---

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(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, 2005

OR

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

For the transition period from _________ to ________

OR

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

Date of event requiring this shell company report _________

Commission File Number:
0-12332

SCAILEX CORPORATION LTD. (Exact name of Registrant as
specified in its charter and translation of Registrants name into English)

Israel (Jurisdiction of
incorporation or organization)

3 Azrieli Center, Triangular Tower, 43rdFloor, Tel Aviv 67023, Israel (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, NIS 0.12
nominal (par) value per share (Title of Class)

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

Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of December 31, 2005:

# 38,066,363 Ordinary
Shares, NIS 0.12 nominal (par) value per share

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

o Yes   x No

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.

o Yes   x No

Note  Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
sections.



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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.

x Yes    o 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.

Large Accelerated Filer o Accelerated Filer    x Non-Accelerated Filer    o

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

Item 17 o 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).

x Yes    o No

2

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# TABLE OF CONTENTS

|                                                              |                                                            | Page
|------------------------------------------------------------- | ---------------------------------------------------------- | ----
|
|
|
|
|INTRODUCTION                                                  | 5                                                         
|                                                             
|PART I                                                        | 6                                                         
|Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 6                                                         
|                                                             
|Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 6                                                         
|                                                             
|Item 3. KEY INFORMATION                                       | 6                                                         
|                                                              | A. Selected Financial Data                                 | 6   
|                                                              | B. Capitalization and Indebtedness                         | 8   
|                                                              | C. Reasons for the Offer and Use of Proceeds               | 8   
|                                                              | D. Risk Factors                                            | 8   
|                                                             
|Item 4. INFORMATION ON THE COMPANY                            | 14                                                        
|                                                              | A. History and Development of the Company                  | 14  
|                                                              | B. Business Overview                                       | 16  
|                                                              | C. Organizational Structure                                | 20  
|                                                              | D. Property, Plants and Equipment                          | 20  
|                                                             
|Item 4A. UNRESOLVED STAFF COMMENTS                            | 21                                                        
|                                                             
|Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 21                                                        
|                                                              | A. Operating Results                                       | 22  
|                                                              | B. Liquidity and Capital Resources                         | 29  
|                                                              | C. Research and Development, Patents and Licenses          | 34  
|                                                              | D. Trend Information                                       | 34  
|                                                              | E. Off-Balance Sheet Arrangements                          | 34  
|                                                              | F. Tabular Disclosure of Contractual Obligations           | 34  
|                                                             
|Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 35                                                        
|                                                              | A. Directors and Senior Management                         | 35  
|                                                              | B. Compensation                                            | 38  
|                                                              | C. Board Practices                                         | 39  
|                                                              | D. Employees                                               | 45  
|                                                              | E. Share Ownership                                         | 45  
|                                                             
|Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSM    | 47                                                        
|                                                              | A. Major Shareholders                                      | 47  
|                                                              | B. Related Party Transactions                              | 50  
|                                                              | C. Interests of Expert and Counsel                         | 54  
|                                                             
|Item 8. FINANCIAL INFORMATION                                 | 54                                                        
|                                                              | A. Consolidated Statements and Other Financial Information | 54  
|                                                              | B. Significant Changes                                     | 54  
|                                                             
|Item 9. THE OFFER AND LISTING                                 | 55                                                        
|                                                              | A. Offer and Listing Details                               | 55  
|                                                              | B. Plan of Distribution                                    | 56  
|                                                              | C. Markets                                                 | 56  
|                                                              | D. Selling Shareholders                                    | 56  
|                                                              | E. Dilution                                                | 56  
|                                                              | F. Expenses of the Issue                                   | 56  

3

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|                                                                                       |                                           |   
|-------------------------------------------------------------------------------------- | ----------------------------------------- | --
|
|
|
|
|Item 10.  ADDITIONAL INFORMATION                                                       | 56                                       
|                                                                                       | A. Share Capital                          | 56
|                                                                                       | B. Memorandum and Articles of Association | 56
|                                                                                       | C. Material Contracts                     | 60
|                                                                                       | D. Exchange Controls                      | 62
|                                                                                       | E. Taxation                               | 62
|                                                                                       | F. Dividends and Paying Agents            | 72
|                                                                                       | G. Statement by Experts                   | 72
|                                                                                       | H. Documents on Display                   | 72
|                                                                                       | I. Subsidiary Information                 | 72
|                                                                                      
|Item 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 73                                       
|                                                                                      
|Item 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 74                                       
|                                                                                      
|PART II                                                                                | 74                                       
|                                                                                      
|Item 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 74                                       
|                                                                                      
|Item 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 74                                       
|                                                                                      
|Item 15. CONTROLS AND PROCEDURES                                                       | 74                                       
|                                                                                      
|Item 16A.  Audit Committee Financial Expert                                            | 74                                       
|Item 16B.  Code of Ethics                                                              | 75                                       
|Item 16C.  Principal Accountant Fees and Services                                      | 75                                       
|Item 16D. Exemptions From the Listing Standards for Audit Committees                   | 75                                       
|Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 76                                       
|                                                                                      
|PART III                                                                               | 76                                       
|                                                                                      
|Item 17.  FINANCIAL STATEMENTS                                                         | 76                                       
|                                                                                      
|Item 18.  FINANCIAL STATEMENTS                                                         | 76                                       
|                                                                                      
|Item 19.  EXHIBITS                                                                     | 77                                       
|                                                                                      
|SIGNATURES                                                                             |                                          

