SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                   FORM 20-F/A

                                 AMENDMENT NO. 1

[_]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

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

                         COMMISSION FILE NUMBER: 0-19415

                         MAGIC SOFTWARE ENTERPRISES LTD.
              (Exact Name of Registrant as specified in its charter
               and translation of Registrant's name into English)

                                     ISRAEL
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

                    5 HAPLADA STREET, OR YEHUDA 60218, ISRAEL
                    (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

      Title of each class              Name of each exchange on which registered
ORDINARY SHARES, NIS 0.1 PAR VALUE               NASDAQ GLOBAL MARKET

Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

     ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE...............31,323,845
                            (as of December 31, 2006)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

                               Yes [_]     No [X]

If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.

                               Yes [_]     No [X]

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

                               Yes [X]     No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

   Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]

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

                           Item 17 [_]     Item 18 [X]

If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).

                               Yes [_]     No [X]

This annual report on Form 20-F/A is incorporated by reference into the
registrant's Registration Statements on Form S-8, Registration Nos. 333-13270,
333-11220, 333-1946, 333-10794, 333-113552 and 333-132221.

                                EXPLANATORY NOTE

     This Amendment No. 1 on Form 20-F/A is being filed solely to correct Item
18 of Magic Software Enterprises Ltd.'s Annual Report on Form 20-F for the
fiscal year ended December 31, 2006, which was filed on June 26, 2007.

     Item 18 has been corrected to include the auditors' reports of the
Registrant's substantial subsidiaries for the fiscal year ended December 31,
2006, which were inadvertently omitted from the original Form 20-F.

     This Amendment is not intended to revise other information presented in the
Registrant's Annual Report on Form 20-F for the fiscal year ended December 31,
2006 as originally filed and all such other information in the original filing
remains unchanged.

     This Amendment does not reflect events occurring after the filing of the
original Form 20-F and does not modify or update the disclosure therein in any
way other than as required to reflect the amendment discussed above. As a
result, this Amendment continues to speak as of June 26, 2006.


                                       1

                                TABLE OF CONTENTS

PART III                                                                       3

ITEM 17.  FINANCIAL STATEMENTS                                                 3
ITEM 18.  FINANCIAL STATEMENTS                                                 3
ITEM 19.  EXHIBITS                                                             3
S I G N A T U R E S                                                            5


                                       2

                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

          Not applicable.

ITEM 18.  FINANCIAL STATEMENTS

Index to Financial Statements                                                F-1

Reports of Independent Registered Public Accounting Firm                     F-2

Consolidated Balance Sheets                                            F-3 - F-4

Consolidated Statements of Operations                                        F-5

Statements of Changes in Shareholders' Equity                                F-6

Consolidated Statements of Cash Flows                                  F-7 - F-8

Notes to Consolidated Financial Statements                            F-9 - F-43

Appendix A - Details of Subsidiaries and Affiliated Company                 F-44

Reports of Independent Auditors with Respect to Subsidiaries         F-45 - F-51

ITEM 19.  EXHIBITS

INDEX TO EXHIBITS

EXHIBIT   DESCRIPTION

3.1       Memorandum of Association of the Registrant(1)

3.2       Articles of Association of the Registrant(2)

4.1       Specimen of Ordinary Share Certificate(3)

8         List of Subsidiaries of the Registrant*

10.1      1991 Employee Stock Option Plan, as amended(4)

10.2      2000 Employee Stock Option Plan(5)

12.1      Certification of Acting Chief Executive Officer pursuant to Rule
          13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
          amended

12.2      Certification of Acting Chief Financial Officer pursuant to Rule
          13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
          amended

13.1      Certification of Acting Chief Executive Officer pursuant to 18 U.S.C.
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002


                                       3

13.2      Certification of Acting Chief Financial Officer pursuant to 18 U.S.C.
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002

15.1      Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young
          Global

15.2      Consent of Levy Cohen & Co., Chartered Accountants (relating to Magic
          Software Enterprises (UK) Limited)

15.3      Consent of Levy Cohen & Co., Chartered Accountants (relating to Hermes
          Logistics Technologies Limited)

15.4      Consent of ASG Audit Corporation, a Member of Grant Thornton
          International (relating to Magic Software Japan K.K.)

15.5      Consent of KDA Audit Corporation (relating to Magic Software Japan
          K.K.)

15.6      Consent of Mock & Partners International, Registered Accountants
          (relating to Magic Benelux B.V.)

15.7      Consent of Maria Negyeffy, Registered Auditors (relating to Magic
          (Onyx) Magyarorszag Szoftverhaz Kft.)

15.8      Consent of Federico Pozzi, Registered Auditors (relating to Magic
          Italy Srl.)

----------

*    Previously filed.

(1)  Filed as Exhibit 3.2 to the registrant's registration statement on Form
     F-1, registration number 33-41486, and incorporated herein by reference.

(2)  Filed as Exhibit 3.1 to the registrant's registration statement on Form
     F-1, registration number 33-41486, and incorporated herein by reference.

(3)  Filed as Exhibit 4.1 to the registrant's registration statement on Form
     F-1, registration number 33-41486, and incorporated herein by reference.

(4)  Filed as Exhibit 10.1 to the registrant's annual report on Form 20-F for
     the year ended December 31, 2000 , and incorporated herein by reference.

(5)  Filed as Exhibit 10.2 to the registrant's annual report on Form 20-F for
     the year ended December 31, 2000, and incorporated herein by reference.


                                       4

              MAGIC SOFTWARE ENTERPRISES LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2006

                                 IN U.S. DOLLARS

                                      INDEX

                                                              PAGE
                                                           ----------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       F-2

CONSOLIDATED BALANCE SHEETS                                F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                         F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                 F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                      F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 F-9 - F-43

DETAILS OF SUBSIDIARIES AND AFFILIATE                         F-44


                                        5

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                         MAGIC SOFTWARE ENTERPRISES LTD.

     We have audited the accompanying consolidated balance sheets of Magic
Software Enterprises Ltd. (the "Company") and its subsidiaries as of December
31, 2005 and 2006, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2006. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain subsidiaries, which statements reflect total
assets of 10% and 18% as of December 31, 2005 and 2006, respectively, and total
revenues of 39%, 18% and 33% for each of the three years in the period ended
December 31, 2006. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for those subsidiaries, is based solely on the reports of the other
auditors.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

     In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries at December 31, 2005 and 2006, and the related consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.

     As discussed in Note 2 to the consolidated financial statements, the
company adopted the provision of Statement of Financial Accounting Standard No.
123(R), "Share-Based Payment", effective January 1, 2006.

     As discussed in Note 2 to the consolidated financial statements, on
December 31, 2006, the Company initially applied the provisions of Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements", and recorded a cumulative effect adjustment to beginning
accumulated deficit at January 1, 2006 and adjustments to property and equipment
as of December 31, 2005.

                                               /s/ Kost Forer Gabbay & Kasierer
Tel-Aviv, Israel                                 KOST FORER GABBAY & KASIERER
June 26, 2007                                  A Member of Ernst & Young Global


                                     F - 2

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                                                                                 DECEMBER 31,
                                                                              ------------------
                                                                                2005       2006
                                                                              -------    -------

    ASSETS

CURRENT ASSETS:

  Cash and cash equivalents                                                   $ 9,116    $ 8,162
  Short-term bank deposits                                                        368         69
  Marketable securities (Note 3)                                                4,381      4,649
  Trade receivables (net of allowance for doubtful accounts of $ 2,210 and
    $ 1,836 at December 31, 2005 and 2006, respectively)                       14,572     12,365
  Other accounts receivable and prepaid expenses (Note 4)                       2,832      2,472
  Inventory                                                                       400        328
                                                                              -------    -------

TOTAL current assets                                                           31,669     28,045
                                                                              -------    -------

LONG-TERM INVESTMENTS:
  Long-term lease deposits                                                        805        576
  Investments in affiliated companies                                             198        213
  Severance pay fund                                                            2,135      2,176
                                                                              -------    -------

TOTAL long-term investments                                                     3,138      2,965
                                                                              -------    -------

PROPERTY AND EQUIPMENT, NET (Note 5)                                            6,955      6,414
                                                                              -------    -------

OTHER INTANGIBLE ASSETS, NET (Note 6)                                          11,199     10,863
                                                                              -------    -------

GOODWILL (Note 7)                                                              20,762     21,624
                                                                              -------    -------

                                                                              $73,723    $69,911
                                                                              =======    =======

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


                                     F - 3

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

                                                                                   DECEMBER 31,
                                                                              -----------------------
                                                                                2005          2006
                                                                              ---------     ---------

    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Short-term credit and current maturities of long-term loans (Note 8)        $   4,183     $   4,514
  Trade payables                                                                  3,319         3,491
  Accrued expenses and other accounts payable (Note 9)                           10,696        11,399
                                                                              ---------     ---------

TOTAL current liabilities                                                        18,198        19,404
                                                                              ---------     ---------

ACCRUED SEVERANCE PAY                                                             2,527         2,499
                                                                              ---------     ---------

LONG-TERM LOANS (Note 10)                                                           165           233
                                                                              ---------     ---------

MINORITY INTEREST                                                                   528           131
                                                                              ---------     ---------

COMMITMENTS AND CONTINGENTIES (Note 15)

SHAREHOLDERS' EQUITY (Note 12):
  Share capital:

    Authorized: 50,000,000 Ordinary shares of NIS 0.1 par value at
      December 31, 2005 and 2006; Issued: 32,345,867 and 32,599,213
      shares at December 31, 2005 and 2006, respectively; Outstanding:
      31,070,499 and 31,323,845 shares at December 31, 2005 and 2006,
      respectively                                                                  829           834
  Additional paid-in capital                                                    106,072       106,375
  Accumulated other comprehensive loss                                           (1,514)       (1,337)
  Treasury shares, at cost: 1,275,368 Ordinary shares at December 31, 2005
    and 2006.                                                                    (6,772)       (6,772)
  Accumulated deficit                                                           (46,310)      (51,456)
                                                                              ---------     ---------

TOTAL shareholders' equity                                                       52,305        47,644
                                                                              ---------     ---------

                                                                              $  73,723     $  69,911
                                                                              =========     =========

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


                                     F - 4

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)

                                                                    YEAR ENDED DECEMBER 31,
                                                             -----------------------------------
                                                               2004         2005         2006
                                                             --------     --------     --------

Revenues (Note 13):

  Software sales                                             $ 28,022     $ 25,103     $ 22,336
  Maintenance and technical support                            12,555       14,376       14,935
  Consulting services                                          24,590       21,511       24,454
                                                             --------     --------     --------

TOTAL revenues                                                 65,167       60,990       61,725
                                                             --------     --------     --------

Cost of revenues:

  Software sales                                                6,462        8,483        7,016
  Maintenance and technical support                             3,199        2,679        3,615
  Consulting services                                          15,818       15,514       18,087
                                                             --------     --------     --------

TOTAL cost of revenues                                         25,479       26,676       28,718
                                                             --------     --------     --------

Gross profit                                                   39,688       34,314       33,007
                                                             --------     --------     --------

Operating costs and expenses:
  Research and development, net (Note 14a)                      3,845        3,733        3,942
  Selling and marketing                                        17,157       18,510       16,777
  General and administrative                                   15,384       16,332       15,572
  Restructuring and Impairment                                      -            -        2,157
                                                             --------     --------     --------

TOTAL operating expenses, net                                  36,386       38,575       38,448
                                                             --------     --------     --------

Operating income (loss)                                         3,302       (4,261)      (5,441)
Financial income (expenses), net (Note 14b)                       912         (811)         410
Other income, net (Note 1f)                                         -        1,169          278
                                                             --------     --------     --------

Income (loss) before taxes on income                            4,214       (3,903)      (4,753)
Taxes on income (Note 11)                                         281          491          325
                                                             --------     --------     --------

                                                                3,933       (4,394)      (5,078)
Equity in earnings of affiliates                                   79           19           15
Minority interest in losses (earnings) of subsidiaries             78         (232)          57
                                                             --------     --------     --------

Net income (loss)                                            $  4,090     $ (4,607)    $ (5,006)
                                                             ========     ========     ========

