payable  (provided that  upon  the occurrence of an  Event of Default described in Section 8.5 (insolvency), all Obligations shall become  immediately due and payable without any action by Bank);

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(b)          Demand that Borrower (i) deposit cash with Bank in an amount equal to the aggregate limit of corporate credit cards and merchant credit card processing reserves, and (ii) pay in advance all fees with respect to such corporate credit cards and merchant credit card processing reserves, and Borrower shall promptly deposit and pay such amounts;

(c)          Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;

(d)          Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;

(e)          Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it,and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise;

(f)           Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, and (ii)indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;

(g)          Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit;

(h)          Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate. Bank may sell the Collateral without giving any warranties as to the Collateral Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale;

(i)           Bank may credit bid and purchase at any public sale;

(j)          Apply for the appointment of a receiver, trustee, liquidator or  conservator  of  the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and

(k)         Any deficiency  that  exists after disposition  of the  Collateral  as provided  above will  be paid immediately by Borrower.

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Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

9.2           Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) enter into a shortform intellectual property security agreement consistent with the terms of this Agreement for recording purposes only or modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending ExhibitsA, B,and C,thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; and (h) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in clauses (g) and (h) above, regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated.

9.3           Accounts Collection. At any time after the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.

9.4           BankExpenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.

9.5           Bank'sLiabilityforCollateral. Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.

9.6           No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other Person liable for them and Bank may release, modify  or  waive  any  collateral provided by any other Person to secure any of the Obligations,  all without affecting Bank's rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.

9.7           RemediesCumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no  waiver  by  Bank of any Event of Default  on Borrower's  part  shall  be deemed  a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence byit. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. Borrower expressly agrees that this Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise.

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9.8           Demand;Protest. Except as otherwise provided in this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.

10.                 NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a  recognized overnight delivery service, certified mail,  postage  prepaid,  return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:

If to Borrower:	BluePhoenix Solutions USA, Inc.
	601  Union  Street, Suite 4616
	Seattle, WA 981
	Attn: Rick Rinaldo
	FAX:(  )
If to Bank:	Comerica Bank
	M/C7578
	39200 Six Mile Rd.
	Livonia, MI 48152
	Attn: National Documentation Services
with a copy to:	Comerica Bank
	10500 NE 8th Street, Suite 1905
	Bellevue, WA 98004
	Attn: Michael Fishback
	FAX: (425) 452-2510

The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

11.                 CHOICEOFLAWANDVENUE:JURYTRIALWAIVER.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the State and Federal courts located in the State of California. THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BYLAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.

12.                 REFERENCE PROVISION.

12.1          In the event the Jury Trial Waiver set forth above is not enforceable, the parties elect to proceed under this Judicial Reference Provision.

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12.2          With the exception of the items specified in Section 12.3, below, any controversy, dispute or claim (each, a "Claim") between the parties arising out of or relating to this Agreement or any other document, instrument or agreement between the undersigned parties (collectively in this Section, the "Comerica Documents''), will be resolved by a reference proceeding in California in accordance with the provisions of Sections 638 et seq. of the California Code of Civil Procedure ("CCP"), or their successor sections, which shall constitute the exclusive remedy for the resolution of any Claim, including whether the Claim is subject to the reference proceeding. Except as otherwise provided in the Comerica Documents, venue for the reference proceeding will be in the Superior Court in the County where the real property involved in the action, if any, is located or in a County where venue is otherwise appropriate under applicable law (the "Court'').

12.3          The matters that shall not  be subject to a reference are the following: (i) foreclosure of any security interests in real or personal property, (ii) exercise of self help remedies (including, without limitation, set­ oft), (iii) appointment of a receiver and (iv) temporary, provisional or ancillary remedies (including,  without limitation, writs of attachment, writs of possession, temporary restraining orders or preliminary injunctions). This Agreement does not limit the right of any party to exercise or oppose any of the rights and remedies described in clauses (i) and (ii)or to seek or oppose from a court of competent jurisdiction any of the items described in clauses (iii) and (iv). The exercise of, or opposition to, any of those items does not waive the right of any patty to a reference pursuant to this Agreement.

12.4          The referee shall be a retired Judge or Justice selected by mutual written agreement of the parties. If the parties do not agree within ten (10)days of a written request to do so by any party, then, upon request of any party, the referee shall be selected by the Presiding Judge of the Court (or his or her representative). A request for appointment of a referee may be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would result if ex parte relief is not granted.

12.5          The parties agree that time is of the essence in conducting the reference proceedings. Accordingly, the referee shall be requested, subject to change in the time periods specified herein for good cause shown, to (i) set the matter for a status and trial setting conference within fifteen (15) days after the date of selection of the referee, (ii) if practicable, try all issues of law or fact within one hundred twenty (120) days after the date of the conference and (iii) report a statement of decision within twenty (20) days after the matter has been submitted for decision.

12.6          The referee will have power to expand or limit the amount and duration of discovery. The referee may set or extend discovery deadlines orcutoffs for good cause, including a party's failure to provide requested discovery for any reason whatsoever. Unless otherwise ordered based upon good cause shown, no party shall be entitled to "priority" in conducting discovery, depositions may be taken by either party upon seven (7) days written notice, and all other discovery shall be responded to within fifteen (!5) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding.

12.7          Except as expressly  set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of hearings, the  order  of  presentation  of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee, and the referee will be provided a courtesy copy of the transcript. The party making such a request shall  have the obligation to arrange for and pay the court reporter. Subject to the referee's power to award costs to the prevailing party, the parties will equally share the cost of the referee and the court reporter at trial.

12.8          The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, enter equitable orders  that will be binding on the parties and rule on any motion which  would be authorized in a court proceeding, including without limitation motions for summary judgment or summary adjudication. The referee shall issue a decision at the close of the reference proceeding which disposes of all claims of the parties that are the subject of the reference. Pursuant to CCP §644, such decision  shall be entered by the Court as a judgment  or  all order  in the same manner  as if the action  had  been  tried  by  the Court and  any such decision will be final, binding and conclusive. The parties reserve the right to appeal from the final judgment or order or from any appealable decision or order entered by the referee, The parties reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision.

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12.9          If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by reference procedure willbe resolved and determined by arbitration. The arbitration will be conducted by a retired judge or Justice, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery set forth above shall apply to any such arbitration proceeding.

12.10        THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER COMERICA DOCUMENTS.

13.                 GENERALPROVISIONS.

13.1          SuccessorsandAssigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned  by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation  in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder.

13.2          Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement and/or the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank, its officers, employees and agents as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct.

13.3          TimeofEssence. Time is of the essence for the performance of all obligations set forth in this Agreement.

13.4          SeverabilityofProvisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

13.5          CorrectionofLoanDocuments. Bank may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.

13.6          Amendments in Writing, Integration. All amendments to or terminations of this Agreement or the other Loan Documents must be in writing signed by the parties. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the Loan Documents.