4

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# INTRODUCTION

Unless indicated otherwise by the
context, all references in this Annual Report to:

| | we,
us, our, Scailex, or the Company are to Scailex Corporation Ltd. (formerly
known as Scitex Corporation Ltd.) and its wholly owned and/or majority owned
subsidiaries;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | dollars
or $ are to United States dollars;
|- | ----------------------------------------------

| | NIS
or Shekel are to New Israel Shekels;
|- | --------------------------------------------

| | the
Companies Law or the Israeli Companies Law are to the Israeli Companies Law,
5759-1999, as amended;
|- | -----------------------------------------------------------------------------------------------------------

| | the
SEC are to the United States Securities and Exchange Commission;
|- | ----------------------------------------------------------------------

| | Discount
and CEI are to Discount Investment Corporation Ltd. and Clal Electronics
Industries Ltd., respectively, our principal shareholders;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Clal
are to Clal Industries and Investments Ltd., the parent of CEI;
|- | ----------------------------------------------------------------------

| | Scailex
Vision and Scailex Vision International are to Scailex Vision (Tel-Aviv) Ltd.
(formerly known as Scitex Vision Ltd.), our majority owned subsidiary,
and Scailex Vision International Ltd. (formerly known as Scitex Vision International
Ltd.), Scailex Visions wholly owned subsidiary, respectively; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jemtex
are to Jemtex InkJet Printing Ltd., our majority owned subsidiary.
|- | ---------------------------------------------------------------------------

| | Group
Companies are to RealtimeImage Ltd., XMPie Inc. and Dor Ventures, all of which
reflect investments that are accounted in our financial statements under the
cost method.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS

Except for the historical
information contained in this Annual Report on Form 20-F, certain information contained
herein, including, without limitation, information appearing under Item 4.
Information on the Company and Item 5. Operating and Financial Review and
Prospects, are forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
Forward-looking statements are based on various assumptions (some of which are beyond our
control) and may be identified by the use of forward-looking terminology, such as may,
can be, will, expects, anticipates, intends,
believes, projects, continues, plans,
seeks, potential, and similar words and phrases. Actual results
could differ materially from those contained in forward-looking statements due to a
variety of factors, including, but not limited to:

| | our
absence of significant operations following the sale of the business of Scailex Vision
and uncertainty as to our future business model and our ability to identify and evaluate
suitable business opportunities;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
fact  that  our  U.S.  shareholders  may  suffer  adverse  tax  consequences  when we
will be          classified as a passive foreign investment company or PFIC;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | risks
relating to pursuing strategic alternatives;
|- | --------------------------------------------------

| | risks
and  uncertainties  relating to the Company's plans for its financial  assets following
the          sale of Scailex Vision;
|- | ----------------------------------------------------------------------------------------------------------------------------------

| | changes
in domestic and foreign economic and market conditions;
|- | ---------------------------------------------------------------

| | the
impact of the Company's accounting policies;
|- | ------------------------------------------------

5

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| | the
fact that we may be deemed an investment company under the Investment Company
Act of 1940 under certain circumstances (including as a result of the investments of
assets following the sale of the operations of Scailex Vision), and/or the risk that we
may be required to take certain actions with respect to the investment of our assets or
the distribution of cash to shareholders in order to avoid being deemed an investment
company;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | risks
and uncertainties resulting form the pending sale of approximately 50% of our outstanding
share capital by our two principal shareholders to an unaffiliated third party and the
potential impact on the Company and our operations and strategies; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | those
risks set forth under Item 3D. Risk Factors in this Annual Report as well as
those discussed elsewhere in this Annual Report.
|- | -------------------------------------------------------------------------------------------------------------------------------------

Except as may be required by law, we
do not undertake, and specifically disclaim, any obligation to release publicly the
results of any revisions which may be required to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances after the
date of such forward-looking statements.

# USE OF TRADE NAMES

Scailex is our trademark. Jemtex and
Gema II are trademarks of Jemtex.