Basic and diluted net earnings (loss) per share (Note 16)    $   0.13     $  (0.15)    $  (0.16)
                                                             ========     ========     ========

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


                                     F - 5

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                                                                                             ACCUMULATED
                                                                               ADDITIONAL       OTHER       TREASURY                   COMPREHENSIVE     TOTAL
                                                                     SHARE      PAID-IN      COMPREHENSIVE   SHARES       ACCUMULATED     INCOME      SHAREHOLDERS'
                                                                    CAPITAL     CAPITAL       INCOME (LOSS)  AT COST        DEFICIT       (LOSS)         EQUITY
                                                                    --------    --------       --------      --------       --------     --------       --------

Balance as of January 1, 2004                                       $    805    $104,765       $    (80)     $ (5,773)      $(45,793)                   $ 53,924
  Other comprehensive income:
    Foreign currency translation adjustments                               -           -            384             -              -     $    384            384
    Unrealized gains from available-for-sale securities, net               -           -              2             -              -            2              2
  Net income                                                               -           -              -             -          4,090        4,090          4,090
                                                                                                                                         --------

  Total comprehensive income                                                                                                             $  4,476
                                                                                                                                         ========
  Exercise of stock options and warrants                                  22       1,227              -             -              -                       1,249
  Purchase of Treasury shares                                              -           -              -          (102)             -                        (102)
                                                                    --------    --------       --------      --------       --------                    --------
Balance as of December 31, 2004                                          827     105,992            306        (5,875)       (41,703)                     59,547
    Realized losses from available-for-sale securities                     -           -             36             -              -                          36
  Other comprehensive loss:
    Foreign currency translation adjustments                               -           -         (1,578)            -              -     $ (1,578)        (1,578)
    Unrealized losses from available-for-sale securities                   -           -           (278)            -              -         (278)          (278)
  Net loss                                                                 -           -              -             -         (4,607)      (4,607)        (4,607)
                                                                                                                                         --------

  Total comprehensive loss                                                                                                               $ (6,463)
                                                                                                                                         ========
  Exercise of stock options                                                2          80              -             -              -                          82
  Purchase of Treasury shares                                              -           -              -          (897)             -                        (897)
                                                                    --------    --------       --------      --------       --------                    --------

Balance as of December 31, 2005                                          829     106,072         (1,514)       (6,772)       (46,310)                     52,305
  Effect of SAB 108                                                                                                             (140)                       (140)
                                                                                                                            --------                    --------
                                                                                                                             (46,450)                     52,165

  Stock based compensation expenses                                                   27                                                                      27
    Realized losses from available-for-sale securities                     -           -              5             -              -                           5
  Other comprehensive loss:

    Foreign currency translation adjustments                               -           -             22             -              -           22             22
    Unrealized gain from available-for-sale securities                     -           -            150             -              -          150            150
  Net loss                                                                 -           -              -             -         (5,006)      (5,006)        (5,006)
                                                                                                                                         --------

  Total comprehensive loss                                                                                                               $ (4,834)
                                                                                                                                         ========
  Exercise of stock options                                                5         276              -             -              -                         281
                                                                    --------    --------       --------      --------       --------                    --------

Balance as of December 31, 2006                                     $    834    $106,375       $ (1,337)     $ (6,772)      $(51,456)                   $ 47,644
                                                                    ========    ========       ========      ========       ========                    ========

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


                                     F - 6

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                                                                              YEAR ENDED DECEMBER 31,
                                                                       ----------------------------------------
                                                                         2004            2005            2006
                                                                       --------        --------        --------

CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income (loss)                                                    $  4,090        $ (4,607)       $ (5,006)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Depreciation and amortization                                         4,649           5,139           5,464
    Equity in earnings of affiliates                                        (79)            (19)            (15)
    Minority interest in earnings (losses) of subsidiaries                  (78)            232             (57)
    Accrued severance pay, net                                               37             (30)            (69)
    Loss (gain) on sale of property and equipment                            (9)             16              56
    Stock-based compensation expenses                                         -               -              27
    Amortization of premiums and accrued interest on
      marketable securities, net                                            (53)             67              55
    Loss (gain) on sale of marketable securities                            (28)             68              10
    Gain on sale of subsidiary's operation                                    -               -            (278)
    Impairment of intangible asset                                            -               -             309
    Decrease in trade receivables                                           126           4,569           2,752
    Decrease (increase) in related parties receivables                        5             (28)            204
    Decrease (increase) in other accounts receivable and prepaid
      expenses                                                              (76)            471             242
    Decrease (increase) in inventory                                       (181)            (20)             72
    Increase (decrease) in trade payables                                  (488)            646              19
    Increase (decrease) in accrued expenses and other accounts
      payable                                                            (2,642)           (907)             46
                                                                       --------        --------        --------

Net cash provided by operating activities                                 5,273           5,597           3,831
                                                                       --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Capitalized software development costs                                 (3,472)         (3,909)         (3,535)
  Purchase of property and equipment                                     (1,006)         (1,123)         (1,032)
  Purchase of intangible assets                                            (374)              -               -
  Additional investment in subsidiaries (See note 1b-d)                  (1,626)              -          (1,910)
  Proceeds from sale of subsidiary's operation                                -               -             900
  Proceeds from sale of property and equipment                               23              18              97
  Proceeds from sale of marketable securities                               777             664             226
  Purchase of marketable securities                                      (5,921)           (199)           (408)
  Change in short-term and long-term deposits                              (317)           (599)            477
                                                                       --------        --------        --------

Net cash used in investing activities                                   (11,916)         (5,148)         (5,185)
                                                                       --------        --------        --------

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


                                     F - 7

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                                                                       YEAR ENDED DECEMBER 31,
                                                                 ----------------------------------
                                                                   2004         2005         2006
                                                                 --------     --------     --------

 CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from exercise of stock options and warrants          $  1,249     $     82     $    281
   Purchase of Treasury shares                                       (102)        (897)           -
   Short-term credit, net                                            (108)       1,979          328
   Repayment of long-term loan                                       (359)         (54)        (122)
   Proceeds from long-term loans                                      126          164          185
   Dividend to minority in subsidiary                                   -         (509)           -
                                                                 --------     --------     --------

 Net cash provided by financing activities                            806          765          672
                                                                 --------     --------     --------


 Effect of exchange rate changes on cash and cash equivalents        (164)         322         (272)
                                                                 --------     --------     --------

 Increase (decrease) in cash and cash equivalents                  (6,001)       1,536         (954)
 Cash and cash equivalents at beginning of the year                13,581        7,580        9,116
                                                                 --------     --------     --------

 Cash and cash equivalents at end of the year                    $  7,580     $  9,116     $  8,162
                                                                 ========     ========     ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:

            NET CASH PAID DURING THE YEAR FOR:

            Income taxes                                         $    281     $    424     $    433
                                                                 ========     ========     ========

            Interest                                             $     74     $    102     $    265
                                                                 ========     ========     ========

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


                                     F - 8

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 1:- GENERAL

     a.   Magic Software Enterprises Ltd. (the "Company"), an Israeli
          corporation, and its subsidiaries ("the Group") develops, markets and
          supports software development and deployment technology ("the Magic
          technology") and applications developed using this Magic technology.
          Magic technology enables enterprises to accelerate the process of
          building and deploying software applications that can be rapidly
          customized and integrated with existing systems. The principal markets
          of the Company and its subsidiaries are Europe, Israel, the U.S. and
          Japan (see Note 13).

          As for information about the Company's holdings in subsidiaries and
          affiliated company, see Appendix A.

     b.   During 2004, in consideration of $ 1,240, the Company purchased an
          additional 20.96% equity interest in Advanced Answer on Demand
          Holdings Corp. ("AAOD"), a private Florida based company that provides
          integrated software solutions for the long-term healthcare industry.
          As a result, the Company's interest in AAOD's share capital increased
          to 83.89%.

          In February 2006, in consideration of $ 1,910, the Company purchased
          an additional 16.11% equity interest in AAOD. As a result, the
          Company's interest in AAOD's share capital increased to 100%. The
          purchase price was allocated, as follows:

          Customer relations *)                                        $   314
          Acquired technology*)                                            216
          Goodwill                                                         990
          Minority interest                                                390
                                                                       -------

          Total net assets acquired                                    $ 1,910
                                                                       =======

          *)   The customer relations and acquired technology are amortized on a
               straight-line basis over a period of five years.

     c.   During 2004, the Company purchased an additional equity interest of
          26% in Onyx Szoftverhaz Hungary, bringing its holding to 100% in
          consideration of $ 290. The excess of the cost over the net amounts
          assigned to the fair value of assets acquired and liabilities assumed
          was recorded as goodwill at the total amount of $ 69.

     d.   During 2004, the Company purchased an additional equity interest of
          12.5% from the minority in CarPro Systems Ltd., ("CarPro") bringing
          it's holding to 87.5%, in consideration of $ 96.

          During 2005, the Company invested an additional amount of
          approximately $ 214 in CarPro equity, bringing its holding to 90.48%.


                                     F - 9

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 1:- GENERAL (CONT.)

          On December 7, 2006, the Company has recorded a net gain of $278
          relating to the sale of CarPro's assets and liabilities, including the
          intellectual property (the RentPro and LeasePro software) and its
          customer base, to its distributor CarPro Systems International B.V.
          (the "Buyer"),. Additionally Magic Software Enterprises sold to the
          buyer a substantial number of licenses for Magic Software's products
          for continued use in the ongoing maintenance and enhancement of the
          CarPro software products. The combined sales price is $ 1,750 to be
          paid over a period of five years. The Company recognized the
          consideration from the sale of Carpro's operations on a cash basis and
          net of related expenses (including goodwill and other intangible
          assets write-offs).

     e.   During 2002, Magic U.K., a subsidiary of the Company established a
          joint venture company in the U.K., known as Hermes Logistics
          Technologies Ltd. Holding ("Hermes"), which owns the Intellectual
          Property ("IP") of the Hermes application.

          In 2004, the subsidiary purchased the remaining 49% interest in Hermes
          and increased its holdings to 100% for a cash consideration of
          approximately $ 354, which was recorded as other intangible assets,
          and committed to pay royalties to the seller in the amount of 1.75% of
          gross sales of the Hermes application for a period of 5 years (see
          Note 15e).

     f.   The Company has recorded a net income of $1,169 in 2005 relating to
          life insurance that the Company received in 2005 following the death
          of the former chief executive officer of the subsidiary AAOD in June
          2004.

     g.   On August 16, 2006, Magic's board of directors approved a
          comprehensive global Restructuring plan (the "Plan"). The Plan
          establishes the terms of the benefit arrangement, including the
          benefits that employees will receive upon termination. In accordance
          with Statement of Financial Accounting Standard No. 146, "Accounting
          for Costs Associated with Exit or Disposal Activities" ("SFAS No.
          146") the Company recorded $ 1,365 related to one-time termination
          benefits provided to terminated employees. As of December 31, 2006,
          all termination benefits were paid and substantially all terminated
          employees no longer provide services to the Company. In addition the
          Company wrote- off certain intangible assets related to the
          restructuring plan and incurred other exit costs in the amounts of $
          309 and $ 483 respectively.

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

     The consolidated financial statements have been prepared in accordance with
     accounting principles generally accepted in the U.S. ("U.S. GAAP"), applied
     on a consistent basis, as follows:

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the amounts reported in the financial statements
     and accompanying notes. Actual results could differ from those estimates.


                                     F - 10

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     FINANCIAL STATEMENTS IN UNITED STATES DOLLARS

     A substantial portion of the revenues of the Company and certain of its
     subsidiaries is generated in U.S. dollars ("dollar"). In addition, a
     substantial portion of the Company's costs is incurred in dollars. The
     Company's management believes that the dollar is the currency of the
     primary economic environment in which the Company and its subsidiaries
     operate. Thus, the functional and reporting currency of the Company and
     certain of its subsidiaries is the dollar.

     Accordingly, monetary accounts maintained in currencies other than the
     dollar are remeasured into dollars in accordance with SFAS No. 52, "Foreign
     Currency Translation" ("SFAS No. 52"). All transaction gains and losses of
     the remeasurement of monetary balance sheet items are reflected in the
     statements of operations as financial income or expenses, as appropriate.