13.7          Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

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13.8          Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding or Bank has any obligation to make any Credit Extension to Borrower. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 13.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

13.9          Confidentiality. In handling any confidential information, Bank and all employees and agents of Bank shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or Affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii)to prospective transferees, participants or purchasers of any interest in the Obligations, (iii)as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, (v) to Bank's accountants, auditors and regulators, and (vi) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information.

[signatures on following page]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

BLUEPHOENIX SOLUTIONS USA, INC.
By:	/s/ Rick Rinaldo
Name:	Rick Rinaldo
Title:	CFO
COMERICA BANK
By:	/s/ Michael Fishback
Name:	Michael Fishback
Title:	Vice President

[Signature Page to Loan and Security Agreement (3004855)]

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EXHIBITA

DEFINITIONS

"Accounts" means all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services byBorrower and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed byBorrower and Borrower's Books relating to any of the foregoing.

"Advance" or "Advances" means a cash advance or cash advances under the Revolving Line.

"Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners.

"Bank Expenses" means all costs or expenses of Bank, or any other holder or owner of the Loan Documents (including, without limit, court costs, legal expenses and reasonable attorneys' fees and expenses, whether generated in-house or by outside counsel, whether or not suit is instituted, and, if suit is instituted, whether at trial court level, appellate court level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in connection with the preparation, negotiation, execution, delivery, amendment, administration, and performance, or incurred in collecting, attempting to collect under the Loan Documents or the Obligations, or incurred in defending the Loan Documents, or incurred in any other matter or proceeding relating to the Loan Documents or the Obligations; and reasonable Collateral audit fees, which Collateral audit fees shall not exceed $_______ per audit.

"Borrower State" means Delaware, the state under whose laws Borrower is organized.

"Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

"Borrowing Base" means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. The advance rate is subject to adjustment up or down based on the results of the Initial Audit.

"Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.

''Change in Control" shall mean any transaction or series of related transactions in which any ''person" or "group" (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such "person" or "group" to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction, provided, however, that such power derives solely from such shares or class of stock held by such "person" or "group" and not by virtue of a collaboration with other "person" or "group" who holds shares or class of stock of the Borrower as of the date of this Agreement.

''Chief Executive Office State" means Washington, where Borrower's chief executive office is located.

"Closing Date" means the date of this Agreement.

''Code" means the California Uniform Commercial Code as amended or supplemented from time to time.

Exhibit A - Page 1

"Collateral" means the property described on Exhibit Battached hereto and all Negotiable Collateral and Intellectual Property Collateral to the extent not described on Exhibit B, except to the extent any such property (i)is nonassignable by its terms without the consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including without limitation, Sections 9406 and 9408 of the Code), (ii)the granting of a security interest therein is contrary to applicable law, provided that upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral, or (iii) constitutes the capital stock of a controlled foreign corporation (as defined in the IRC), in excess of sixty five percent (65%) of the voting power of all classes of capital stock of such controlled foreign corporations entitled to vote.

"Collateral State" means the state or states where the Collateral is located, which is Washington.

''Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person;  and (iii)all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

"Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

"Credit Extension" means each Advance, Non-Formula Revolving Line Advance or any other extension of credit by Bank to or for the benefit of Borrower hereunder.

"Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.3; provided, that Bank may change the standards of eligibility: (i) based on the results of the Initial Audit, or (ii) thereafter, by giving Borrower thirty (30) days prior written notice, such change in standards of eligibility shall be made to the minimum extent necessary for the purpose of reducing credit risks exposures created following the date of this Agreement not as a result of any act or omission of the Bank,  Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

(a) Such portion of Accounts that the account debtor has failed to pay in full within ninety (90) days of invoice date;

(b)Credit balances over ninety (90) days;

(c)Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date;

(d)Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all  Accounts  ("Concentration  Limit"),  to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; provided, however, the Concentration Limit for IBM Corporation shall be one hundred percent (100%);

(e)Accounts with respect to which the account debtor does not have its principal place of business in the United  States, except for Eligible Foreign Accounts;

Exhibit A - Page 2

(f)            Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States, except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727);

(g)            Such portion of Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower;

(h)            Such pottion of Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, demo or promotional, or other terms by reason of which the payment by the account debtor may be conditional;

(i)            Accounts with respect to which the account debtor is an individual,  officer,  employee, agent or Affiliate of Borrower;

(j)            Such portion of Accounts that have not yet been billed to the account debtor or that relate to deposits (such as good faith deposits) or other property of the account debtor held by Borrower for the performance of services or delivery of goods which Borrower has not yet performed or delivered;

(k)            Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole reasonable discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business;

(l)            Accounts the collection of which Bank reasonably determines after inquiry and consultation with Borrower to be doubtful; and

(m)           Retentions and hold-backs.

"Eligible Foreign Accounts" means Accounts (i) with respect to which the account debtor does not have its principal place of business in the United States and is not located  in an OFAC sanctioned country, (ii) that are (a) insured under a credit insurance policy in form and substance reasonably  acceptable to Bank with respect to which Bank is the first priority Joss payee under a payee endorsement reasonably acceptable to Bank in the exercise of its sole reasonable judgment, (b) generated by an account debtor with its principal  place  of business  in Canada, provided that the Bank has perfected its security interest in the appropriate Canadian province, or (b) approved by Bank on a case-by-case basis, and (iii) that otherwise meet the definition of Eligible Accounts, other  than  clause (c). All Eligible Foreign Accounts must be calculated in U.S. Dollars.

"Environmental Laws" means all laws, rules, regulations, orders and the like issued  by  any  federal  state,  local foreign or other governmental or quasi-governmental authority or any agency pertiaining  to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.

"Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

"Event of Default" has the meaning assigned in Article 8.

"GAAP" means generally accepted accounting principles, consistently applied, as in effect from time to time in the United States of America.

Exhibit A - Page 3

"Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations.

"Initial Audit" means an audit of the Collateral, the results of which shall (i) be delivered prior to Borrower requesting the initial Advance and (ii)be satisfactory to Bank.

"Insolvency Proceeding" means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

"Intellectual Property Collateral" means all of Borrower's right, title, and interest in and to the following:

(a)            Copyrights, Trademarks and Patents;

(b)           Any and all trade secrets, and any and all intellectual property rights in  computer software and computer software products now or hereafter existing, created, acquired or held;

(c)           Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held;

(d)           Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above;

(e)           All licenses  or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising fi·om such use to the extent permitted by such license or rights;

(f)           All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and

(g)          All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

"Inventory" means all present and future inventory in which Borrower has any interest.

"Investment" means any beneficial ownership of (including stock, partnership or limited liability company interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

"Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

"Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other document, instrument or agreement entered into in connection with this Agreement, all other standard forms, agreements or other documents entered into between the Borrower and the Bank, in connection with this Agreement or otherwise, all as amended or extended from time to time.

"Material Adverse Effect" means (i)a material adverse change in Borrower's business or financial condition, (ii)a material impainnent in the prospect of repayment of all or any portion of the Obligations or in otherwise performing Borrower's obligations under the Loan Documents, or (iii) a material impairment in the perfection, value or priority of Bank's security interests in the Collateral.