# PART I

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

Not applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not applicable.

|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------

|A. | SELECTED
FINANCIAL DATA
|-- | -----------------------

The following selected consolidated
statements of operations data for the years ended December 31, 2003, 2004 and 2005 and the
selected consolidated balance sheet data as of December 31, 2004 and 2005 are derived
from our audited consolidated financial statements set forth elsewhere in this Annual
Report, which have been prepared in accordance with generally accepted accounting
principles in the United States (U.S. GAAP). The selected consolidated
statement of operations data for the years ended December 31, 2001 and 2002 and the
selected consolidated balance sheet data as of December 31, 2001, 2002 and 2003 are
derived from audited consolidated financial statements not appearing in this Annual
Report, which have been prepared in accordance with U.S. GAAP.

In November 2005, Scailex Vision, our
majority owned subsidiary, sold its business to Hewlett-Packard Company, as described
below under Item 10.C Additional InformationMaterial Contracts. As a
result of the sale, the results of operations of Scailex Vision are reported as
discontinued operations and the consolidated results from continuing operations no longer
include revenues and expenses attributable to Scailex Vision. Similarly, assets and
liabilities relating to Scailex Vision are presented in our balance sheet separately as
assets and liabilities of discontinued operations. Our consolidated financial statements
for prior periods have been reclassified to reflect these changes. See Note 1b2
to our consolidated financial statements included in this Annual Report.

6

---

---



In addition, as of December 31, 2005,
our continuing operations are comprised of Scailex Corporation and Jemtex. Consequently,
we did not record any revenues from such continuing operations in the years 2001 through
2005. Since we are exploring our strategic alternatives, including engaging in new areas
of operations, the data presented below are not indicative of our future operating results
or financial position.

The following selected financial
data should be read in conjunction with Item 5. Operating and Financial Review and
Prospects and the consolidated financial statements and the notes thereto and the
other financial information appearing elsewhere in this Annual Report.

BALANCE SHEET DATA

|                                      | December 31,
|------------------------------------- | ------------
|
|
|
|
|Net working capital (continuing       |             
|operations) ****                      |             
|Net working capital (discontinued     |             
|operations) ****                      |             
|Cash, cash equivalents and short term |             
|investments (continuing operations)   |             
|Cash, cash equivalents and short term |             
|investments (discontinued operations) |             
|Total assets                          |             
|Long term liabilities (continuing     |             
|operations)                           |             
|Long term liabilities (discontinued   |             
|operations)                           |             
|Share capital                         |             
|Shareholders' equity                  |             

*Includes a restricted cash deposit
in a bank, the balance of which was $5,165,000, $5,000,000 and $20,203,000 as of December
31, 2005, 2004 and 2002, respectively, and is presented on the balance sheet as a
restricted deposit.

** Includes a restricted cash
deposit in a bank, the balance of which was $13,000,000 and $18,262,000 as of December 31,
2004 and 2003, respectively.

*** Adjusted retroactively to reflect
a change in the method of accounting for an investment from the cost method to the equity
method.

**** Net working capital is
calculated as current assets minus current liabilities as presented in the audited
financial reports.

7

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STATEMENT OF OPERATIONS DATA

|                                                  | Year Ended December 31,
|------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                          |                        
|Cost of revenues                                  |                        
|Expenses                                          |                        
|Research and development costs - net              |                        
|Marketing,  general and administrative            |                        
|Amortization of intangible assets                 |                        
|Operating loss                                    |                        
|Financial income (expenses) - net                 |                        
|Other income (loss) - net                         |                        
|Write-down of investment in an associated company |                        
|Loss before taxes on income                       |                        
|Tax benefit (Taxes on income)                     |                        
|Share in results of associated companies          |                        
|Net income (loss) from continuing operations      |                        
|Net income (loss) from discontinued operations    |                        
|Net income (loss)                                 |                        
|Earnings (loss) per share- basic                  |                        
|Continuing operations                             |                        
|Discontinued operations                           |                        
|                                                  |                        
|Earnings (loss) per share- diluted                |                        
|Continuing operations                             |                        
|Discontinued operations                           |                        
|                                                  |                        
|Weighted average number of shares                 |                        
|outstanding(in thousands) - basic                 |                        
|- diluted                                         |                        
|Dividends per share                               |                        

* Adjusted retroactively to reflect
a change in the method of accounting for an investment from the cost method to the equity
method.

|B. | CAPITALIZATION
AND INDEBTEDNESS.
|-- | --------------------------------

Not Applicable.

|C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS.
|-- | ------------------------------------------

Not Applicable.

|D. | RISK
FACTORS
|-- | ------------

The following important factors,
together with others that appear with the forward-looking statements made by, or on behalf
of, Scailex in this Annual Report, or in Scailexs other SEC filings and public
statements, could affect our actual results and could cause our actual results to differ
materially from those expressed in any forward-looking statements.