     The financial statements of foreign subsidiaries and of certain entities
     that are reported using the equity method of accounting, whose functional
     currency is not the U.S. dollar, have been translated into dollars. All
     balance sheet amounts have been translated using the exchange rates in
     effect at each balance sheet dates. Statement of operation amounts have
     been translated using the average exchange rate prevailing during each
     year. Such translation adjustments are reported as a component of
     accumulated other comprehensive income (loss) in shareholders' equity.

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
     and its wholly and majority owned subsidiaries. Intercompany balances and
     transactions including profit from intercompany sales not yet realized
     outside the Group, have been eliminated upon consolidation.

     CASH EQUIVALENTS:

     Cash equivalents are short-term highly liquid investments that are readily
     convertible to cash with maturities of three months or less, at the date
     acquired.

     SHORT-TERM DEPOSITS

     Short-term deposits include deposits with original maturities of more than
     three months and less than one year which presented at cost, including
     accrued interest. The deposits are in U.S. dollars and in New Israeli
     Shekels and bear interest at an average annual rate of 4.94% and 4.24%,
     respectively.


                                     F - 11

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     MARKETABLE SECURITIES

     The Company accounts for investments in marketable securities in accordance
     with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
     Securities ("SFAS No. 115"). Management determines the appropriate
     classification of its investments in marketable debt securities at the time
     of purchase and reevaluates such determinations at each balance sheet date.
     Debt securities are classified as available - for - sale and reported at
     fair value.

     Debt securities that are designated as available-for-sale are stated at
     fair value, with unrealized gains and losses reported in accumulated other
     comprehensive income (loss), a separate component of shareholders' equity.
     Realized gains and losses on sales of investments, as determined on a
     specific identification basis, are included in financial income, net.

     INVENTORIES

     Inventories consist of software packaging, discs, printed materials,
     hardware devices and third party licenses, and are stated at the lower of
     cost or market value. Cost is determined by the "first-in, first-out"
     method.

     Inventory write-offs are provided to cover risks arising from slow-moving
     items, technological obsolescence, excess inventories, and for market
     prices lower than cost. In 2006, the Company wrote off approximately $ 237
     of slow-moving inventory of license, which was not part of the core
     business of the Company, related to the reorganization plan which was
     approved by the Company's management and Board of Directors during the
     third quarter of 2006.

     INVESTMENTS IN AFFILIATED COMPANIES

     In these financial statements, affiliated companies are companies held to
     the extent of 20% or more (which are not subsidiaries), where the Company
     can exercise significant influence over operating and financial policy of
     the affiliate. The investment in affiliated companies is accounted for by
     the equity method. Profits on inter-company sales, not realized outside the
     Group, were eliminated.

     Management periodically reviews the carrying value of the investments. If
     this review indicates that the cost is not recoverable, the carrying value
     is reduced to its estimated fair value. As of December 31, 2005 and 2006,
     no impairment indicators have been identified.

     PROPERTY AND EQUIPMENT NET

     Property and equipment are stated at cost, net of accumulated depreciation.
     Depreciation is computed by the straight-line method over the estimated
     useful lives of the assets at the following estimated useful lives:


                                     F - 12

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                                                                 YEARS
                                             --------------------------------------------

     Buildings                                                    25
     Computers and peripheral equipment                            3
     Office furniture and equipment                              7 - 15
     Motor vehicles                                                7
     Software for internal use                                     3
     Leasehold improvements                  Over the shorter of the lease term or useful
                                                           economic life

     The Group accounts for costs of computer software developed or obtained for
     internal use in accordance with Statement of Position No. 98-1, Accounting
     for the Costs of Computer Software Developed or Obtained for Internal Use
     ("SOP No. 98-1"). The SOP requires the capitalization of certain costs
     incurred in connection with developing or obtaining internal use software.

     During the year 2006, the Company capitalized $ 140 of software cost,
     related to the ERP (enterprise resource planning) system. Capitalized
     software costs are amortized by the straight-line method over their
     estimated useful life of three years. In September 2006, as part of the
     restructuring process held by the Company, the Software project was
     postponed.

     IMPAIRMENT OF LONG-LIVED ASSETS

     The Company's long-lived assets are reviewed for impairment in accordance
     with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
     Assets" ("SFAS No. 144") whenever events or changes in circumstances
     indicate that the carrying amount of an asset may not be recoverable.
     Recoverability of assets to be held and used is measured by a comparison of
     the carrying amount of an asset to the future undiscounted cash flows
     expected to be generated by the assets. If such assets are considered to be
     impaired, the impairment to be recognized is measured by the amount by
     which the carrying amount of the assets exceeds the fair value of the
     assets. As of December 31, 2005, no impairment indicators have been
     identified. For the year 2006 see Note 1g.

     OTHER INTANGIBLE ASSETS

     Intangible assets are comprised of distribution rights, acquired technology
     and customer relations, and are amortized over their useful life using a
     method of amortization that reflects the pattern in which the economic
     benefits of the intangible assets are consumed or otherwise used up.
     Distribution rights, acquired technology and customer relations are
     amortized on a straight line basis over a period of five years.


                                     F - 13

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     GOODWILL

     Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and
     intangible assets with an identifiable useful life are no longer amortized
     but are subject to annual impairment tests based on estimated fair value in
     accordance with SFAS No. 142. The Company conducts its annual test of
     impairment for goodwill in December of each year. In addition the Company
     tests for impairment periodically whenever events or circumstances occur
     subsequent to its annual impairment tests that indicate that the asset
     might be impaired. Indicators the Company considered important which could
     trigger an impairment include, but are not limited to, significant
     underperformance relative to historical or projected future operating
     results, significant changes in the manner of use of the acquired assets or
     the strategy for its overall business, significant negative industry or
     economic trends, a significant decline in its stock price for a sustained
     period and its market capitalization relative to net book value.

     The Company has three reporting units. The goodwill of each reporting unit
     was measured separately. The first step of the goodwill impairment test
     compared the carrying value of each reporting unit with its fair value on
     that date. Since the fair value of the reporting units exceeded their
     carrying amount, no impairment was identified in 2006.

     REVENUE RECOGNITION

     To date, the Company has derived its revenues from licensing the rights to
     use its software, maintenance and technical support and providing
     professional services. The Company sells its products primarily through its
     direct sales force and indirectly through distributors.

     The Company accounts for software sales in accordance with Statement of
     Position No. 97-2, "Software Revenue Recognition" as amended by Statement
     of Position 98-9, "Modifications of SOP 97-2, Software Revenue Recognition
     with Respect to Certain Transactions" ("SOP No. 97-2"). SOP No. 97-2
     generally requires revenues earned from software arrangements involving
     multiple elements to be allocated to each element based on the relative
     fair values of the elements determined by the vendor's specific objective
     evidence (VSOE) of fair value. Revenues are recognized under the "residual
     method" when VSOE of fair value exists for all undelivered elements and
     VSOE of fair value does not exist for all of the delivered elements, and
     when all SOP No. 97-2 criteria for revenue recognition are met. The VSOE of
     fair value of the undelivered elements included in multiple element
     arrangement (maintenance, support and services) is determined based on the
     price charged for the undelivered element when sold separately.

     Revenues from license fees are recognized when persuasive evidence of an
     agreement exists, delivery of the product has occurred, no significant
     obligations with regard to implementation remain, the fee is fixed or
     determinable, and collectibility is probable. The Company generally does
     not grant a right of return to its customers. When a right of return
     exists, the Company defers revenue until the right of return expires, at
     which time revenue is recognized provided that all other revenue
     recognition criteria are met.


                                     F - 14

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     Maintenance and technical support revenues are deferred and recognized on a
     straight-line basis over the term of the maintenance and support agreement.

     Revenue from consulting services consists of billable hours for services
     provided, recognized as the services are rendered.

     Arrangements that include consulting services are evaluated to determine
     whether those services are essential to the functionality of other elements
     of the arrangement. When services are considered essential, revenues under
     the arrangement are recognized using contract accounting based on Statement
     of Position No. 81-1, "Accounting for Performance of Construction-Type and
     Certain Production-Type Contracts" ("SOP 81-1") on a percentage of
     completion method based on inputs measures. Provisions for estimated losses
     on uncompleted contracts are made in the period in which such losses are
     first determined, in the amount of the estimated loss for the entire
     contract. As of December 31, 2006, no such estimated losses were
     identified.

     When consulting services are not considered essential, the revenues
     allocable to the consulting services are recognized as the services are
     performed. In most cases, the Company had determined that the services are
     not considered essential to the functionality of other elements of the
     arrangement.

     Deferred revenue includes unearned amounts received under maintenance and
     support contracts, and amounts received from customers but not yet
     recognized as revenues.

     RESEARCH AND DEVELOPMENT COSTS

     SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
     Leased or Otherwise Marketed", ("SFAS No. 86") requires capitalization of
     certain software development costs subsequent to the establishment of
     technological feasibility. Based on the Company and its subsidiaries
     product development process, technological feasibility is established upon
     completion of a detailed program design and working model.

     Research and development costs incurred in the process of developing
     product improvements are generally charged to expenses as incurred.

     Significant costs incurred by the Company and its subsidiaries between
     completion of the detailed program design and a working model, and the
     point at which the product is ready for general release, have been
     capitalized.


                                     F - 15

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     Capitalized software costs are amortized by the greater of the amount
     computed using the: (i) ratio that current gross revenues from sales of the
     software to the total of current and anticipated future gross revenues from
     sales of that software, or (ii) the straight-line method over the estimated
     useful life of the product (three to five years). The Company assesses the
     recoverability of this intangible asset on a regular basis by determining
     whether the amortization of the asset over its remaining life can be
     recovered through undiscounted future operating cash flows from the
     specific software product sold. As of December 31, 2005 and 2006, no
     impairment losses have been identified.

     SEVERANCE PAY

     Pursuant to Section 14 of the Severance Compensation Act, 1963 ("Section
     14"), certain employees of the Company who elected to be included under
     this section, are entitled only to monthly deposits, at a rate of 8.33% of
     their monthly salary, made in their name with insurance companies. Payments
     in accordance with Section 14 release the Company from any future severance
     payments in respect of those employees. Deposits under Section 14 are not
     recorded as an asset in the Company's balance sheet.

     The liability of the Israeli companies for severance pay (for those who
     elected not to be included under Section 14) is calculated pursuant to
     Israel's Severance Pay Law, based on the most recent salary of the
     employees multiplied by the number of years of employment, as of the
     balance sheet date. Employees are entitled to one month's salary for each
     year of employment or a portion thereof. The Company's liability for all of
     its employees in Israel is fully provided by monthly deposits with
     insurance policies and by an accrual. The value of these policies is
     recorded as an asset in the Company's balance sheet.

     The deposited funds include profits accumulated up to the balance sheet
     date. The deposited funds may be withdrawn only upon the fulfillment of the
     obligation pursuant to Israel's Severance Pay Law or labor agreements. The
     value of the deposited funds is based on the cash surrendered value of
     these policies, and includes immaterial profits.

     Severance expenses for the years ended December 31, 2004, 2005 and 2006
     amounted to approximately $ 389, $ 453 and $ 463, respectively.

     ADVERTISING EXPENSES

     Advertising expenses are charged to selling and marketing expenses, as
     incurred. Advertising expenses for the years ended December 31, 2004, 2005
     and 2006 were $ 46, $ 119 and $ 87, respectively.


                                     F - 16

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     INCOME TAXES

     The Company and its subsidiaries account for income taxes in accordance
     with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This
     Statement prescribes the use of the liability method whereby deferred tax
     assets and liability account balances are determined based on differences
     between financial reporting and tax bases of assets and liabilities and are
     measured using the enacted tax rates and laws that will be in effect when
     the differences are expected to reverse. The Company and its subsidiaries
     provide a valuation allowance, if necessary, to reduce deferred tax assets
     to their estimated realizable value.

     TREASURY SHARES

     The Company repurchases its Ordinary shares from time to time in the open
     market and holds such shares as Treasury shares. The Company applies the
     "cost method" and presents the cost to repurchase such shares as a
     reduction in shareholders' equity. As of December 31, 2006, the Company did
     not sell any of the shares.

     BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE

     Basic net earnings (net loss) per share is computed based on the weighted
     average number of Ordinary shares outstanding during each year. Diluted
     earnings per share are computed based on the weighted average number of
     Ordinary shares outstanding during each year, plus dilutive potential
     Ordinary shares considered outstanding during the year, in accordance with
     SFAS No. 128, "Earnings Per Share" ("SFAS No. 128").

     Part of the outstanding stock options and warrants has been excluded from
     the calculation of the diluted earnings (net loss) per share because such
     securities are anti-dilutive for 2004, 2005 and 2006. The total weighted
     average number of shares related to the outstanding options and warrants
     excluded from the calculations of diluted earnings (net loss) per share was
     209,161, 1,298,186 and 883,884 for the years ended December 31, 2004, 2005
     and 2006, respectively.

     ACCOUNTING FOR STOCK-BASED COMPENSATION

     On January 1, 2006, the Company adopted Statement of Financial Accounting
     Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)")
     which requires the measurement and recognition of compensation expense
     based on estimated fair values for all share-based payment awards made to
     employees and directors. SFAS 123(R) supersedes Accounting Principles Board
     Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for
     periods beginning in fiscal 2006. In March 2005, the Securities and
     Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
     relating to SFAS 123(R). The Company has applied the provisions of SAB 107
     in its adoption of SFAS 123(R).


                                     F - 17

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     SFAS 123(R) requires companies to estimate the fair value of equity-based
     payment awards on the date of grant using an option-pricing model. The
     value of the portion of the award that is ultimately expected to vest is
     recognized as an expense over the requisite service periods in the
     Company's consolidated income statement. Prior to the adoption of SFAS
     123(R), the Company accounted for equity-based awards to employees and
     directors using the intrinsic value method in accordance with APB 25 as
     allowed under Statement of Financial Accounting Standards No. 123,
     "Accounting for Stock-Based Compensation" ("SFAS 123").

     The Company adopted SFAS 123(R) using the modified prospective transition
     method, which requires the application of the accounting standard starting
     from January 1, 2006, the first day of the Company's fiscal year 2006.
     Under that transition method, since all the unvested options had been
     accelerated prior to the adoption of statement 123(R), (see note 12),
     compensation cost recognized in the year ended December 31, 2006, includes
     compensation cost for all share-based payments granted subsequent to
     January 1, 2006, based on the grant-date fair value estimated in accordance
     with the provisions of Statement 123(R). Results for prior periods have not
     been restated.

     The Company recognizes compensation expenses for the value of its awards,
     which have graded vesting based on the straight line method over the
     requisite service period of each of the awards, net of estimated
     forfeitures. Estimated forfeitures are based on actual historical
     pre-vesting forfeitures.

     As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
     income before income taxes and net income for the year ended December 31,
     2006, is $ 27 lower than if it had continued to account for stock-based
     compensation under APB 25.

     Prior to January 1, 2006, the Company applied the intrinsic value method of
     accounting for stock options as prescribed by APB 25, whereby compensation
     expense is equal to the excess, if any, of the quoted market price of the
     stock over the exercise price at the grant date of the award.

     The Pro-forma table below illustrates the effect of the Company's stock
     based compensation expense on net income and basic and diluted earnings per
     share for 2005 and 2004, had the Company applied the fair value recognition
     provisions of SFAS 123.

     The fair value for options granted in 2004 and 2005 is amortized over their
     vesting period and estimated at the date of grant using a Black-Scholes
     options pricing model with the following weighted average assumptions:

                                                    2004                 2005
                                                   -------              -------

     Dividend yield                                  0%                    0%
     Expected volatility                            67.3%                 80%
     Risk-free interest                              2.8%                  3.9%
     Expected life (in years)                        3                     5


                                     F - 18

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     The pro-forma table below reflects the Company's stock based compensation
     expense, net income (loss) and basic and diluted earnings per share for the
     years ended December 31 2004 and 2005, had the Company applied the fair
     value recognition provisions of SFAS 123, as follows:

                                                                  YEAR ENDED DECEMBER 31,
                                                                   -------------------
                                                                     2004        2005
                                                                   -------     -------

Net income (loss) - as reported                                    $ 4,090     $(4,607)
  Add: stock-based compensation expense recognized under APB 25          -           -
Deduct: stock-based compensation expense determined under fair
  value method for all awards                                         (820)     (2,599)
                                                                   -------     -------

Pro forma net income (loss):                                       $ 3,270     $(7,206)
                                                                   =======     =======

Net earnings (loss) per share:

Basic and diluted earnings (loss) per share, as reported           $  0.13     $ (0.15)
                                                                   =======     =======

Pro forma basic and diluted earnings (loss) per share              $  0.10     $ (0.23)
                                                                   =======     =======

     The Company estimates the fair value of stock options granted using the
     Black-Scholes-Merton option-pricing model. The option-pricing model
     requires a number of assumptions, of which the most significant are,
     expected stock price volatility, and the expected option term. Expected
     volatility was calculated based upon actual historical stock price
     movements over the most recent periods ending on the grant date, equal to
     the expected option term. The expected option term represents the period
     that the Company's stock options are expected to be outstanding and was
     determined based on historical experience of similar options, giving
     consideration to the contractual terms of the stock options. The Company
     has historically not paid dividends and has no foreseeable plans to issue
     dividends. The risk-free interest rate is based on the yield from U.S.
     Treasury zero-coupon bonds with an equivalent term.

     The following weighted assumptions were used in the model for 2006:

                                                      2006
                                                     -------

     Dividend yield                                    0%
     Expected volatility                               64%
     Risk-free interest                               4.7%
     Expected life (in years)                        5 years

     For purpose of pro-forma disclosures stock based compensation is amortized
     over the vesting period using the straight line method. Pro-forma
     compensation expense under SFAS 123, among other computational differences,
     does not consider potential pre-vesting forfeitures. Because of these
     differences, the pro-forma stock based compensation expense presented above
     for the prior years ended December 31 2004 and 2005 under SFAS 123 and the
     stock based compensation expense recognized during the current year ended
     December 31, 2006 under SFAS 123(R) are not directly comparable.


                                     F - 19

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     During the year ended December 31 2006, the Company recognized stock-based
     compensation expense related to employee stock options in the amount of $
     27, that were recorded as General and administrative expenses.

     As of December 31, 2006, the total unrecognized estimated compensation
     costs related to non-vested stock options granted prior to that date was $
     7, which is expected to be recognized over a period of up to 2.25 years.
     The Company recorded cash received from the exercise of stock options of $
     281.

     The Company accounts for stock option and warrant grants issued to
     non-employee using the guidance of SFAS No. 123(R), "Accounting for
     Stock-Based Compensation" and EITF No. 96-18: "Accounting for Equity
     Instruments that are Issued to Other Than Employees for Acquiring, or in
     Conjunction with Selling, Goods or Services," whereby the fair value of
     such option and warrant grants is determined using the Black-Scholes
     options pricing model at the earlier of the date at which the
     non-employee's performance is completed or a performance commitment is
     reached.

     CONCENTRATIONS OF CREDIT RISK

     Financial instruments which potentially subject the Company and its
     subsidiaries to concentration of credit risk consist principally of cash
     and cash equivalents, marketable securities and trade receivables.

     The Company's cash and cash equivalents are invested primarily in deposits
     with major banks worldwide, however, such cash and cash equivalents in the
     United States may be in excess of insured limits and are not insured in
     other jurisdictions. Management believes that the financial institutions
     that hold the Company's investments are financially sound, and accordingly,
     minimal credit risk exists with respect to these investments.

     The Company's marketable securities include investments in debentures of
     corporations, foreign banks, governments and commercial debentures.
     Management believes that those corporations and governments are financially
     sound and that the portfolios are well-diversified, and accordingly,
     minimal credit risk exists with respect to these marketable securities.

     Trade receivables of the Company and its subsidiaries are derived from
     sales to customers located primarily in the U.S., Europe, Japan and Israel.
     The Company performs ongoing credit evaluations of its customers and to
     date has not experienced any material losses. An allowance for doubtful
     accounts is determined with respect to those amounts that the Company has
     determined to be doubtful of collection. Moreover, in some of the
     subsidiaries there is an additional general allowance (based on a
     percentage of accounts receivables or revenue) which depends on the nature
     of the local market and local law requirements. The doubtful accounts
     expenses for the years ended December 31, 2005 and 2006 were $ 1,212 and $
     607, respectively.


                                     F - 20

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     DERIVATIVE INSTRUMENTS

     Statement of Financial Accounting Standard No. 133, "Accounting for
     Derivative Instruments and Hedging Activities" ("SFAS No. 133"), requires
     companies to recognize all of their derivative instruments as either assets
     or liabilities in the statement of financial position at fair value.

     The Company entered into a forward transaction for the sale of $ 1,250 at a
     future price of Euro 1.3225 per $ 1 as at December 1, 2006. During 2006,
     the Company recorded a net income of $ 6 related to this forward
     transaction.

     Besides the aforementioned foreign exchange contract, the Company and its
     subsidiaries have no off-balance-sheet concentration of credit risk such as
     option contracts or other foreign hedging arrangements.

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used by the Company and its
     subsidiaries in estimating their fair value disclosures for financial
     instruments:

     The carrying amounts of cash and cash equivalents, trade receivables and
     other accounts receivable, short-term bank credit, trade payables and other
     accounts payable approximate their fair value due to the short-term
     maturity of these instruments.

     The fair values for marketable securities are presented based on quoted
     market prices (see also Note 3).

     The carrying amount of the Company's long-term borrowing approximates its
     fair value. The fair value was estimated using discounted cash flow
     analyses, based on the Company's incremental borrowing rates for similar
     type of borrowing arrangements.

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:

     a.   In September 2006, the SEC staff issued Staff Accounting Bulletin No.
          108, "Considering the Effects of Prior Year Misstatements when
          Quantifying Misstatements in Current Year Financial Statements." ("SAB
          108") SAB 108 was issued in order to eliminate the diversity of
          practice surrounding how public companies quantify financial statement
          misstatements.

          Traditionally, there have been two widely-recognized methods for
          quantifying the effects of financial statement misstatements: the
          "roll-over" method and the "iron curtain" method. The roll-over method
          focuses primarily on the impact of a misstatement on the income
          statement--including the reversing effect of prior year
          misstatements--but its use can lead to the accumulation of
          misstatements in the balance sheet. The iron-curtain method, on the
          other hand, focuses primarily on the effect of correcting the
          period-end balance sheet with less emphasis on the reversing effects
          of prior year errors on the income statement. Prior to our application
          of the guidance in SAB 108, we used the roll-over method for
          quantifying financial statement misstatements.


                                     F - 21

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

          In SAB 108, the SEC staff established an approach that requires
          quantification of financial statement misstatements based on the
          effects of the misstatements on each of the company's financial
          statements and the related financial statement disclosures. This model
          is commonly referred to as a "dual approach" because it requires
          quantification of errors under both the iron curtain and the roll-over
          methods.

          SAB 108 permits existing public companies to initially apply its
          provisions either by (i) restating prior financial statements as if
          the "dual approach" had always been applied or (ii) recording the
          cumulative effect of initially applying the "dual approach" as
          adjustments to the carrying values of assets and liabilities as of
          January 1, 2006 with an offsetting adjustment recorded to the opening
          balance of retained earnings.

          We elected to record the effects of applying SAB 108 using the
          cumulative effect transition method.

          The following table summarizes the effects (up to January 1, 2006) of
          applying the guidance in SAB 108 (in thousands):

                                             PERIOD IN WHICH THE MISSTATEMENT ORIGINATED
                                                 --------------------------------
                                                            YEAR ENDED DECEMBER 31,
                                                 --------    --------------------
                                                CUMULATIVE                          ADJUSTMENT
                                                 PRIOR TO                         RECORDED AS OF
                                                JANUARY 1,                           JANUARY 1,
                                                   2004        2004        2005        2006
                                                 --------    --------    --------    --------
                                                              U.S $ IN THOUSANDS
                                                 --------------------------------------------

Accrued depreciation of land lease rights (1)         112          14          14         140
                                                 --------    --------    --------    --------
Impact on net income (loss)                           112          14          14
                                                 ========    ========    ========
accumulated deficit (2)                                                                   140
                                                                                     ========

          (1)  Prior to these financial statements the Company has not amortized
               its lease rights in land related to its headquarters in Or
               Yehuda, Israel. The accumulated amortization as at December 31,
               2005 of $140 has been recorded against accumulated deficit.