Exhibit A - Page 4

"Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing.

"Non-Formula Revolving Line" means a Credit Extension of up to Five Hundred Thousand Dollars ($500,000).

"Non-Formula Revolving Line Advance" means a cash advance or cash advances under the Non-Formula Revolving Line.

''Non-Formula Revolving Line Maturity Date" means October 2, 2014.

"Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by  Borrower pursuant to this Agreement or any other agreement, including  without  limitation,  indebtedness owing by Borrower to Bank in connection with credit cards issued by Bank to Borrower, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise but excluding any Warrants.

"Parent" means Blue Phoenix Solutions Ltd.

"Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

"Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.

"Permitted Indebtedness" means:

(a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document;

(b)Indebtedness existing on the Closing Date and disclosed in the Schedule;

(c)     Indebtedness not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate in any fiscal year of Borrower secured by a lien described in clause (c) of the defined term ''Permitted Liens" provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness;

(d)Subordinated Debt;

(e)Indebtedness to trade creditors incurred in the ordinary course of business;

(f) Negative balances in bank accounts at a specific bank, but only to the extent such bank accounts are subject to a contractual combination of accounts of the same bank (pooling arrangement), where the overall balance of the bank accounts of such bank subject to such contractual combination of accounts (pooling arrangement) is positive; and

(g)Extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be.

Exhibit A - Page 5

"Permitted Investment" means:

(a)           Investments disclosed in the Schedule;
 

(b)           (i) Marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one ( 1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor's Ratings Services or Moody's Investors Service, Inc., (iii) Bank's certificates of deposit maturing no more than one (1) year from the date of investment therein, and (iv) Bank's money market accounts;

(c)           Permitted Stock Repurchases;

(d)           Investments accepted in connection with Permitted Transfers;

(e)           Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate in any fiscal year;

(f)           Investments not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate in any fiscal year consisting of (i) advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plan agreements approved by Borrower's Board of Directors;

(g)          Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary  course of Borrower's business;

(h)           Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided  that this subparagraph (h) shall not apply to Investments of Borrower in any Subsidiary; and

(i)            Joint ventures or strategic alliances in the ordinary course of Borrower's business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do not exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate in any fiscal year.

"Permitted Liens" means the following:

(a)           Any Liens existing on the Closing Date and disclosed in the Schedule (excluding Liens to be satisfied with the proceeds of the Advances or Non-Formula Revolving Line Advances) or arising under this Agreement or the other Loan Documents;

(b)           Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which Borrower maintains adequate reserves, provided the same have no priority  over any of Bank's security interests;

(c)            Liens securing Indebtedness not to exceed Two Hundred Filly Thousand Dollars ($250,000) in the aggregate (i) upon or in any Equipment (other than Equipment financed by a Credit Extension) acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or (ii) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment;

(d)           Liens incurred in connection with the extension, renewal or refinancing of  the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and

Exhibit A - Page 6

(e)      Liens arising from judgments, decrees or  attachments  in  circumstances  not  constituting an Event of Default under Sections 8.4 (attachment) or 8.8 (judgments/settlements);  and

(f)      Liens in favor of other financial institutions arising in connection with  Borrower's deposit accounts held at such institutions to secure standard fees for deposit services charged by, but not financing made available by such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit accounts.

"Permitted Stock Repurchases" means repurchases of stock from former employees or directors of Borrower under the terms of applicable repurchase agreements (i)in an aggregate amount not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases, or (ii)in any amount where the consideration for the repurchase is the cancellation of indebtedness owed by such former employees to Borrower regardless of whether an Event of Default exists.

"Permitted Transfer" means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of:

(a) Inventory in the ordinary course of business;

(b)Non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business;

(c)Worn-out or obsolete Equipment not financed with the proceeds of a Credit Extension; or

(d)Transfer of cash equivalent from Borrower to Affiliates in connection with transfer pricing agreements or agreements of the same nature.

(e)Assets or rights, sold, transferred or otherwise disposed of, under or in connection with a transaction or action which is permitted under the Loan Documents.

(f) Other assets of Borrower or its Subsidiaries that do not in the aggregate exceed Two Hundred Fifty Thousand Dollars ($250,000) during any fiscal year.

"Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution,  public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

"Pricing Addendum" means that certain Prime Referenced Rate Addendum to Loan and Security Agreement attached hereto as Exhibit F.

"Prohibited Territory" means any person or country listed by the Office of Foreign Assets Control of the United States Department of Treasury as to which transactions between a United States Person and that territory are prohibited.

"Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower.

"Revolving Line" means a Credit Extension of up to Five Hundred Thousand Dollars ($500,000).

"Revolving Maturity Date" means October 1, 2014.

"Schedule" means the schedule of exceptions attached hereto and approved by Bank, if any.

Exhibit A - Page 7

"SOS Reports" means the official reports from the Secretary of State of the Borrower State and other applicable federal, state or local government offices identifying all current security interests tiled in the Collateral and Liens of record as of the date of such report.

"Subordinated Debt" means any debt incurred by Borrower that is subordinated in writing to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).

"Subsidiary" means any corporation, partnership or limited liability company or joint venture in which (i)any general partnership interest or (ii)more than fifty percent (50%) of the stock, limited liability company interest or joint venture of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned byBorrower, either directly or through an Affiliate.

"Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected  with and symbolized by such trademarks.

Exhibit A - Page 8

DEBTOR:                               BLUEPHOENIX SOLUTIONS USA, INC.

SECURED PARTY:               COMERICA BANK

EXHIBIT  B

COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT

All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

(a)	all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor's books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;
(b)	all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the foregoing, or any parts thereof or any underlying or component elements of any of the foregoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;
(c)	all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;
(d)	all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and
(e)	any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.

Exhibit B - Page 1

EXHIBIT C

TECHNOLOGY & LIFE SCIENCES DIVISION

LOAN ANALYSIS

LOANADVANCE/PAYDOWN REQUEST FORM

DEADLINE FOR SAME DAY PROCESSING IS 3:00* P.M, P.S.T.

DEADLINE FOR CREDIT EXTENSIONS IS 3:00P.M., P.S.T.**

DEADLINE FORWIRETRANSFERS IS 1.30 P.M, P.S.T.

*At month end and the day before a holiday, the cut off time is 1:30 P.M, P.S.T.