# Risks Related to Our
Business

| | We
have sold our principal operating businesses and currently conduct only limited business
activities.
|- | -------------------------------------------------------------------------------------------------------

| | We
sold the business of Scitex Digital Printing Inc., or SDP, one of our two principal
operating subsidiaries, to Kodak in January 2004. In November 2005, Scailex Vision, our
remaining principal operating subsidiary, sold its business to Hewlett-Packard Company,
or Hewlett-Packard. Since then, we hold substantially all of our assets in cash and cash
equivalents and the remainder is invested in several companies, including Jemtex, our
majority owned subsidiary. Our plan of operation is to explore and consider strategic
alternatives relating to our remaining holdings as well as to other investments and
opportunities, including a possible merger or business combination with a domestic or
foreign, private or public operating entity. Other than activities relating to attempting
to locate such opportunities and activities relating to our holdings and the investment
of our funds in short and long-term investments, we do not currently conduct any
operations. Moreover, the pending sale of approximately 50% of our outstanding share
capital by our two principal shareholders to an unaffiliated third party may have an
impact on the Company and our future operations and strategies, which we currently cannot
predict. See Item 7A.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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| | We
may not be successful in identifying and evaluating suitable business opportunities or inconsummating a business combination.
|- | --------------------------------------------------------------------------------------------------------------------------------

| | There
can be no assurance that we will be successful in identifying and evaluating suitable
business opportunities or in consummating a business combination. While we are actively
exploring strategic transactions and opportunities, we have not targeted any particular
industry or specific business within an industry in which to pursue such opportunities.
Accordingly, we may enter into a business combination with a business entity having no
significant operating history or other negative characteristics such as having a limited
or no potential for immediate earnings, or otherwise pursue a business combination that
will not necessarily provide us with significant financial benefits in the short term. In
the event that we complete a business combination, the success of our operations will be
dependent upon the management of the target company and numerous other factors beyond our
control. There is no assurance that we will be able to negotiate a business combination
on terms favorable to us, or at all.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
we do consummate a major strategic transaction, such as a business combination, ourshareholders
may suffer a dilution of value of shares and we may need to raise additionalfinancing.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
business combination normally will involve the issuance of a significant number of
additional Scailex shares. Depending upon the value of the assets and businesses acquired
in such business combination, the per share value of our ordinary shares may increase or
decrease, perhaps significantly. In addition, if we consummate a business combination, we
may need to raise funds through a public or private financing. We may be unable to obtain
additional financing on acceptable terms or at all.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
may be deemed an investment company under the Investment Company Act of 1940,
which couldsubject us to material adverse consequences.
|- | ------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the sale of the businesses of SDP and Scailex Vision and the investment of the cash
proceeds of such transactions, we are not an investment company under
the United States Investment Company Act of 1940, or the Investment Company Act, because
we rely on an exemption from that act which generally exempts transient investment
companies for a one year period, which in our case commenced when we sold the business of
Scailex Vision.  At the end of such one year period, if we have not entered
into a business combination or developed an operating business, the likelihood of being
deemed to be an investment company would increase over time and we may be required
to seek exemptive or other relief from the SEC so as not to be regulated under the
Investment Company Act.  No assurance can be made that we will obtain such
exemptive or other relief from the SEC, if and when we seek the same. If we were deemed
to be an investment company, we would not be permitted to register under the Investment
Company Act without obtaining exemptive relief from the SEC because we are incorporated
outside of the United States and, prior to being permitted to register, we would not be
permitted to publicly offer or promote our securities in the United States. As a
result, we may be required to take certain actions with respect to the investment of our
assets or the distribution of cash to shareholders in order to avoid being deemed an
investment company, which actions may not be as favorable to us as if we were not
potentially subject to regulation under the Investment Company Act. If we are deemed to
be an investment company, we could be found to be in violation of the Investment Company
Act, and a violation of that act could subject us to material adverse consequences.
We seek to conduct our operations, including by way of investing our cash and cash
equivalents, to the extent possible so as not to become subject to regulation under
the Investment Company Act.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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| | We
hold substantially all of our assets in cash and financial instruments and are exposed to
decreases in the value of our financial investments.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, we held, on a consolidated basis, approximately $319.5 million in
cash and financial instruments, including a restricted cash deposit ($235.9 million
presented as cash, cash equivalents and short term investments, $29.7 million presented
as non current assets, $53.9 million of which is allocated to discontinued operations),
which represent substantially all of our assets. Part of our cash on hand is held in
different types of investment grade bonds.  If the obligor of any of the bonds we
hold defaults or undergoes a reorganization in bankruptcy, we may lose all or a
portion of our investment in such obligor.  We may also be subject to loss to the
extent that the market value of these bonds decline. This will adversely affect our
financial condition. For information on the types of our investments as of
December 31, 2005, see Item 11 Quantitative and Qualitative
Disclosures About Market RiskPresentation of Exchange Rate andInterest Rate
Risk.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have incurred substantial net losses in the past, and we may incur losses again in thefuture.
|- | ------------------------------------------------------------------------------------------------