          (2)  Represents the net increase in the accumulated deficit recorded
               as of January 1, 2006 to record the initial application of SAB
               108.

     b.   In September 2006, the FASB issued Statement of Financial Accounting
          Standards (SFAS) 157, ``Fair Value Measurements.'' SFAS 157 defines
          fair value, establishes a framework for measuring fair value in
          generally accepted accounting principles (GAAP) and expands
          disclosures about fair value measurements. SFAS 157 is effective for
          fiscal years beginning after November 15, 2007 and interim periods
          within those fiscal years. The Company is currently evaluating the
          effect that the adoption of SFAS 157 will have on its financial
          position and results of operations.


                                     F - 22

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     c.   In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
          for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS
          No. 159 permits companies to choose to measure certain financial
          instruments and certain other items at fair value. The standard
          requires that unrealized gains and losses on items for which the fair
          value option has been elected be reported in earnings. SFAS No. 159 is
          effective for the Company beginning in the first quarter of fiscal
          year 2008, although earlier adoption is permitted. The Company is
          currently evaluating the impact that SFAS No. 159 will have on its
          consolidated financial statements

     RECLASSIFICATION:

     Certain amounts from prior years have been reclassified to conform to
     current period presentation.

NOTE 3:- MARKETABLE SECURITIES

     The Company invests in marketable debt securities, which are classified as
     available-for-sale. The following is a summary of marketable debt
     securities:

                                                                           DECEMBER 31,
                               ---------------------------------------------------------------------------------------------------
                                                    2005                                                 2006
                               ----------------------------------------------       ----------------------------------------------
                              AMORTIZED   UNREALIZED    UNREALIZED     MARKET      AMORTIZED   UNREALIZED    UNREALIZED     MARKET
                                COST        LOSSES        GAINS        VALUE         COST        LOSSES        GAINS        VALUE
                               ------       ------        ------       ------       ------       ------        ------       ------

AVAILABLE-FOR-SALE:

Governmental debentures        $1,662       $  (81)       $    -       $1,581       $1,641       $  (18)       $    3       $1,626
Commercial debentures           2,473         (125)            2        2,350        2,842          (56)            7        2,793
Equity funds                      486          (36)            -          450          249          (19)            -          230
                               ------       ------        ------       ------       ------       ------        ------       ------

TOTAL available-for-sale
   marketable securities       $4,621       $ (242)       $    2       $4,381       $4,732       $  (93)       $   10       $4,649
                               ======       ======        ======       ======       ======       ======        ======       ======

     During 2005 and 2006, the Company recorded proceeds from sales of
     marketable securities in the amount of $ 664 and $ 226, respectively and
     related losses of $ 68 and $ 10, respectively, in financial income, net.


                                     F - 23

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 3:- MARKETABLE SECURITIES (CONT.)

     The amortized costs of available-for-sale debt securities at December 31,
     2006, by contractual maturities, are shown below:

                                                     UNREALIZED GAINS (LOSSES)
                                         ---------------------------------------------------
                                        AMORTIZED                                   ESTIMATED
                                          COST          GAINS         LOSSES        FAIR VALUE
                                         -------       -------        -------        -------

Due in one year or less                  $   928       $     -        $   (28)       $   900
Due between one year to five years         3,199            10            (59)         3,150
Due in more than five years                  605             -             (6)           599
                                         -------       -------        -------        -------

                                         $ 4,732       $    10        $   (93)       $ 4,649
                                         =======       =======        =======        =======

     The actual maturity dates may differ from the contractual maturities
     because debtors may have the right to call or prepay obligations without
     penalties.

     The unrealized losses in the Company's investments in available-for-sale
     marketable securities were caused by interest rate increases and
     devaluation of the Euro. It is expected that the securities would not be
     settled at a price less than the amortized cost of the Company's
     investment. Based on the partial recovery in the securities' market value
     after the balance sheet date and the ability and intent of the Company to
     hold these investments until recovery, the debentures were not considered
     to be other than temporarily impaired at December 31, 2006.

NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                            DECEMBER 31,
                                                        -------------------
                                                         2005         2006
                                                        ------       ------

Short-term deposits and other accounts receivable       $  968       $  890
Prepaid expenses                                           876          870
Government authorities                                     875          642
Employee loans                                              42           70
Related party receivables                                   71            -
                                                        ------       ------

                                                        $2,832       $2,472
                                                        ======       ======


                                     F - 24

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 5:- PROPERTY AND EQUIPMENT

                                                  DECEMBER 31,
                                             ---------------------
                                              2005           2006
                                             -------       -------
Cost:
  Buildings and leasehold improvements       $ 6,910       $ 6,868
  Computers and peripheral equipment          10,688        11,116
  Office furniture and equipment               3,106         3,056
  Motor vehicles                                 446           356
  Software for internal use                    2,083         2,236
                                             -------       -------

                                              23,233        23,632
                                             -------       -------
Accumulated depreciation:
  Buildings and leasehold improvements         2,282         2,682
  Computers and peripheral equipment          10,208        10,608
  Office furniture and equipment               2,334         2,317
  Motor vehicles                                 228           215
  Software for internal use                    1,226         1,396
                                             -------       -------

                                              16,278        17,218
                                             -------       -------

Depreciated cost                             $ 6,955       $ 6,414
                                             =======       =======

     Depreciation expenses amounted to $ 1,430, $ 1,492 and $ 1,428 for the
     years ended December 31, 2004, 2005 and 2006, respectively. As for charges,
     see Note 15c.

NOTE 6:- OTHER INTANGIBLE ASSETS

     a.   Intangible assets:

                                           DECEMBER 31,
                                      ---------------------
                                       2005           2006
                                      -------       -------
Original amounts:
  Capitalized software costs          $31,508       $32,672
  Acquired technology and other         1,828         2,196
                                      -------       -------

                                       33,336        34,868
                                      -------       -------
Accumulated amortization:
  Capitalized software costs           21,348        22,606
  Acquired technology and other           789         1,399
                                      -------       -------

                                       22,137        24,005
                                      -------       -------

Amortized cost                        $11,199       $10,863
                                      =======       =======

     b.   Amortization expenses amounted to $ 3,219, $ 3,647 and $ 4,036 for the
          years ended December 31, 2004, 2005 and 2006, respectively.


                                     F - 25

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 6:- OTHER INTANGIBLE ASSETS (CONT.)

     c.   Estimated acquired technology and other intangible assets amortization
          expenses for the years ended:

          DECEMBER 31,
          ------------

          2007                                                    $  119
          2008                                                       119
          2009 and thereafter                                         13

NOTE 7:- GOODWILL

     The changes in the carrying amount of goodwill for the two years ended
     December 31, 2006 are as follows:

Balance as of January 1, 2005                                          $ 21,684
  Foreign currency translation adjustments                                 (922)
  Acquisition of additional interest in subsidiaries (see Note 1)             -
                                                                       --------

Balance as of December 31, 2005                                          20,762
  Foreign currency translation adjustments                                  990
  Sale of Subsidiary's operations (see note 1d)                            (160)
  Acquisition of additional interest in subsidiary (see Note 1b)             32
                                                                       --------

Balance as of December 31, 2006                                        $ 21,624
                                                                       ========


                                     F - 26

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS

     a.   Classified by currency, linkage terms and interest rates, the credit
          and loans are as follows:

                                                    INTEREST RATE               DECEMBER 31,
                                                 -------------------        -------------------
                                                  2005         2006          2005         2006
                                                 ------       ------        ------       ------
                                                          %
                                                 -------------------
Short-term bank loans:
  In, or linked to, U.S. dollars                   6            -           $2,318       $    -
  In, or linked to, Euro                       3.75-5.68       5.5           1,405        3,184
  In other currencies                             1.63      2.13-6.75          341          975
                                                                            ------       ------

                                                                             4,064        4,159
                                                                            ------       ------
Short-term bank credit:
  In other currencies                               -           -                -          111
                                                                            ------       ------

                                                                                 -          111
                                                                            ------       ------

Short-term credit (1):
  In, or linked to, U.S. dollar                 5.6-6.6      5.6-6.6            66          185
                                                                            ------       ------

                                                                                66          185
                                                                            ------       ------
Current maturities of long-term loans                                           53           59
                                                                            ------       ------

                                                                            $4,183       $4,514
                                                                            ======       ======


          (1)  Financing arrangement in regard to the ERP system.

     b.   Contractual restrictions and financial covenants:

          For the purpose of obtaining credit and/or other bank services from
          banking institutions, the Company is committed towards the banking
          institutions as follow:

          1.   The Company is committed that the amount of cash and cash
               equivalents and short term investment will not be at any time
               below the amount of $ 6.5 million.

          2.   The Company is committed that at any time the rate of
               shareholders' equity of the Company will not drop below 45% of
               total balance sheet. In addition, shareholders equity will not
               drop at any time below the amount of $ 36 million.

          3.   The Company is committed that the total of its financial
               obligations (i.e., short and long terms from banking institutions
               or commitments due to debentures) will not exceed $7 million and
               10% of total balance sheet.

          4.   The Company is committed not to pledge under any form of general
               floating charge and for any purpose any of the Companies' assets
               and/or part of it in favor of any third party, without receiving
               the banking institutions' advance and written consent.


                                     F - 27

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:- SHORT-TERM CREDIT AND CURRENT MATURITIES OF LONG-TERM LOANS (CONT.)

          If the Company does not comply with all or part of the financial
          ratios, or upon the occurrence of certain events as specified in the
          agreement, the bank will be allowed to request the immediate repayment
          of the aforementioned credit.

          As of December 31, 2006, the Company was complied with some of the
          financial covenants and received a waiver from the banks for those
          financial covenants the Company did not comply with.

     c.   Credit line:

          As of December 31, 2006, the Company used $ 2.2 million of its credit
          facility with the First International Bank of Israel Ltd. and $ 3
          million with the Poalim Bank Ltd. As of December 31, 2006, the Company
          has an unutilized credit line of $ 0.3 million and $ 0.7 million in
          the First International Bank of Israel Ltd. and the Poalim Bank Ltd.,
          respectively.

NOTE 9:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE

                                            DECEMBER 31,
                                       -------       -------
                                        2005           2006
                                       -------       -------

Employees and payroll accruals         $ 4,019       $ 4,351
Accrued expenses                         2,287         2,109
Deferred revenues                        3,442         4,132
Government authorities and other           948           807
                                       -------       -------

                                       $10,696       $11,399
                                       =======       =======

NOTE 10:- LONG-TERM LOANS

     Long-term loans are composed as follows:

                                     INTEREST RATE             DECEMBER 31,
                                  ------------------        ------------------
                                  2005          2006        2005          2006
                                  -----        -----        -----        -----
                                          %
                                  ------------------

In U.S. dollar                  5.6-6.6       5.6-6.6       $  94        $  95
In Yens                           4.37          3.70           85          169
In euros                          9.35           -              6
In other currencies              10.97          14             33           28
Less - current maturities                                     (53)         (59)
                                                            -----        -----

                                                            $ 165        $ 233
                                                            =====        =====


                                     F - 28

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- TAXES ON INCOME

     a.   Tax benefits under the Law for the Encouragement of Capital
          Investments, 1959 (the "Law"):

          Seven expansion programs of the Company have been granted "Approved
          Enterprise" status under the Law. For these expansion programs, the
          Company has elected the alternative benefits track, waiving grants in
          return for tax exemptions. Pursuant thereto, the income of the Company
          derived from the following "Approved Enterprise" expansion programs is
          tax-exempt for the periods stated below and will be eligible for
          reduced tax rates thereafter (such reduced tax rates are dependent on
          the level of foreign investments in the Company), as described below.

          1.   The period of the benefits for the first program and its four
               extensions has already ended as of December 31, 2006.

          2.   The fifth program entitles the Company to a tax exemption for a
               four-year period ended December 31, 2000, and is subject to a
               reduced tax rate of 25% for an additional period of six years.
               The period of benefits for this program has not yet commenced.