**Subject to 3 day advance notice.

TO: Loan Analysis	DATE: ________________	TIME: ________________
FAX#: (650) 462-6061

FROM:	BluePhoenix Solutions USA Inc.	TELEPHONE REQUEST (For Bank Use Only):
	Borrower's Name
FROM:		The following person is authorized to request the loan payment transfer/loan advance on the designated account and is known to me.
	Authorized Signer's Name
FROM:
	Authorized Signature (Borrower)		Authorized Requester & Phone#
PHONE#
			Receivedby(Bank)&Phone#
FROM ACCOUNT#:
(please include Note number, if applicable)
			Authorized Signature (Bank)
TO ACCOUNT#:
(please include Note number, if applicable)

REQUESTED TRANSACTION TYPE	REQUESTED DOLLAR AMOUNT	For Bank Use Only
PRINCIPALINCREASE*(ADVANCE)                                                                PRINCIPALPAYMENT(ONLY)                                                                             OTHER INSTRUCTIONS:	$_____________________   $_____________________	Date Rec'd: Time: Comp. Status:                            YES            NO Status Date: Time: Approval:
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of thedateofthetelephonerequestforanadvanceconfirmedbythisBorrowingCertificate,includingwithoutlimitationtherepresentationthatBorrower has paid for and owns the equipment financed byBank; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

*IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE) YES NO

If YES, the Outgoing Wire Transfer Instructions must be completed below.

OUTGOING WIRE TRANSFER INSTRUCTIONS	Fed Reference Number	Bank Transfer Number
The items marked with an asterisk (*) are required  to be completed.

*Beneficiary Name
*Beneficiary Account Number
*Beneficiary Address
Currency Type	US DOLLARS ONLY
*ABA Routing Number (9 Digits)
*Receiving Institution Name
*Receiving Institution Address
*Wire Amount	$

Exhibit C - Page 1

EXHIBIT D

FORM OF BORROWING BASE CERTIFICATE

(See Attached)

Exhibit D - Page 1

EXHIBIT E

COMPLIANCE CERTIFICATE

Please send all Required Reporting to:	Comerica Bank
	Technology & Life Sciences Division
	Loan Analysis Department
	250 Lylton Avenue
	3rd Floor, MC 4240
	Palo Alto CA 94301
	Phone: (650) 462-6060
	Fax: (650) 462-6061

FROM:BluePhoenixSolutions USA, Inc.

The undersigned authorized Officer of BluePhoenix Solutions USA, Inc. ("Borrower"), hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement''), (i) Borrower is in complete compliance for the period ending ___________, 201__ with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are time and correct in all material respects as of the date hereof; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. Attached herewith are the required documents supporting the above certification ("Supporting Documents"). The Officer further certifies the Supporting Documents are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied form one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status bycircling Yes/No under "Complies" or "Applicable" column,

REPORTING COVENANTS	REQUIRED	COMPLIES
Company Prepared Monthly F/S	Monthly, within 30 days	YES	NO
Compliance Certificate	Monthly, within 30 days	YES	NO
CPA Audited, Unqualified F/S for Parent	Annually, within ISO days of FYE	YES	NO
Company Prepared Annual F/S	Annually, within ISO days of FYE	YES	NO
Borrowing Base Cert, A/R & A/P Agings	Monthly, within 30 days	YES	NO
Annual Business Plan	Annually, on or before 1/31	YES	NO
Intellectual Property Report	Quarterly within 30 days	YES	NO
Audit	Semi-annual	YES	NO
If Public:
10-Q	Quarterly, within 5 days of SEC filing (50days)	YES	NO
10-K	Annually, within 5 days of SEC filing (95 days)	YES	NO
Total amount of Borrower's cash and investments	Amount:$  ______________________________	YES	NO
Total amount of Borrower's cash and investments maintained with Bank	Amount:$  ______________________________	YES	NO
	DESCRIPTION	APPLICABLE
Legal Action> $250,000 (Sect. 6.2(iv))	Notify promptly upon notice _____________________________	YES	NO
Inventory Disputes> $250,000 (Sect. 6.3)	Notify promptly upon notice _____________________________	YES	NO
Mergers &Acquisitions> $250,000 (Sect. 7.3)	Notify promptly upon notice _____________________________	YES	NO
Cross default with other agreements >$250,000 (Sect. 8.6)	Notify promptly upon notice _____________________________	YES	NO
Judgments/Settlements >$2SO,OOO (Sect. 8.8)	Notify promptly upon notice _____________________________	YES	NO

FINANCIAL COVENANTS	REQUIRED	ACTUAL	COMPLIES
Permitted Indebtedness for equipment leases	<$250,000	$ ____________________	YES	NO
Permitted Investments for stock repurchase	<$250,000	$ ____________________	YES	NO
Permitted Investments for subsidiaries	<$250,000	$ ____________________	YES	NO
Permitted lnvestments for employee loans	<$250,000	$ ____________________	YES	NO
Permitted Investments for joint ventures	<$250,000	$ ____________________	YES	NO
Permitted Liens for equipment leases	<$250,000	$ ____________________	YES	NO
Permitted Transfers	<$250,000	$ ____________________	YES	NO
Please Enter Below Comments Regarding Violations:

Exhibit E - Page 1

The undersigned further acknowledges that at any time Borrower is not in compliance with all the terms set forth in the Agreement, including, without limitation, the financial covenants, no Credit Extensions will be made.

Very truly yours,

BLUEPHOENIX SOLUTIONS USA, INC.

Authorized Signer

Name

Title

Exhibit E - Page 2

EXHIBIT F

PRICING ADDENDUM

(See Attached)

Exhibit F - Page 1

SCHEDULE OFEXCEPTIONS

TOLOANANDSECURITYAGREEMENT

[Borrower to Complete]

PermittedIndebtedness (Exhibit A)

Permitted Investments (Exhibit A)

PermittedLiens (Exhibit A)

PriorNames (Section 5.5)

InventoryorEquipmentLocations (Section 5.5)

Litigation (Section 5.6)

InboundLicenses(Section 5.12)

Corporation Resolutions and Incumbency Certification

Authority to Procure Loans

I certify that I am the duly elected and qualified Secretary of BLUEPHOENIX SOLUTIONS USA, INC., a Delaware corporation (the "Corporation"); that the following is a true and correct copy of resolutions duly adopted by the Board of Directors of the Corporation in accordance with its bylaws and applicable statutes.

Copy of Resolutions:

Be it Resolved, That:

1. Any one (1) of the following CEO and CFO (insert titles only) of the Corporation are/is authorized, for, on behalf of, and in the name of the Corporation to:

(a) Negotiateandprocureloans,lettersofcreditandothercreditorfinancialaccommodationsfromComericaBank ("Bank"), a Texas banking association, from time to time, in an unlimited amount, including without limitation that certain Loan and Security Agreement dated October 2, 2013, as may be subsequently amended from time to time.

(b) Discount with the Bank, commercial or other business paper belonging to the Corporation made or drawn by or upon third parties, without limit as to amount;

(c) Purchase, sell, exchange, assign, endorse for transfer and/or deliver certificates and/or instruments representing stocks, bonds, evidences of Indebtedness or other securities owned by the Corporation, whether or not registered in the name of the Corporation;

(d) Give security for any liabilities of the Corporation to the Bank by grant, security interest, assignment, lien, deed of trust or mortgage upon any real or personal property, tangible or intangible of the Corporation;

(e) Issue a warrant or warrants to purchase the Corporation's capital stock; and  

(f) Execute and deliver in form and content as may be required by the Bank any and all notes, evidences of Indebtedness, applications for letters of credit, guaranties, subordination agreements, loan and security agreements, financing statements, assignments, liens, deeds of trust, mortgages, trust receipts and other agreements, instruments or documents to carry out the purposes of these Resolutions, ,and any and all amendments or modifications thereto, any or all of which may relate to all or to substantially all of the Corporation's property and assets.  