| | Although
our net income (including from discontinued operations) for the years ended December 31,
2003, 2004 and 2005 was approximately $1.4 million, $47.3 million and $106.1 million,
respectively, we incurred net losses (including from discontinued operations) in the
years ended December 31, 2001 and December 31, 2002 of approximately $253.0 million
(including $215.9 million associated with our holdings in Creo Inc., or Creo) and $32.0
million (including $22.3 million associated with our holdings in Creo), respectively. In
respect of continuing operations, although our net income for the year ended December 31,
2005 was approximately $0.7 million, we incurred net losses in the years ended December 31,
2002, 2003 and 2004 of approximately $32.3 million, $8.0 million and $5.2 million,
respectively. We may continue to incur losses in the future, which could materially
adversely affect our business and financial condition, as well as the value and market
price of our shares. Even if we maintain profitability, we cannot assure you that future
net income will offset our cumulative losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are undergoing, and may in the future undergo, tax audits and may have to make materialpayments to tax authorities at the conclusion of these audits.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
conducted business globally and a substantial part of our operations was conducted in
various countries during the 1990s. Accordingly, not all of the tax returns of our
operations during the 1990s as well as for subsequent years are final and may be subject
to further audit and assessment by the applicable tax authorities. For example, in order
to resolve a tax audit of our U.S. subsidiaries for the years 1992 through 1996, we paid
to the U.S. Internal Revenue Service (IRS) an aggregate sum of approximately $21.5
million until 2002, and in 2004 we paid an aggregate sum of approximately $11.6 million
to the IRS and other U.S. state tax authorities. If we become subject to further tax
audits or assessments, we may be required to pay additional taxes, as a result of which,
our future results may be adversely affected. For more information about these audits
andother tax assessments, please see under Item 5.B  Liquidity & Capital
Resources  Tax Audits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Some
of our holdings are in companies with no proven business model or that may be unable toobtain future financing.
|- | --------------------------------------------------------------------------------------------------------------------

| | Some
of the companies in which we have invested, including Jemtex, our majority-owned
subsidiary, are emerging companies with no substantial operating history or proven
business model and have extensive research and development and marketing costs and
limited revenues, if any. In order to succeed, these companies may require additional
capital to fund these costs, which may prove to be difficult to obtain. If these
companies are unable to obtain sufficient financing from their current shareholders,
which may also include additional investments by us in these companies, or from new
financing sources, their continued operations may be at risk. In addition, even if such
companies are able to finance their operations, there is no assurance that their products
or technology will achieve market acceptance or that their business model will prove to
be profitable. This could adversely affect our business.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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---



| | Scailex
Vision is exposed to potential liabilities in connection with the sale ofthe
businessof Scailex Vision to Hewlett-Packard.
|- | ----------------------------------------------------------------------------------------------------------------------------------

| | Scailex
Vision, our majority owned subsidiary, has agreed to indemnify Hewlett-Packard for
certain breaches of the asset purchase agreement entered between them, including in the
case of breaches of representations and warranties made by Scailex Vision, up to a cap of
approximately $24 million. A claim against Scailex Vision could result in substantial
cost, which would have a negative impact on our financial condition. In addition, we havegenerated
a significantamount of income from this transaction. Based on our and Scailex
Visions assessment, we believe that Scailex Vision is in compliance with all taxes
due in relation with this transaction. The various tax authorities may not agree with
Scailex Visions view. Any such disagreement or a subsequent tax dispute could
result in tax liabilities in amounts which we currently cannot estimate. For more
information, seeunder Item 10C. Material Contracts  Sale of Scailex
Visions Business below.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Risks Related to Operations in Israel