          3.   In each of January 1998, November 1998 and November 2002, the
               Company received approvals for other expansions of its "Approved
               Enterprise" status, which entitles the Company to a two-year tax
               exemption period for each expansion and to a reduced tax rate of
               25% for an additional period of five to eight years. The period
               of benefits for those expansions has not yet commenced.

               The tax benefit periods provided by the fifth, sixth, seventh and
               eighth programs end at the earlier of 12 years from the
               commencement of production, or 14 years from receipt of the
               approval. As the Company currently has no taxable income, these
               benefits have not yet commenced.

               The benefits available to an enterprise are conditional upon the
               fulfillment of conditions stipulated in the Law and its
               regulations and the criteria set forth in the specific letters of
               approval. In the event that the Company does not meet these
               conditions, it would be required to refund the amount of tax
               benefits, with the addition of interest and linkage adjustment to
               the Israeli Consumer Price Index ("CPI"). In the opinion of the
               Company's management, the Company has been in full compliance
               with the conditions of the above programs through December 31,
               2006, and with respect to the first eight programs, has received
               written confirmation to this effect from the Investment Center.

               If dividends were to be distributed out of tax-exempt profits
               deriving from an "Approved Enterprise", the Company would be
               liable for corporate tax at a rate of 25%. The Company does not
               anticipate paying dividends in the foreseeable future.


                                     F - 29

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- TAXES ON INCOME (CONT.)

               Income from sources other than the "Approved Enterprise" during
               the benefit period will be subject to tax at the regular
               corporate tax rate (see Note 11d below).

               On April 1, 2005, an amendment to the Investment Law came into
               effect ("the Amendment") and has significantly changed the
               provisions of the Investment Law. The Amendment limits the scope
               of enterprises which may be approved by the Investment Center by
               setting criteria for the approval of a facility as an Approved
               Enterprise, such as provisions generally requiring that at least
               25% of the Approved Enterprise's income will be derived from
               export. Additionally, the Amendment enacted major changes in the
               manner in which tax benefits are awarded under the Investment Law
               so that companies no longer require Investment Center approval in
               order to qualify for tax benefits.

               As a result of the April 2005 amendment, tax-exempt income
               generated under the provisions of the new law will subject us to
               taxes upon distribution of the tax-exempt income to shareholders
               or liquidation of the company, and we may be required to record a
               deferred tax liability with respect to such tax-exempt income.

               However, the Investment Law provides that terms and benefits
               included in any certificate of approval already granted will
               remain subject to the provisions of the law as they were on the
               date of such approval. Therefore, the Company's existing Approved
               Enterprise will generally not be subject to the provisions of the
               Amendment. As a result of the amendment, tax-exempt income
               generated under the provisions of the new law, will subject the
               Company to taxes upon distribution or liquidation and the Company
               may be required to record deferred tax liability with respect to
               such tax-exempt income. As of December 31, 2006, the Company did
               not generate income under the provision of the new law.

     b.   Tax benefits under the Law for the Encouragement of Industry (Taxes),
          1969 ("the Encouragement Law"):

          The Company is an "industrial company", as defined by the
          Encouragement Law and, as such, is entitled to certain tax benefits,
          mainly accelerated depreciation of machinery and equipment, as
          prescribed by regulations published under the Inflationary Adjustments
          Law, the right to deduct public issuance expenses and patents and
          other intangible property rights for tax purposes, and the right to
          file, under specified conditions, a consolidated tax return with
          additional related Israeli "industrial companies".

     c.   Measurement of taxable income under the Income Tax (Inflationary
          Adjustments) Law, 1985:

          Results for tax purposes in Israel are measured and reflected in real
          terms in accordance with the change in the CPI. As explained in Note
          2b, the consolidated financial statements are presented in dollars.
          The differences between the change in the Israeli CPI and in the
          NIS/dollar exchange rate causes a difference between taxable income or
          loss and the income or loss before taxes reflected in the consolidated
          financial statements. In accordance with paragraph 9(f) of SFAS No.
          109, "Accounting for Income Taxes" ("SFAS No. 109"), the


                                     F - 30

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- TAXES ON INCOME (CONT.)

          Company has not provided deferred income taxes on this difference
          between the reporting currency and the tax bases of assets and
          liabilities.

     d.   Tax rates:

          Until December 31, 2003, the regular tax rate applicable to income of
          companies (which are not entitled to benefits due to "approved
          enterprise", as described above) was 36%. In June 2004, an amendment
          to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004
          was passed by the "Knesset" (Israeli parliament) and on July 25, 2005,
          another law was passed, the amendment to the Income Tax Ordinance (No.
          147) 2005, according to which the corporate tax rate is to be
          progressively reduced to the following tax rates: 2004 - 35%, 2005 -
          34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and
          thereafter - 25%.

     e.   The Company received final tax assessments for the 1997 to 2002 tax
          years. As of today, the Company filed an appeal with the court on one
          issue left open. The issue is being deliberated in the Tel - Aviv
          district court. The next hearing was set to September 2008. Since the
          Company's management, based on the opinion of its legal advisors,
          believes that the probability of an unfavorable outcome for the
          Company on this matter is remote, no provision was recorded in the
          financial statements in respect of this matter (all other items
          determined by the tax authorities as increasing the Company's taxable
          income, were offset against net operating loss carryforward). In the
          remote case that the tax authorities position will be accepted, the
          Company will lose most of its carryforward losses as of December 31,
          2002, and as a result, will have to pay approximately $ 700.

     f.   Net operating losses carryforward:

          Through December 31, 2005 and 2006, the Company and its Israeli
          subsidiaries had operating loss carryforwards of approximately $
          23,102 and $ 26,438, respectively, which can be carried forward and
          offset against taxable income in the future for an indefinite period.

          Through December 31, 2005 and 2006, Magic Software Enterprises Inc.,
          CoreTech Consulting Inc. and AAOD had federal net operating tax loss
          carryforward of approximately $ 14,497, and $ 11,747, respectively
          which can be carried forward and offset against taxable income for
          15-20 years and will expire from 2011 to 2026.

          The Company's subsidiaries in Europe and Japan had estimated total
          available tax loss carryforward of $ 10,847 and $ 1,119 respectively
          in 2005 and $ 15,695 and $ 2,358, in 2006 respectively, in 2006 to
          offset against future taxable income for 15-20 years and 5 years,
          respectively.


                                     F - 31

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- TAXES ON INCOME (CONT.)

     g.   Income (loss) before taxes on income:

                      YEAR ENDED DECEMBER 31,
               -------------------------------------
                2004           2005            2006
               -------        -------        -------

Domestic       $ 3,069        $(6,379)       $(2,414)
Foreign          1,145          2,476         (2,339)
               -------        -------        -------

               $ 4,214        $(3,903)       $(4,753)
               =======        =======        =======

     h.   Taxes on income:

          Taxes on income consist of the following:

                        YEAR ENDED DECEMBER 31,
                      --------------------------
                      2004       2005       2006
                      ----       ----       ----
Current:
   Domestic           $ 99       $ 63       $  1
   Foreign             182        428        324
                      ----       ----       ----

Taxes on income       $281       $491       $325
                      ====       ====       ====

     i.   Deferred income taxes:

          Deferred income taxes reflect the net tax effects of temporary
          differences between the carrying amounts of assets and liabilities for
          financial reporting purposes and the amounts used for income tax
          purposes. Significant components of the Company and its subsidiaries
          deferred tax assets are as follows:

                                             DECEMBER 31,
                                      ------------------------
                                        2005            2006
                                      --------        --------

Net Operating Loss carryforward       $ 15,938        $ 16,598
Allowances and reserves                    812             829
                                      --------        --------

                                        16,750          17,427
Less: valuation allowance              (16,750)        (17,427)
                                      --------        --------

Net deferred tax assets               $      -        $      -
                                      ========        ========

          The Company and its subsidiaries provided a 100% valuation allowance
          against the deferred tax assets in respect of its tax losses
          carryforward and other temporary differences due to uncertainty
          concerning its ability to realize these deferred tax assets in the
          foreseeable future.


                                     F - 32

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- TAXES ON INCOME (CONT.)

     j.   Reconciliation of the theoretical tax expense to the actual tax
          expense:

          Reconciliation between the theoretical tax expense, assuming all
          income is taxed at the statutory rate applicable to the income of
          companies in Israel and the actual tax expenses is as follows:

                                                                     YEAR ENDED DECEMBER 31,
                                                             ----------------------------------------
                                                              2004             2005           2006
                                                             -------         -------         -------
Income (loss) before taxes on income,
  as reported in the consolidated
  statements of operations                                   $ 4,214         $(3,903)        $(4,753)
                                                             =======         =======         =======

Statutory tax rate                                                35%             34%             31%
                                                             =======         =======         =======

Theoretical tax expense (benefit)                            $ 1,475         $(1,327)        $(1,473)


Utilization of tax losses carryforward for which
  a valuation allowance was provided                          (1,544)         (1,121)           (292)
Deferred taxes assets for which valuation
  allowance was provided                                           -           2,647           1,930
Non-deductible expenses and other                                113             120              63
Tax in respect of previous years                                 281             138             114
Tax adjustment in respect of inflation in Israel
  and other                                                      (44)             34             (17)
                                                             -------         -------         -------

Actual tax expense                                           $   281         $   491         $   325
                                                             =======         =======         =======


                                     F - 33

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 12:- SHAREHOLDERS' EQUITY

     a.   The Ordinary shares of the Company are traded on both the Nasdaq
          National Market in the United States and the Tel-Aviv Stock Exchange
          in Israel.

     b.   Treasury shares

          The Company's Board of Directors resolved to authorize and empower the
          Company to repurchase its shares from time to time on the open market.
          Accordingly, through the end of 2006, the Company repurchased
          1,275,368 of its shares for an aggregate amount of $6,772.

     c.   Stock Option Plan:

          Under the Company's 1991 and 2000, Stock Option Plans ("the plans"),
          as amended, options may be granted to employees, officers, directors
          and consultants of the Company and its subsidiaries.

          Pursuant to the plans, the Company reserved for issuance 6,750,000 and
          4,600,000 Ordinary shares, respectively. As of December 31, 2006, an
          aggregate of 2,258,753 Ordinary shares of the Company are still
          available for future grant.

          Each option granted under the plans is exercisable until the earlier
          of 10 years from the date of the grant of the option or the expiration
          dates of the respective option plans. The 1991 plan expired on July
          31, 2001 and the 2000 plan will expire on November 5, 2010. The
          exercise price of the options granted under the plans may not be less
          than 65% of the market price of such shares on the grant date of the
          award. The Company grants options to its employees at an exercise
          price that is equal to the share market price at the grant date. The
          options vest primarily over three years. Any option, which is
          forfeited or canceled before expiration, becomes available for future
          grants.

          On December 29, 2005, the Company has adopted an amendment to 2000
          Employee Stock Option Plan to provide for the issuance hereunder of an
          additional 600,000 Ordinary shares.

          As of December 29, 2005, all of the unvested out-of-the-money options,
          which amounted to 611,517, with an average exercise price of $ 3.46
          per share with related vesting period from January 1, 2006 through
          March 2009 had been accelerated. The shares which may be purchased by
          exercise of the accelerated options shall be subject to a holding
          period according to which the employees shall only be entitled to sell
          a monthly fraction of such numbers of shares (1/36 per month).

          The Company's decision to accelerate the vesting of those options and
          to grant fully vested options was based primarily upon the issuance of
          SFAS No. 123R, which requires the Company to treat all unvested stock
          options as compensation expense effective January 1, 2006. The Company
          believes that the acceleration of vesting of those options will enable
          the Company to avoid recognizing stock-based compensation expense
          associated with these options in future periods. Additional purposes
          of the fully vested grant and for the acceleration were to make the
          options more attractive to the recipients, and to avoid discrimination
          between groups of option holders, respectively.


                                     F - 34

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

          The acceleration had no impact on the Company's statement of
          operations, however the impact of vesting accelerating on proforma
          stock-based compensation required to be disclosed in the financial
          statement footnotes under the provisions of SFAS No. 123, was to
          increase such disclosed compensation cost by approximately $ 1,021.