2. Said Bank be and it is authorized and directed to pay the proceeds' of any such loans or discounts as directed by the persons so authorized to sign, whether so payable to the order of any of said persons in their individual capacities or not, and whether such proceeds are deposited to the individual credit of any of said persons or not;

3. Any and all agreements, instruments and documents previously executed and acts and things previously done to carry out the purposes of these Resolutions are ratified, confirmed and approved as the act or acts of the Corporation.

4. These Resolutions shall continue in force, and the Bank may consider the holders of said otTices and their signatures to be and continue to be as set forth in a certified copy of these Resolutions delivered to the Bank, until notice to the contrary in writing is duly served on the Bank (such notice to have no effect on any action previously taken by the Bank in reliance on these Resolutions).

5. Any person, corporation or other legal entity dealing with the Bank may rely upon a certificate signed by an officer of the Bank to effect that these Resolutions and any agreement, instrument or document executed pursuant to them are still in full force and effect and binding upon the Corporation.

6. The Bank may consider the holders of the offices of the Corporation and their signatures, respectively, to be and continue to be as set forth in the Certificate of the Secretary of the Corporation until notice to the contrary in writing is duly setved on the Bank.

1

I further certify that the above Resolutions are in full force and effect as of the date of this Certificate; that these Resolutions and any borrowings or financial accommodations under these Resolutions have been properly noted in the corporate books and records, and have not been rescinded, annulled, revoked or modified; that neither the foregoing Resolutions nor any actions to be taken pursuant to them are or willbe in contravention of any provision of the certificate of incorporation or bylaws of the Corporation or of any agreement, indenture or other instrument to which the Corporation is a party or by which it is bound; and that neither the certificate of incorporation nor bylaws of the Corporation nor any agreement, indenture or other instrument to which the Corporation is a party or by which it is bound require the vote or consent of shareholders of the Corporation to authorize any act, matter or thing described in the foregoing Resolutions.

I further certify that the following named persons have been duly elected to the offices set opposite their respective names, that they continue to hold these offices at the present time, and that the signatures which appear below are the genuine, original signatures of each respectively:

(PLEASE SUPPLY GENUINE SIGNATURES OF AUTHORIZED SIGNERS BELOW)

NAME (Type or Print)	TTILE	SIGNATURE
Matt Bell	President	/s/ Matt Bell
Rick Rinaldo	Vice President	/s/ Rick Rinaldo

In Witness Whereof, I have affixed my name as Secretary and have caused the corporate seal (where available) of said Corporation to be affixed on October 2, 2013.

/s/ Rick Rinaldo

Secretary

***

The Above Statements are Correct.
	SIGNATURE OF OFFICER OR DIRECTOR OR, IF NONE. A SHAREHOLDER OTHER THAN SECRETARY WHEN SECRETARY IS AUTHORIZED TO SIGN ALONE.

Failure to complete the above when the Secretary is authorized to sign alone shall constitute a certification bythe Secretary that the Secretary is the sole Shareholder, Director and Officer of the Corporation.

2

To: BLUEPHOENIX SOLUTIONS USA, INC.

USA PATRIOT ACT

NOTICE

OF

CUSTOMER IDENTIFICATION

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

WHAT THIS MEANS FOR YOU: when you open an account, we will ask your name, address, date of birth, and other information that will allow us to identity you. We may also ask to see your driver's license or other identifying documents.

DEBTOR:	BLUEPHOENIX SOLUTIONS USA, INC.
SECURED PARTY:	COMERICA  BANK

EXHIBIT A to UCC Financing Statement

COLLATERAL DESCRIPTION ATTACHMENT TO UCC NATIONAL FINANCING FORM

All personal property of Borrower (herein referred toas "Borrower" or "Debtor") whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

(a)	all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor's books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;
(b)	all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the foregoing, or any parts thereof or any underlying or component elements of any of the foregoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;
(c)	all trademarks, service marks, trade names and service names and the goodwill associated  therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;
(d)	all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pe11aining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations in-part with respect to any of the foregoing; and
(e)	any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.

2

Agreement to Furnish Insurance

(BluePhoenix)

(Herein called "Bank")

Borrower: BluePhoenix Solutions USA, Inc.

I understand that the Loan and Security Agreement which I executed in connection with this transaction requires me to provide a physical damage insurance policy including a Lenders Loss Payable Endorsement in favor of the Bank as shown below, within ten (10) days from the date of this agreement.

The following minimum insurance must be provided according to the terms of the security documents.

o AUTOMOBILES, TRUCKS, RECREATIONAL VEHICLES	o MACHINERY & EQUIPMENT:
Comprehensive & Collision	MISCALLANEOUS PERSONAL PROPERTY
Lender's Loss Payable Endorsement	Fire & Extended Coverage
	Lender's Loss Payable Endorsement
	o Breach of Warranty Endorsement
o BOATS	o AIRCRAFT
All Risk Hull Insurance	All Risk Ground & Flight Insurance
Lender's Loss Payable Endorsement	Lenders Loss Payable Endorsement
o Breach of Warranty Endorsement	o Breach of Warranty Endorsement
o MOBILE HOMES	o REAL PROPERTY
Fire, Theft & Combined Additional Coverage	Fire & Extended Coverage
Lender's Loss Payable Endorsement	Lender's Loss Payable Endorsement
o Earthquake	o All Risk Coverage
	o Special Form Risk Coverage
	o INVENTORY
	o Earthquake
	o Other
o Other _______________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________

I may obtain the required insurance from any company that is acceptable to the Bank, and will deliver proof of such coverage with an effective date of October 2, 2013 or earlier.

I understand and agree that if I fail to deliver proof of insurance to the Bank at the address below, or upon the lapse or cancellation of such insurance, the Bank may procure Lender's Single Interest Insurance or other similar coverage on the property. If the Bank procures insurance to protect its interest in the property described in the security documents, the cost for the insurance will be added to my indebtedness as provided in the security documents. Lender's Single Interest Insurance shall cover only the Bank's interest as a secured party, and shall become effective at the earlier of the funding date of this transaction or the date my insurance was canceled or expired. I UNDERSTAND THAT LENDER'S SINGLE INTEREST INSURANCE WILL PROVIDE ME WITH ONLY LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN, HOWEVER, MY EQUITY IN THE PROPERTY WILL NOT BE INSURED. FURTHER, THE INSURANCE WILL NOT PROVIDE MINIMUM PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND DOES NOT MEET THE REQUIREMENTS OF THE FINANCIAL RESPONSIBILITY LAW.

CALIFORNIA CIVIL CODE SECTION 2955.5. HAZARD INSURANCE DISCLOSURE: No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.