| | Political,
economic and military instability in Israel or the Middle East may limit our abilityto
find a target for a merger or other business combination and adversely affect our results
ofoperations.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
corporate headquarters and the principal facilities of our Group Companies, and many of
our and their suppliers are located in Israel. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Since October 2000, there has been a high level of violence
between Israel and the Palestinians which has strained Israels relationship with
its Arab citizens, Arab countries and, to some extent, with other countries around the
world. Any armed conflicts or political instability in the region, including acts of
terrorism or any other hostilities involving or threatening Israel, would likely
negatively affect business conditions and harm our business. Furthermore, several
countries restrict business with Israel and Israeli companies and additional countries
may restrict doing business with Israel and Israeli companies as a result of hostilities
between Israel and the Palestinians.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
political, economic and military conditions might deter potential targets from effecting
a business combination with an Israeli company. In addition, the operations and financial
results of our remaining Group Companies could be adversely affected if political,
economic or military events curtailed or interrupted trade between Israel and its present
trading partners or if major hostilities involving Israel should occur in the Middle East.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
litigant may have difficulty enforcing U.S. judgments against us, our officers and
directors, our Israeli subsidiaries and affiliates or asserting U.S. securities law
claims in Israel.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
of process upon us, our Israeli subsidiaries and affiliates, and our directors and
officers, substantially all of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, because the majority of our assets and
investments, and substantially all of our directors and officers are located outside the
United States, any judgment obtained in the United States against us or any of them may
not be collectible within the United States. There is doubt as to the enforceability of
civil liabilities under the Securities Act of 1933 and the Securities Exchange Act of
1934 in original actions instituted in Israel. However, subject to specified time
limitations, Israeli courts may enforce a U.S. final executory judgment in a civil
matter, provided that:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | adequate
 service  of  process  has  been  effected  and  the  defendant  has  had  a  reasonable
         opportunity to be heard;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  and its  enforcement  are not  contrary  to the law,  public  policy,
 security or          sovereignty of the State of Israel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

11

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| |  | the
judgment was obtained  after due process before a court of competent  jurisdiction
 according          to the rules of private international law prevailing in Israel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  was not obtained by  fraudulent  means and does not conflict  with any other
valid          judgment in the same matter between the same parties;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
action  between the same  parties in the same  matter is not  pending in any Israeli
 court at          the time the lawsuit is instituted in the U.S. court; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. court is not prohibited from enforcing judgments of Israeli courts.
| | - | ----------------------------------------------------------------------------

| | Provisions
of Israeli law may delay, prevent or make more difficult an acquisition of Scailex.
|- | ----------------------------------------------------------------------------------------------

| | The
Israeli Companies Law generally requires that a merger be approved by the board of
directors and a majority of the shares voting on the proposed merger. For purposes of the
shareholder vote, unless a court rules otherwise, the merger will not be deemed approved
if shares representing a majority of the voting power present at the shareholders
meeting, and which are not held by the other party to the merger (or by any person who
holds 25% or more of the shares or the right to appoint 25% or more of the directors of
the other party or its general manager) have voted against the merger. Upon the request
of any creditor of a party to the proposed merger, a court may delay or prevent the
merger if it concludes that there is a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy the obligations of the surviving
company. Finally, a merger may generally not be completed unless at least (1) 50 days
have passed since the filing of a merger proposal signed by both parties with the Israeli
Registrar of Companies and (2) 30 days have passed since the merger was approved by the
shareholders of each of the parties to the merger. Also, in certain circumstances an
acquisition of shares in a public company must be made by means of a tender offer.
Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges
between an Israeli company and a foreign company, less favorably than U.S. tax laws.
These provisions of Israeli corporate and tax law may have the effect of delaying,
preventing or make more difficult an acquisition of or merger with us, which may
adversely affect our ability to engage in a business combination and could depress our
share price.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Israeli
banking laws may impose restrictions on the total debt that we may borrow from Israelibanks.
|- | ----------------------------------------------------------------------------------------------------

| | Pursuant
to a directive published by the Israeli Supervisor of Banks, which became effective on
March 31, 2004, we may be deemed part of a group of affiliated borrowers comprised of IDB
Holding Corporation Ltd., the ultimate parent of Discount and Clal, our principal
shareholders, and other companies which may be included in such group of borrowers
pursuant to the directive. The directive generally provides that an entity will be
subject to limitations on the amount of financing available to it from an Israeli bank if
such entity is included within a group of borrowers to which the amount of debt financing
that has been extended from such Israeli bank exceeds certain limits as specified in the
directive. As we are currently part of the IDB affiliated group of companies which
includes many companies that require, or may in the future require, extensive credit
facilities from Israeli banks for the operation of their businesses, we cannot assure you
that our banks will not exceed these limits (if applicable to us) in the future. Should
our banks exceed these limits, they may limit our ability to draw funds, which may have a
material adverse effect on our business, financial condition and results of operations.This
status may change in light of the contemplated sale by Clal and Discount of their
shareholdings to Israel Petrochemicals Enterprise Ltd. (see Item 7A).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Risks
Related to the Market for Our Ordinary Shares

| | Our
U.S. shareholders may suffer adverse tax consequences if we are classified as a passive
foreign investment company.
|- | -----------------------------------------------------------------------------------------------------------------------