          A summary of the Company's stock option activity and related
          information for the year ended December 31, 2006, is as follows:

                                                                  WEIGHTED-
                                                                   AVERAGE
                                                      WEIGHTED-   REMAINING
                                                       AVERAGE   CONTRACTUAL    AGGREGATE
                                       NUMBER OF       EXERCISE     TERM        INTRINSIC
                                        OPTIONS         PRICE     (IN YEARS)      VALUE
                                        -------         -----     ----------      -----

Outstanding at January 1, 2006         3,061,216        $2.62
Granted                                   62,000        $1.69
Exercised                               (253,346)       $1.11
Forfeited                               (517,238)       $3.41
                                      ----------

Outstanding at December 31,2006        2,352,632        $2.52       6.67       $    1,405
                                      ==========        =====       ====       ==========

Vested and expected to vest            2,336,982        $3.20       6.65       $    1,396
                                      ==========

Exercisable at December 31,2006        2,290,032        $5.24       6.60       $    1,370
                                      ==========        =====       ====       ==========

          The weighted-average grant-date fair value of options granted during
          the twelve months ended December 31, 2006 was $ 0.98. The aggregate
          intrinsic value in the table above represents the total intrinsic
          value (the difference between the fair market value of the Company
          ordinary shares on December 31, 2006 and the exercise price,
          multiplied by the number of in-the-money options) that would have been
          received by the option holders had all option holders exercised their
          options on December 31, 2006. This amount is changed based on the fair
          market value of the Company's shares. Total intrinsic value of options
          exercised for the twelve months ended December 31, 2006 was $ 161. As
          of December 31, 2006, there was $ 7,052 of total unrecognized
          compensation cost related to non-vested share-based compensation
          arrangements granted under the Company's stock option plans. That cost
          is expected to be recognized over a period of approximately 3 years.
          Total grant-date fair value of vested options for the twelve months
          ended December 31, 2006 $ 0 as a result of the acceleration in
          December 29, 2005.


                                     F - 35

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

          The following table is a summary of the Company's stock option
          activity during 2004, 2005 and 2006:

                                                  YEAR ENDED              YEAR ENDED                YEAR ENDED
                                               DECEMBER 31, 2004       DECEMBER 31, 2005        DECEMBER 31, 2006
                                             ----------------------  ----------------------  ----------------------
                                                          WEIGHTED                WEIGHTED               WEIGHTED
                                                          AVERAGE                 AVERAGE                 AVERAGE
                                               NUMBER     EXERCISE     NUMBER     EXERCISE     NUMBER    EXERCISE
                                             OF OPTIONS    PRICE     OF OPTIONS    PRICE     OF OPTIONS    PRICE
                                             ----------  ----------  ----------  ----------  ----------  ----------

Outstanding at the beginning
   of the year                                3,346,406  $     2.26   2,513,237  $     2.95   3,061,216  $     2.62
Granted                                         406,601  $     4.84     820,028  $     1.70      62,000  $     1.69
Exercised                                      (973,551) $     1.28     (80,604) $     1.04    (153,346) $     1.11

Forfeited                                      (266,219) $      3.6    (191,445) $     3.54    (617,238) $     3.41
                                             ----------              ----------              ----------
Outstanding at the end of
  the year                                    2,513,237  $     2.95   3,061,216  $     2.62   2,352,632  $     2.52
                                             ==========  ==========  ==========  ==========  ==========  ==========

Exercisable at the end of
  the year                                    1,423,970  $     2.28   3,061,216  $     2.62   2,290,632  $     2.54
                                             ==========  ==========  ==========  ==========  ==========  ==========

Weighted average fair value of
  options granted during the year                        $      2.2              $      1.1              $      1.7
                                                         ==========              ==========              ==========

          The options outstanding as of December 31, 2006, have been separated
          into ranges of exercise price categories, as follows:

                       OPTIONS         WEIGHTED                         OPTIONS        WEIGHTED
                      OUTSTANDING      AVERAGE           WEIGHTED     EXERCISABLE       AVERAGE
                         AS OF         REMAINING         AVERAGE         AS OF       EXERCISE PRICE
                      DECEMBER 31,  CONTRACTUAL LIFE     EXERCISE     DECEMBER 31,   OF EXERCISABLE
     EXERCISE PRICE      2006           (YEARS)            PRICE          2006          OPTIONS
        ---------      ---------       ---------         ---------     ---------       ---------

          0-1            214,355               6         $    0.83       214,355       $    0.83
          1-2          1,253,793               7         $    1.37     1,191,793       $    1.36
          2-3             15,600               3         $    2.48        15,600       $    2.48
          3-4            466,333               7         $    3.82       466,333       $    3.82
          4-5            230,840               7         $    4.13       230,840       $    4.13
          5-6            135,500               7         $    5.95       135,500       $    5.95
          6-7                711               3         $    6.14           711       $    6.14
         10-11            26,500               3         $   10.16        26,500       $   10.16
         18-19             9,000               3         $   18.79         9,000       $   18.79
                       ---------                                       ---------

                       2,352,632               7         $    2.52     2,290,632       $    2.54
                       =========       =========         =========     =========       =========

          The fair value on grant date of options which became vested during the
          year ended December 31, 2006 amounted to $ 0 as there was no vesting
          of options during the year.

     d.   Warrants to service providers:

          In April 2003, the Company issued 110,000 warrants as a consideration
          of the purchase of its distribution activity in Switzerland.


                                     F - 36

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

          The warrants were exercisable into the Company's Ordinary shares for a
          period of four years, at an exercise price of $ 0.6565 per share.
          These warrants were exercised in April 2004.

          During the year ended December 31, 2006, 50,000 warrants were granted
          to Peter Gyenes, a consultant of the Company. Those warrants were not
          exercised or forfeited.

          The fair value of warrants which became vested during the year ended
          December 31, 2006 amounted to $ 24 thousand.

          The fair value for the warrants to service providers was estimated on
          the date of grant using Black-Scholes option pricing model, with the
          following weighted-average assumptions for the year ended December 31,
          2006 weighted average volatility of 58.3% risk-free interest rates of
          4.7% dividend yields of 0% and a weighted average life of the options
          of 3 years.

     e.   Dividends:

          The Company does not intend to pay cash dividends in the foreseeable
          future.

     f.   Accumulated other comprehensive loss

                                                YEAR ENDED DECEMBER 31,
                                                ----------------------
                                                  2005           2006
                                                -------        -------

Accumulated unrealized loss on
  available-for-sale securities                    (240)           (83)
Accumulated foreign currency
  translation adjustments                        (1,274)        (1,254)
                                                -------        -------

Total other comprehensive loss                  $(1,514)       $(1,337)
                                                =======        =======

                                     F - 37

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- GEOGRAPHIC INFORMATION

     Summary information about geographic areas:

     The Company manages its business on the basis of one reportable segment
     (see Note 1 for a brief description of the Company's business). The
     Company's business is divided into the following geographic areas: Israel,
     Europe, the U.S.A., Japan and other regions. Total revenues are attributed
     to geographic areas based on the location of the customers.

     This data is presented in accordance with SFAS No. 131, "Disclosures about
     Segments of an Enterprise and Related Information" ("SFAS No. 131").

     The following table presents total revenues classified according to
     geographical destination for the years ended December 31, 2004, 2005 and
     2006:

                   YEAR ENDED DECEMBER 31,
             -----------------------------------
              2004           2005         2006
             -------       -------       -------

Israel       $ 3,354       $ 4,013       $ 4,307
Europe        25,698        23,186        21,887
U.S.A.        21,090        20,435        23,236
Japan         11,450        10,107        10,223
Other          3,575         3,249         2,072
             -------       -------       -------

             $65,167       $60,990       $61,725
             =======       =======       =======

     The Company's long-lived assets are as follows:

                 DECEMBER 31,
             -------------------
              2005         2006
             ------       ------

Israel       $5,239       $4,990
Europe          751          679
U.S.A.          561          467
Japan           280          313
Other           124          105
             ------       ------

             $6,955       $6,554
             ======       ======


                                     F - 38

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA

     a.   Research and development costs:

                                               YEAR ENDED DECEMBER 31,
                                        -------------------------------------
                                          2004          2005           2006
                                        -------        -------        -------

Total costs                             $ 7,317        $ 7,642        $ 7,477
Less - capitalized software costs        (3,472)        (3,909)        (3,535)
                                        -------        -------        -------

Research and development, net           $ 3,845        $ 3,733        $ 3,942
                                        =======        =======        =======

     b.   Financial income (expenses), net:

Interest and bank charges               $  (157)       $  (117)       $   (49)
Gain (loss) arising from foreign
  currency transactions                   1,069           (694)           459
                                        -------        -------        -------

Financial income (expenses),net         $   912        $  (811)       $   410
                                        =======        =======        =======

NOTE 15:- COMMITMENTS AND CONTINGENTIES

     a.   Lease commitments:

          Certain of the facilities, motor vehicles and equipment of the Company
          and its subsidiaries are rented under long-term operating lease
          agreements. Future minimum lease commitments under non-cancelable
          operating leases as of December 31, 2006, are as follows:

          2007                      2,670
          2008                      2,298
          2009                      1,751
          2010 and thereafter       1,064
                                    -----

                                    7,783
                                    =====

          Rent expenses for the years ended December 31, 2004, 2005 and 2006,
          were approximately $ 1,844, $ 1490 and $ 1,585, respectively.

     b.   Guarantees:

          The Company has provided two of its clients with bank guarantees
          totaling $ 41, which is linked to the NIS and valid through July 2007.


                                     F - 39

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- COMMITMENTS AND CONTINGENCIES (CONT.)

     c.   Charges:

          As collateral for a subsidiary's line of credit, a charge was recorded
          on the subsidiary's trade receivables.

          In respect of a lease agreement, the Company placed a lien on the
          leased computer equipment.

     d.   Legal proceedings:

          Lawsuits have been lodged against the Company in the ordinary course
          of business in insignificant amounts. The Company intends to defend
          itself vigorously against those lawsuits. Management cannot predict
          the outcome of the lawsuits nor can they make any estimate of the
          amount of damages; therefore, no provision has been made for the
          lawsuits.

          1.   In June 2004, an Israeli Company has filed a lawsuit against the
               Company in the Tel-Aviv District Court in the amount of NIS 8
               million (approximately $ 1,840), with a possibility to increase
               the lawsuit's amount to approximately NIS 17 million
               (approximately $ 3,900), for recovery of damages caused to
               plaintiff by the Company's failure to integrate a software
               system. During the last three years, the parties tried to settle
               the case with an external mediator. This attempt failed recently
               and the parties returned to the court to proceed with the court
               proceedings. Preliminary court proceedings have commenced, such
               as disclosure of documents and questionnaires. As of December 31,
               2006, the Company's management, based on its legal advisors
               opinion, cannot predict the outcome of the lawsuit nor can they
               make any estimate of the amount of damages; therefore, no
               provision has been made for the lawsuit.

          2.   In February 2006, a client of the Company's subsidiary, CarPro
               Systems Ltd., has filed in the Magistrate's court in Tel Aviv,
               Israel, a lawsuit against the subsidiary, claiming an alleged
               breach of the agreement between the parties, in the amount of $
               257. The claim had been moved to arbitration, which will commence
               in August 2007. The lawsuit is in its initial stages, therefore
               the Company's management, based on its legal advisors opinion,
               cannot predict the outcome of the lawsuit nor can they make any
               estimate of the amount of damages; therefore, no provision has
               been made for the lawsuit.

          3.   In May 2005, a client of the Company's subsidiary, Magic Software
               Enterprises (Israel) Ltd., filed a lawsuit against the subsidiary
               claiming an alleged breach of the agreement between the parties.
               The plaintiff is seeking damages in the amount of $ 336. The
               claim was moved to arbitration. The Company's management, due to
               the preliminary stage of this litigation and based on its legal
               advisors opinion, cannot predict the outcome of the lawsuit nor
               can they make any estimate of the amount of damages; therefore,
               no provision has been made for the lawsuit.


                                     F - 40

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- COMMITMENTS AND CONTINGENCIES (CONT.)