Bank Address for Insurance Documents:

ComerlcaBank- insuranceServiceCenter

P.O.Box863299

PlanoTexas75086

3

Iacknowledge having readthe provisionsofthis agreement, and agreeto itsterms. Iauthorize the Bankto provide toany person(includinganyinsuranceagentorcompany)anyinformationnecessarytoobtaintheinsurancecoveragerequired.

OWNER OF COLLATERAL: DATED: October 2, 2013

BLUEPHOENIX SOLUTIONS USA, INC.

By:	/s/ [ILLEGIBLE]
Name:	/s/ [ILLEGIBLE]
Title:	/s/ [ILLEGIBLE]

INSURANCE VERIFICATION
Date _______________	Phone ________________
Agents Name _________________________________	Person Talked To _____________________
Agents Address _______________________________________________
Insurance Company ____________________________________________________________________________
Policy Number(s) ______________________________________________________________________________
Effective Dates: From __________ To: ____________
Deductible $	Comments: ______________________

[Signature Page to Agreement to Furnish Insurance (3005043)]

4

Automatic Loan Payment Authorization

Date: October 2, 2013

ObligorName(TypedorPrinted): BLUEPHOENIXSOLUTIONSUSA,INC.

Obligor Number: Lender's Cost Center #: 97-306

Address:	601 Union Street, suite 4616	Seattle	Washington	98101
	STREET ADDRESS	CITY	STATE	ZIP CODE

The undersigned hereby authorizes COMERICABANK("Bank") to charge the account designated below for the payments due on the loan(s) as designated below and all renewals, extensions, modifications and/or substitutions thereof. This authorization will remain in effect unless the undersigned requests a modification that is agreed to by the Bank in writing. The undersigned remains fully responsible for all amounts outstanding to Bank if the designated account is insufficient for repayment.

x Automatic Payment Authorization for all payments on all current and future borrowings, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses).

o Automatic Payment Authorization for all payments on only the specific borrowing identified below, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses).

o Specific Obligation Number:

o Automatic Payment Authorization for less than all payments on only the specific borrowing identifiedbelow, as and when such payments come due.

o Specific Obligation Number:

o Principal and Interest payments only

o Principal payments only

o Interest payments only

o SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS

PaymentDueDate:Your loan payments will be charged to your account as indicated above on the dates such payments become due (or on a date thereafter when there are available funds) unless that day is a Saturday, Sunday, or Bank holiday in which case such payments will be charged on the following business day, with interest to accrue during this extension as provided under the loan documents.

5

Account to be Charged:

Account No. _______________________________

Transit No. ________________________________

Number of lead days to issue billing: ____________

(Charges to account are withdrawals pursuant to account resolution)

BLUEPHOENIX SOLUTIONS USA, INC.

By:	/s/ [ILLEGIBLE]
	SIGNATURE OF
Its:	/s/ [ILLEGIBLE]
	TITLE (If applicable)

[Signature Page to Automatic Loan Payment Authorization  (3004990)]

6

EX-23.2

Exhibit 23.02

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement of our report dated April 30, 2013, relating to the consolidated financial statements of BluePhoenix Solutions Ltd. appearing in its Annual Report for the year ended December 31, 2012.

We also consent to the reference to us under the caption “Experts” in the Prospectus.

	/s/  Ziv Haft
	Ziv Haft
	Certified Public Accountants (Isr.)
	BDO Member Firm
Tel Aviv, Israel
November 5, 2013

XML

Intangible Assets, net (Schedule of Intangible Assets and Others, Net) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Original amount	$ 51,234	$ 51,234
Accumulated amortization	51,072	50,957
Intangible assets, net	162	277
Customer related intangible assets [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Original amount	4,968	4,968
Accumulated amortization	4,806	4,718
Customer related intangible assets [Member] | Minimum [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life	5 years
Customer related intangible assets [Member] | Maximum [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life	8 years
Technology [Member]
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]
Original amount	46,266	46,266
Accumulated amortization	$ 46,266	$ 46,239
Finite-lived intangible asset, useful life	5 years

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
STATEMENTS OF COMPREHENSIVE INCOME [Abstract]
Net loss	$ (1,134)	$ (7,216)	[1]
Other comprehensive income
Total comprehensive loss	(1,134)	(7,216)
Comprehensive result attributable to the non-controlling interests	221	141
Comprehensive loss attributable to BluePhoenix shareholders	$ (1,355)	$ (7,357)

[1] Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

XML

Commitments and contingencies

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies [Abstract]

Commitments and contingencies

Note 4 – Commitments and contingencies:

A. Commitments:

Chief Scientist. One of the Company’s subsidiaries has entered into agreements with the OCS; this subsidiary is 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 June 30, 2013, the contingent liability that was not recognized amounted to $252,000.

Ministry of Production in Italy. In July 2007, the Company’s subsidiary, I-Ter, received an amount of $585,000 from the Ministry of Production in Italy for I-Ter's Easy4Plan product. Easy4Plan is a workflow management tool designed for ISO9000 companies. 36.5% of the funds received constitute a grant, and the remaining 63.5%, is a 10-year loan to be repaid by I-Ter in annual installments until September 2018. The loan bears a minimal annual interest of 0.87% and is linked to the euro. As of June 30, 2013 the remaining loan balance was $234,000.

B. Contingencies:

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 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.

XML

Intangible Assets, net (Schedule Of Estimated Future Amortization) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Intangible Assets, Net [Abstract]
H2 2013	$ 81
2014	81
Intangible assets, net	162	277
Amortization of intangible assets	$ 115,000	$ 1,532,000

XML

CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (1,134)	$ (7,216)	[1]
Adjustments to reconcile net loss to net cash provided by operating activities (including discontinued operation):
Depreciation and amortization	204	1,200
Decrease in accrued severance pay, net	(11)	(34)
Stock-based compensation	252	965
Change in fair value of derivatives and discount amortization	(36)	1,979
(Gain) loss on sales of subsidiaries and Appbuilder	(414)	462
Loss on sale of property and equipment		12
Changes in operating assets and liabilities:
Decrease in trade receivables	233	710
Increase in other current assets	(62)	(885)
Decrease in trade payables	(313)	(695)
Decrease in other current liabilities and deferred revenues	(59)	(193)
Net cash used in operating activities	(1,340)	(3,695)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		4,031
Purchase of property and equipment	(9)	(60)
Proceeds from sale of property and equipment		41
Proceeds from sales of subsidiaries and Appbuilder	800	2,849
Net cash provided (used) by investing activities	791	6,861
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank credit and convertible notes, net	(149)	(1,484)
Repayment of long term loan		(3,487)
Net cash used in financing activities	(149)	(4,971)
NET CASH DECREASE IN CASH AND CASH EQUIVALENTS	(698)	(1,805)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	2,560	3,997
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 1,862	$ 2,192

[1] Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

XML

Goodwill

6 Months Ended

Jun. 30, 2013

Goodwill [Abstract]

Goodwill

Note 2 – Goodwill:

	June 30,			December 31,
	2013			2012
	Unaudited			Audited
	(in thousands)
Balance as of January 1.	$	54,316		$	56,053
Accumulated impairment losses at the beginning of the period		(41,815	)		(41,815	)
		12,501			14,238
Goodwill related to the sale of subsidiaries		—			(1,737	)
Balance at end of period	$	12,501		$	12,501

XML

Discontinued Operation

6 Months Ended

Jun. 30, 2013

Discontinued Operation [Abstract]

Discontinued operation

Note 5 – Discontinued Operation:

A. In May 2012, the Company completed the sale of the Company 51% share holdings in Liacom Systems Ltd., referred to as Liacom, for an aggregate consideration of $1.75 million. This sale was part of the Company strategic plan to focus on the legacy modernization business. The proceeds from the sale were used to repay loans. Liacom met the definition of a component. Accordingly, the results of operations in the statement operations and prior period’s results have been reclassified accordingly. As part of the sale, the company realized goodwill in the amount of $1.3 million based on the relative fair value of Liacom and the portion of the reported unit to be retained. The capital loss recorded upon sale of Liacom amounted to $703,000.