| | As
more fully described in Item 10  Additional Information  Taxationunder
the caption Tax Consequences if we are a Passive Foreign Investment Company, there
is a high likelihood that we will be properly classified as a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes in 2006. Our classification as a
PFIC could result in U.S. holders (as defined in Item 10) suffering adverse tax
consequences. These consequences may include having gains realized on the sale of our
ordinary shares treated as ordinary income, rather than capital gain income, and having
potentially punitive interest charges apply to the proceeds of share sales. U.S. holders
should consult with their own U.S. tax advisors with respect to the U.S. tax consequences
of investing in our ordinary shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Volatility
of our share price could adversely affect us and our shareholders.
|- | -----------------------------------------------------------------------------

| | The
market price for our ordinary shares has been and may continue to be volatile and could
be subject to wide fluctuations in response to numerous factors, such as:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | market
conditions or trends;
| | - | ----------------------------

| |  | political,
economic and other developments in the State of Israel and world-wide;
| | - | ---------------------------------------------------------------------------------

| |  | actual
or anticipated variations in our operating results;
| | - | ----------------------------------------------------------

| |  | material
corporate transactions; and
| | - | ------------------------------------

| |  | entry
into strategic partnerships or joint ventures by us.
| | - | ----------------------------------------------------------

| | In
addition, the stock market in general, and the market for Israeli companies in
particular, has been highly volatile in the past four years. Many of these factors are
beyond our control and may materially adversely affect the market price of our ordinary
shares, regardless of our performance. Shareholders may not be able to sell their
ordinary shares following periods of volatility because of the markets adverse
reaction to such volatility and we may not be able to raise capital through an offering
of securities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Two
shareholders may be able to control us.
|- | -------------------------------------------

| | Clal,
through CEI, its wholly owned subsidiary, and Discount (directly and through DIC Loans
Ltd., its wholly owned subsidiary) own an aggregate of approximately 49.4% of our
outstanding ordinary shares. In addition, they are parties to a voting agreement entered
into in 1980. Accordingly, Clal and Discount may have sufficient voting power, subject to
special approvals required by Israeli law for transactions involving controlling
shareholders, to:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | elect
all of our directors (subject to the provisions of the Companies Law with regard to
         outside directors);
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | control
our management; and
| | - | ---------------------------

| |  | approve
or reject any merger, consolidation or sale of substantially all of our assets.
| | - | ---------------------------------------------------------------------------------------

| | This
concentration of ownership of our ordinary shares could delay or prevent proxy contests,
mergers, tender offers, open-market purchase programs or other purchases of our ordinary
shares that might otherwise give our shareholders the opportunity to realize a premium
over the then-prevailing market price for our ordinary shares. This concentration of
ownership may also adversely affect our share price. In addition, the market price of our
ordinary shares may be adversely affected by events relating to Clal and Discount that
are unrelated to us. See also in Item 7A, regarding the contemplated sale by Clal and
Discount of their shareholdings to Israel Petrochemicals Enterprise Ltd.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
ordinary shares are listed for trading in more than one market and this may result in
pricevariations.
|- | ----------------------------------------------------------------------------------------------------------

| | Our
ordinary shares are listed for trading on NASDAQ National Market, or NASDAQ, and the Tel
Aviv Stock Exchange, or TASE. Trading in our ordinary shares on these markets is made in
different currencies (U.S. dollars on NASDAQ and New Israeli Shekels on TASE), and at
different times (resulting from different time zones, different trading days and
different public holidays in the United States and Israel). The trading prices of our
ordinary shares on these two markets often differ, resulting from the factors described
above, as well as differences in exchange rates. Any decrease in the trading price of our
ordinary shares on one of these markets could cause a decrease in the trading price of
our ordinary shares on the other market.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

|A. | HISTORY
AND DEVELOPMENT OF THE COMPANY
|-- | --------------------------------------

CORPORATE HISTORY &
DETAILS

Our legal and commercial name is
Scailex Corporation Ltd. and our legal form is a company limited by shares. We were
incorporated under the laws of the State of Israel on November 2, 1971, succeeding a
predecessor corporation, Scientific Technology Ltd. that was founded on September 5, 1968.
On December 29, 2005, we changed our name from Scitex Corporation Ltd. to
Scailex Corporation Ltd. Our corporate headquarters and principal executive
offices are located at 3 Azrieli Center, Triangular Tower, 43rdFloor, Tel
Aviv, 67023, Israel. Our telephone number in Israel is (972) 3 - 6075855.
Our website address is www.scailex.com. Information contained on our website
does not constitute a part of this Annual Report.

We initially focused on imaging
competencies in systems for the textile design market. In 1979, we launched the
worlds first computerized color prepress system. In the 1990s, we identified the
evolving digital printing market and focused on commercializing innovative solutions for
the graphic publishing industry in its transition from analog to digital printing, and
made several key acquisitions of digital printing operations. We operated in this field
principally through SDP, our indirect wholly owned subsidiary, and Scailex Vision, our
majority owned subsidiary. In April 2000, we sold our digital preprint operations and our
print-on-demand systems business to Creo. In January 2004 and November 2005, we sold the
businesses of SDP and Scailex Vision, respectively, thereby marking our exit from the
digital printing business (except through Jemtex).