          4.   In March 2006, a client of the Company's subsidiary, Magic
               Software Enterprises France, filed a lawsuit against the
               subsidiary in the commercial court in Paris claiming an alleged
               breach of the agreement between the parties. The plaintiff is
               seeking damages in the amount of (euro) 548,000 (approximately $
               708). The Company's management, due to the preliminary stage of
               this litigation and based on its legal advisors opinion, cannot
               predict the outcome of the lawsuit nor can they make any estimate
               of the amount of damages; therefore, no provision has been made
               for the lawsuit.

     e.   Royalty commitments:

          1.   The Government of Israel, through the Fund for the Encouragement
               of Marketing Activities ("the Fund"), awarded the Company grants
               for participation in its foreign marketing expenses. The Company
               received an aggregate amount of grants of $ 1,526 for the years
               up to and including 2005. The Company is committed to pay
               royalties at the rate of 3% of the increase in exports, up to the
               amount of the grants. As of December 31, 2006, the remaining
               contingent obligation of the Company amounted to $ 442.

          2.   The Company is committed to pay royalties to Enformia Software
               Ltd. ("Enformia") in the amount of 40% regarding any sale of
               products related to the IP purchased from Enformia and to comply
               with all of the terms required by the Office of the Chief
               Scientist ("OCS") in connection with its grants to Enformia.

               As of December 31, 2005 and 2006, the aggregate contingent
               liability to the OCS, in regard to Enformia products, amounted to
               $ 52 and $ 42, respectively. Through December 31, 2005 and 2006,
               the Company has paid and accrued royalties to Enformia, in regard
               to sales of its product, in the amount of $ 114 and $ 84,
               respectively.

          3.   The Company is committed to pay royalties of 1.75% of gross sales
               of the Hermes application, including license fees and all
               services fees for a period of 5 years until end of 2008. Through
               December 31, 2006, the Company has paid and accrued royalties to
               Hermes, in regard to sales of the product, in the amount of $9
               (see Note 1e).


                                     F - 41

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 16:- NET EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted net
     earnings (loss) per share:

                                                                     YEAR ENDED DECEMBER 31,
                                                            -------------------------------------------
                                                              2004             2005              2006
                                                            --------       ------------        --------

Numerator for basic and diluted earnings (loss)
   per share - net income (loss)
   available to shareholders                                $  4,090       $     (4,607)       $ (5,006)
                                                            ========       ============        ========

Weighted average shares outstanding:

Denominator for basic net earnings (loss) per share           31,029             31,124          31,184
Effect of dilutive securities                                  1,397               *) -            *) -
                                                            --------       ------------        --------

Denominator for diluted net earnings (loss) per share         32,426             31,124          31,184
                                                            ========       ============        ========

Basic and diluted net earnings (loss) per share             $   0.13       $      (0.15)       $  (0.16)
                                                            ========       ============        ========

     *)   Anti dilutive.

NOTE 17:- RELATED PARTIES

     In July 2005, the Company signed a memorandum of understanding with a
     related party, to implement the ERP system in a total consideration of $
     670. In 2005 and 2006, the Company performed only part of the project in
     the amount of $ 235 and $ 263, respectively.

NOTE 18:- SUBSEQUENT EVENTS (NOT AUDITED)

     In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
     Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109"
     ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing
     the minimum recognition threshold a tax position is required to meet before
     being recognized in the financial statements. FIN 48 utilizes a two-step
     approach for evaluating tax positions. Recognition (step one) occurs when
     an enterprise concludes that a tax position, based solely on its technical
     merits, is more-likely-than-not to be sustained upon examination.
     Measurement (step two) is only addressed if step one has been satisfied
     (i.e., the position is more-likely-than-not to be sustained). Under step
     two, the tax benefit is measured as the largest amount of benefit,
     determined on a cumulative probability basis that is more-likely-than-not
     to be realized upon ultimate settlement.


                                     F - 42

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- SUBSEQUENT EVENTS (NOT AUDITED) (CONT.)

     FIN 48 applies to all tax positions related to income taxes subject to the
     Financial Accounting Standard Board Statement No. 109, "Accounting for
     income taxes" ("FAS 109"). This includes tax positions considered to be
     "routine" as well as those with a high degree of uncertainty.

     FIN 48 has expanded disclosure requirements, which include a tabular roll
     forward of the beginning and ending aggregate unrecognized tax benefits as
     well as specific detail related to tax uncertainties for which it is
     reasonably possible the amount of unrecognized tax benefit will
     significantly increase or decrease within twelve months. These disclosures
     are required at each annual reporting period unless a significant change
     occurs in an interim period.

     FIN 48 is effective for fiscal years beginning after December 15, 2006. The
     cumulative effect of applying FIN 48 will be reported as an adjustment to
     the opening balance of retained earnings. The Company does not expect that
     the adoption of FIN 48 will have a significant impact on the Company's
     financial position and results of operations.

                                     F - 43

                                                 MAGIC SOFTWARE ENTERPRISES LTD.
                                                            AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------

                      DETAILS OF SUBSIDIARIES AND AFFILIATE

Details of the percentage of control of the share capital and voting rights of
subsidiaries and an affiliated company as of December 31, 2006:

                                                      PERCENTAGE OF           PLACE OF
 NAME OF COMPANY                                  OWNERSHIP AND CONTROL     INCORPORATION
 ---------------                                  ---------------------     -------------
                                                            %
                                                  ---------------------

 Magic Software Japan K.K.                                 100                   Japan
 Magic Software Enterprises Inc.                           100                   U.S.A.
 Magic Software Enterprises (UK) Ltd.                      100                   U.K.
 Hermes Logistics Technologies Limited                     100                   U.K.
 Magic Software Enterprises Spain Ltd.                     100                   Spain
 Coretech Consulting Group Inc.                            100                   U.S.A
 Coretech Consulting Group LLC                             100                   U.S.A
 MSE Holdings, INC                                         100                   U.S.A
 Magic Software Enterprises (Israel) Ltd.                  100                   Israel
 Magic Software Enterprises Italy S.r.l.                   100                   Italy
 Magic Software Enterprises Netherlands B.V.               100                   Netherlands
 Magic Software Enterprises France                         100                   France
 Magic Beheer B.V.                                         100                   Netherlands
 Magic Benelux B.V.                                        100                   Netherlands
 Magic Software Enterprises GMBH                           100                   Germany
 Magic Software Enterprises India Pvt. Ltd.                100                   India
 Onyx Magyarorszag Szsoftverhaz*)                          100                   Hungary
 CarPro Systems Ltd. *)                                     90.48                Israel
 Advanced Answers On Demand Holding Corp. *)               100                   U.S.A
 Nextstep Infotech Prt. Ltd.                                40                   India

*)   See Note 1.

                                     F - 44

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                     MAGIC SOFTWARE ENTERPRISES (UK) LIMITED

      We have audited the accompanying balance sheets of MAGIC SOFTWARE
ENTERPRISES (UK) LIMITED (the "Company") as of December 31, 2005 and 2006, and
the related statements of operations, changes in shareholders' equity for each
of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

      In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Company and at December 31, 2005 and 2006, and the related results of their
operations for each of the three years in, the period ended December 31, 2006,
in conformity with U.S. generally accepted accounting principles.

/s/ LEVY COHEN & CO.
--------------------------
LEVY COHEN & CO.
Registered Auditors

                                                               8th February 2007

                                     F - 45

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                      HERMES LOGISTICS TECHNOLOGIES LIMITED

      We have audited the accompanying balance sheets of HERMES LOGISTICS
TECHNOLOGIES LIMITED (the "Company") as of December 31, 2005 and 2006, and the
related statements of operations, changes in shareholders' equity for each of
the three years in the period ended December 31, 2006. These financial
statements are the responsibility of Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

      In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Company and at December 31, 2005 and 2006, and the related results of their
operations for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.

/s/ LEVY COHEN & CO.
-----------------------------
LEVY COHEN & CO.
Registered Auditors

                                                               8th February 2007

                                     F - 46

GRANT THORNTON ASG                                         [GRANT THORNTON LOGO]
Certified Public Accountants

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Magic Software Japan K. K.

We have audited the accompanying balance sheet of Magic Software Japan K. K.
(the "Company") as of December 31, 2004, and the related statements of income
and accumulated deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magic Software Japan K. K. as
of December 31, 2004, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.

                                                          /s/ Grant Thornton ASG

Tokyo, Japan
January 21, 2005

                                     F - 47

                                  [K.D.A. LOGO]

                              KDA AUDIT CORPORATION

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                  TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

                            MAGIC SOFTWARE JAPAN K.K.

      We have audited the accompanying balance sheet of Magic Software Japan
K.K. (the "Company") as of December 31, 2006, and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2006, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

Tokyo, Japan
January 26, 2007                            /s/ KDA Audit Corporation
                                         ---------------------------------------
                                                  KDA Audit Corporation
                                         (A Member of Baker Tilly International)

                                     F - 48

                          MOCK & PARTNERS INTERNATIONAL
                               REGISTERACCOUNTANTS

                                AUDITORS' REPORT

INTRODUCTION

We have audited the financial statements of Magic Beheer B.V., for the period
until December 31st, 2006. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

SCOPE

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

OPINION

In our opinion, the financial statements give a true and fair view of the
financial position of the company as at December 31st, 2006 and of the result
for the year then ended in accordance with accounting principles generally
accepted in the United States of America.

Amsterdam, February 27th 2007

Mock & Partners International

/s/ H.J.S. Mock
Drs. H.J.S. Mock RA

Rapenburgerstreat 109, 1011 VL Amsterdam. Tel: 020 6381881, Fax: 020 6272624

                                     F - 49

                         REPORT OF INDEPENDENT AUDITORS

             TO THE SHAREHOLDERS OF MAGIC SOFTWARE ENTERPRISES LTD.

                   MAGIC (ONYX) MAGYARORSZAG SZOFTVERHAZ KFT.

      We have audited the accompanying consolidated balance sheets of Magic
(Onyx) Magyarorszag Szoftverhaz Kft. (the "Company") as of December 31, 2005 and
2006, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

      In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 2005 and 2006,
and the related consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.

Budapest, 25 February, 2007

                                                              /s/ Maria Negyessy

                                                                Maria Negyessy
                                                                 Reg. Auditors

                                     F - 50

                         [STUDIO NASSINI ASSOCIATI LOGO]

                              DOTTORI COMMERCIALISTI

   Damiano Nassini, Giovanni Nulli, Federico Pozzi, Alessandro Masetti Zannini

                                                     Brescia, 21st February 2007

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                      MAGIC SOFTWARE ENTERPRISES ITALY SRL

      We have audited the accompanying consolidated balance sheets of Magic
Software Enterprises Italy Srl (the "Company") as of December 31, 2005 and 2006,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

      In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries at December 31, 2005 and 2006, and
the related consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.

                                                            Yours Truly

                                                          /s/ Federico Pozzi

                                                             Federico Pozzi



25135 BRESCIA, ITALY VIA BROZZONI, 9 TEL. +39.30.223262 R.A. FAX +39.30.224054
       E-MAIL: INFO@STUDIONASSINI.IT WEB SITE: HTTP://WWW.STUDIONASSINI.IT

                                   [TIAG LOGO]

   ARGENTINA, AUSTRALIA, AUSTRIA, BELGIUM, CANADA (BRITHIS COLUMBIA, ONTARIO,
 QUEBEC), CHINA, CYPRUS, EGYPT, ENGLAND, FRANCE, GERMANY, GUATEMALA, HONG KONG,
 INDIA, IRELAND, JAPAN, KENYA, LEBANON, LUXENBOURG, MALAYSIA, MALTA, MAURITIUS,
MEXICO, NETHERLANDS, PAKISTAN, POLAND, SCOTLAND, SINGAPORE, SPAIN, SWITZERLAND,
TURKEY, USA (ALABAMA, ARIZONA, CALIFORNIA, ILLINOIS, NEW JERSEY, NEW YORK, NORTH
           CAROLINA, OKLAHOMA, PENNSYLVANIA, TEXAS, UTAH, WASHINGTON,)

                              CF.EP.1VA 01957960170

12

                               S I G N A T U R E S

     The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

                                       MAGIC SOFTWARE ENTERPRISES LTD.


                                       By: /s/ David Assia
                                       -------------------
                                       Name:  David Assia
                                       Title: Chairman of the Board of Directors

Dated: September 24, 2007


                                       6