B. In November 2012, the Company announced the initiation of the sale of the operations of BridgeQuest, Inc. and its relevant subsidiary, which was completed in February 2013. Total consideration for Bridgequest Inc. was $6,500. In addition, as part of the agreement, the Company expected to receive additional amounts upon collection of existing account receivables of BridgeQuest collected by the purchaser following the transaction. BridgeQuest met the definition of a component. Accordingly, the results of operations in the statement of operations and prior periods' results have been reclassified accordingly. As the transaction was completed February 2013, assets and liabilities associated with BridgeQuest were presented as held for sale in the December 31, 2012 balance sheet as the initiation of the sale was in November 2012.

The following is the composition from discontinued operation:

	Six months ended June 30,
	2013			2012
Revenues	$	—		$	7,122
Cost of revenues		16			6,071
Gross profit		(16	)		1,051
Research and development costs		—			652
Selling, general, and administrative expenses		2			845
Loss on realization of shareholdings		372			703
Operating loss		(390	)		(1,149	)
Financial expenses , net		9			3
Profit before provision for  income taxes		(399	)		(1,152	)
Provision for income taxes		—			12
Net loss	$	(399)		$	(1,164)

Herein are the following major classes of assets and liabilities associated with BridgeQuest as of December 31, 2012:

	December 31, 2012
Assets of discontinued operation:
Account receivable	$	544
Other assets	$	247
	$	791
Liabilities of discontinued operation:
Account payable	$	467

XML

Intangible Assets, net

6 Months Ended

Jun. 30, 2013

Intangible Assets, Net [Abstract]

Intangible Assets, Net

Note 3 – Intangible Assets, net

	Useful life years		June 30, 2013		December 31, 2012
			Unaudited		Audited
			(in thousands)
Original amount:
Technology		5	$	46,266	$	46,266
Customer related intangible assets		5–8		4,968		4,968
				51,234		51,234
Accumulated amortization:
Technology				46,266		46,239
Customer related intangible assets				4,806		4,718
				51,072		50,957
			$	162	$	277

The estimated future amortization of the intangible assets as of June 30, 2013 is as follows:

	(in thousands)
H2 2013		81
2014		81
	$	162

* Amortization of intangible assets amounted to $115,000 and $1,532,000 for the six months ended June 30, 2013, and the year ended 2012 respectively.

XML

CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenues	$ 4,561	$ 4,887	[1]
Cost of revenues	2,178	4,227	[1]
Gross profit	2,383	660	[1]
Research and development costs	696	264	[1]
Selling, general and administrative expenses	3,115	4,676	[1]
Gain on sales of subsidiaries and Appbuilder	(786)	(245)	[1]
Total operating expenses	3,025	4,695	[1]
Operating loss	(642)	(4,035)	[1]
Financial expenses, net	42	2,460	[1]
Other income		580	[1]
Loss before taxes	(684)	(5,915)	[1]
Provision for taxes	51	137	[1]
Net loss from continued operations	(735)	(6,052)	[1]
Net loss from discontinued operations	399	1,164	[1]
Net loss	(1,134)	(7,216)	[1]
Net result attributable to noncontrolling interests	221	141	[1]
Loss attributed to BluePhoenix shareholders	$ (1,355)	$ (7,357)	[1]
Loss per share:
From continued operation - basic and diluted	$ (0.09)	$ (0.95)	[1]
From discontinued operation - basic and diluted	$ (0.04)	$ (0.18)	[1]
Attributed to the shareholders	(0.13)	(1.13)	[1]
Shares used in per share calculation: Basic and diluted	10,668,000	6,520,000	[1]

[1] Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

XML

Intangible Assets, net (Tables)

6 Months Ended

Jun. 30, 2013

Intangible Assets, Net [Abstract]

Schedule of Intangible Assets and Others, Net

	Useful life years		June 30, 2013		December 31, 2012
			Unaudited		Audited
			(in thousands)
Original amount:
Technology		5	$	46,266	$	46,266
Customer related intangible assets		5–8		4,968		4,968
				51,234		51,234
Accumulated amortization:
Technology				46,266		46,239
Customer related intangible assets				4,806		4,718
				51,072		50,957
			$	162	$	277

Schedule of Estimated Future Amortization

The estimated future amortization of the intangible assets as of June 30, 2013 is as follows:

	(in thousands)
H2 2013		81
2014		81
	$	162

* Amortization of intangible assets amounted to $115,000 and $1,532,000 for the six months ended June 30, 2013, and the year ended 2012 respectively.

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (USD $) In Thousands, except Share data	Total	Share capital [Member]	Additional paid-in capital [Member]	Accumulated other comprehensive loss [Member]	Cost of Company shares held by subsidiaries [Member]	Retained earnings (Accumulated deficit) [Member]	Noncontrolling interest [Member]
Balance at Dec. 31, 2011	$ 15,595	$ 56	$ 126,544	$ (1,537)	$ (9,455)	$ (100,764)	$ 751
Balance, shares at Dec. 31, 2011		6,310,978
Net loss	(11,077)					(11,428)	351
Sale of subsidiary	(1,013)						(1,013)
Stock based compensation	1,702		1,702
Conversions of loans and derivatives to equity, value	9,600	36	9,564
Conversions of loans and derivatives to equity, shares		3,678,392
Exercise of warrants	282	0	282
Exercise of warrants, shares		76,758
Vested RSUs	0	5	(2,744)		2,739
Vested RSUs, shares		563,125
Balance at Dec. 31, 2012	15,089	97	135,348	(1,537)	(6,716)	(112,192)	89
Balance, shares at Dec. 31, 2012		10,629,253
Net loss	(1,134)					(1,355)	221
Stock based compensation	252		252
Vested RSUs		1	(1)
Vested RSUs, shares		71,725
Balance at Jun. 30, 2013	$ 14,207	$ 98	$ 135,599	$ (1,537)	$ (6,716)	$ (113,547)	$ 310
Balance, shares at Jun. 30, 2013		10,700,978

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Current Assets:
Cash and cash equivalents	$ 1,862	$ 2,560
Restricted cash	33	33
Trade accounts receivable, net	2,408	2,445
Other current assets	805	581
Assets held for sale		791
Total Current Assets	5,108	6,410
Non-Current Assets:
Property and equipment, net	487	562
Goodwill	12,501	12,501
Intangible assets and other, net	162	277
Total Non-Current Assets	13,150	13,340
TOTAL ASSETS	18,258	19,750
Current Liabilities:
Short-term bank credit and others	149	217
Trade accounts payable	992	1,256
Deferred revenues	1,089	712
Other current liabilities	866	950
Liabilities held for sale		467
Total Current Liabilities	3,096	3,602
Non-Current Liabilities
Accrued severance pay, net	398	408
Loans from banks and others	223	281
Derivative liabilities - warrants	334	370
Total Non-Current Liabilities	955	1,059
Commitments and contingencies (Note 4)
Total Equity	14,207	15,089
TOTAL LIABILITIES AND EQUITY	$ 18,258	$ 19,750

XML

Goodwill (Tables)

6 Months Ended

Jun. 30, 2013

Goodwill [Abstract]

Schedule of Goodwill

	June 30,			December 31,
	2013			2012
	Unaudited			Audited
	(in thousands)
Balance as of January 1.	$	54,316		$	56,053
Accumulated impairment losses at the beginning of the period		(41,815	)		(41,815	)
		12,501			14,238
Goodwill related to the sale of subsidiaries		—			(1,737	)
Balance at end of period	$	12,501		$	12,501

XML

Goodwill (Details) (USD $) In Thousands, unless otherwise specified				6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2013 Subsidiaries [Member]	Dec. 31, 2012 Subsidiaries [Member]
Goodwill [Line Items]
Goodwill, gross - Balance as of January 1,		$ 54,316	$ 56,053
Accumulated impairment losses at the beginning of the period		(41,815)	(41,815)
Goodwill - Balance as of January 1,	12,501	12,501	14,238
Goodwill related to sale					(1,737)
Goodwill, gross - Balance at December 31,		54,316	56,053
Goodwill - Balance as of December 31,	$ 12,501	$ 12,501	$ 14,238

XML

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Summary of Significant Accounting Policies [Abstract]

The Company

A. 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 information technology ("IT") modernization solutions.

The Company develops and markets unique enterprise legacy lifecycle IT modernization solutions and provides tools and professional services to selected customers. The Company manages its business in various international markets through several entities, including its wholly-owned subsidiaries located in: USA, UK, Italy, Romania and Israel.

Accounting Principles

B. Accounting Principles:

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

Recently Issued Accounting Pronouncements

C. Recently Issued Accounting Pronouncements:

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1, 2013, did not have an impact on the Company’s consolidated financial statements.

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our financial statements upon adoption.

Unauditted interim consolidated financial statements

D. Unaudited interim consolidated financial statements:

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for the annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended

December 31, 2013. The interim financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 20-F for the year ended December 31, 2012.

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1 – Summary of Significant Accounting Policies:

A. 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 information technology ("IT") modernization solutions.

The Company develops and markets unique enterprise legacy lifecycle IT modernization solutions and provides tools and professional services to selected customers. The Company manages its business in various international markets through several entities, including its wholly-owned subsidiaries located in: USA, UK, Italy, Romania and Israel.

B. Accounting Principles:

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

C. Recently Issued Accounting Pronouncements:

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. This ASU requires disclosures regarding reclassifications out of accumulated other comprehensive income in a single location in the financial statements by component. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU, effective January 1, 2013, did not have an impact on the Company’s consolidated financial statements.

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon de-recognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our financial statements upon adoption.

D. Unaudited interim consolidated financial statements:

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for the annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended

December 31, 2013. The interim financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 20-F for the year ended December 31, 2012.

XML

Commitments and Contingencies (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	1 Months Ended
	Jun. 30, 2013	Jul. 31, 2007 Ministry of Production in Italy [Member]
Commitments And Contingencies [Line Items]
Royalty commitment, percent of funded product sales	3.00%
Royalty commitment, maximum percent of grant linked to product sales	100.00%
Contingent liability, maximum potential royalty payment	$ 252,000
Proceeds from issuance of debt and other		585,000
Percent of proceeds considered a grant		36.50%
Percent of proceeds considered long-term debt		63.50%
Maturity date		Sep. 30, 2018
Debt instrument, minimum interest rate		0.87%
Long-term debt	$ 234,000

XML

Discontinued Operation (Tables)

6 Months Ended

Jun. 30, 2013

Discontinued Operation Additional Disclosures [Abstract]

Composition from Discontinued Operation

The following is the composition from discontinued operation:

	Six months ended June 30,
	2013			2012
Revenues	$	—		$	7,122
Cost of revenues		16			6,071
Gross profit		(16	)		1,051
Research and development costs		—			652
Selling, general, and administrative expenses		2			845
Loss on realization of shareholdings		372			703
Operating loss		(390	)		(1,149	)
Financial expenses , net		9			3
Profit before provision for  income taxes		(399	)		(1,152	)
Provision for income taxes		—			12
Net loss	$	(399)		$	(1,164)

Summary of Major Classes of Assets and Liabilities from Discontinued Operation

Herein are the following major classes of assets and liabilities associated with BridgeQuest as of December 31, 2012:

	December 31, 2012
Assets of discontinued operation:
Account receivable	$	544
Other assets	$	247
	$	791
Liabilities of discontinued operation:
Account payable	$	467

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Discontinued Operation (Narrative) (Details) (USD $)	6 Months Ended			1 Months Ended
	Jun. 30, 2013	Jun. 30, 2012		May 31, 2012 Liacom Systems Ltd [Member]	Feb. 28, 2013 BridgeQuest [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Interest disposed of during period				51.00%
Total consideration for sale of subsidiary				$ 1,750,000	$ 6,500
Goodwill impairment				1,300,000
Loss on sale	$ 786,000	$ 245,000	[1]	$ 703,000

[1] Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

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Discontinued Operation (Composition of Discontinued Operation) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Revenues		$ 7,122
Cost of revenues	16	6,071
Gross profit	(16)	1,051
Research and development costs		652
Selling, general, and administrative expenses	2	845
Loss on realization of shareholdings	372	703
Operating loss	(390)	(1,149)
Financial expenses , net	9	3
Profit before provision for income taxes	(399)	(1,152)
Provision for income taxes		12
Net loss	$ 399	$ 1,164	[1]

[1] Presented after reclassification of Liacom Systems Ltd. and BridgeQuest Inc. as discontinued operation.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	BLUEPHOENIX SOLUTIONS LTD
Entity Central Index Key	0001029581
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	F-1
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding	10,700,978

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Discontinued Operation (Major Classes of Assets and Liabilities) (Details) (BridgeQuest [Member], USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
BridgeQuest [Member]
Assets of discontinued operation:
Account receivable	$ 544
Other assets	247
Total Assets	791
Liabilities of discontinued operation:
Account payable	$ 467