MAJOR BUSINESS
DEVELOPMENTS

In November 2005, we ended our
involvement in the wide format segment of the industrial inkjet digital printing market
through the sale of the business of Scailex Vision to Hewlett-Packard for approximately
$236.6 million in cash, of which approximately $6.6 million was paid to Scailex
Vision in April 2006 to account for a post-closing net working capital adjustment pursuant
to the sale agreement. In February 2006, Scailex Vision distributed a net dividend of
approximately $135 million to its shareholders, of which approximately
$101 million was paid to us. See Item 10C below. Since the closing of this
transaction, we hold substantially all of our assets in financial investments and the
remainder is invested in several companies, including Jemtex, our majority owned
subsidiary.

Our current plan of operation is to
explore and consider strategic alternatives relating to our remaining holdings as well as
to other investments and opportunities, including a possible merger or business
combination with a domestic or foreign, private or public operating entity. Other than
activities relating to attempting to locate such opportunities and activities relating to
our holdings in several companies and the investment of our funds in short and long-term
investments, we do not currently conduct any operations.

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PRINCIPAL CAPITAL
EXPENDITURE & DIVESTITURES

Since January 1, 2003, except for the
self tender offer and the cash distribution described below, most of our principal capital
expenditures and divestitures have been for the acquisition or sale of interests in other
companies, as follows:

| |  | In
July 2005, IDX Systems Corporation, or IDX, acquired the assets of RealTimeImage Ltd.
(formerly RTimage Ltd.), or RTI, in which we held a 14.9% stake, for an estimated
purchase price of $15.5 million. The book value of our investment in RTI was recorded at
$1.2 million on our balance sheet as of December 31, 2005, and such investment is
accounted for under the cost method. In February 2006, we received a dividend of
approximately $2.6 million from RTI.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
January 2004 and November 2005, we sold the businesses of SDP and Scailex Vision,
respectively. These transactions are described under Item 10C. Material Contractsbelow.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
connection with the sale of SDP to Kodak, we approved a plan to distribute approximately
$118 million to our shareholders. In June 2004, we completed a tender offer for our
shares and purchased 4,952,050 shares for an aggregate amount of approximately $28
million ($5.67 per share). In July 2004, we distributed $2.36 per ordinary share, or
approximately $90 million in the aggregate, to our shareholders of record as of June 30,
2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
invested an aggregate of approximately $2.8 million in Objet Geometries Ltd. since
January 1, 2002, including $0.5 million and $0.3 million that was invested in December
2003 and November 2004, respectively, in connection with Objets rights offerings,
and thereafter held an approximate 22.9% interest of Objet. In June 2005, we sold all of
our holdings in Objet to several shareholders of Objet for $3.0 million in cash.
Additional contingent consideration will be paid to Scailex if Objet undergoes specified
exit events prior to the end of 2007.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Since
January 1, 2003, we invested an aggregate of approximately $7.1 million in Jemtex in
consideration for the issuance to us of convertible debentures and preferred shares of
Jemtex. We now hold an approximate 74.9% interest (85.4% assuming conversions of the
debentures but not giving effect to the pending financing described in the next sentence)
in Jemtex. In 2006 (through June 15, 2006), we invested an additional $1.5 million in
Jemtex in respect of a pending round of financing by Jemtex.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the fourth quarter of 2002, we signed an agreement to combine the operations of Scailex
Vision and Scailex Vision International, our then wholly owned subsidiary, and in January
2003 we completed this transaction, as a result of which Scailex Vision became a majority
owned subsidiary of ours and the parent of Scailex Vision International. In July 2003 and
May 2004, Scailex Vision concluded rights offerings in which we invested approximately
$5.0 million and $4.2 million, respectively, by way of convertible loans, in accordance
with our pro rata share of such offering. See in Item 7B below under the captions
Combination of Scailex Vision andScailex Vision International and
Rights Offerings by Scailex Vision, respectively.Said loans were
converted to shares in February 2006.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
previously reported, we were involved in several disputes with C.D.I. Technologies (1999)
Ltd. (CDI) a minority shareholder of Scailex Vision, including claims against us, Scailex
Vision and several other parties. In May 2005, we and our two largest shareholders, Clal
and Discount, purchased all of CDIs interest in Scailex Vision, constituting 1.89%
of Scailex Visions issued share capital (1.35% on a fully diluted basis), for $1.6
million, plus additional contingent consideration to be paid if Scailex Vision undergoes
an exit event within the next two years at a higher valuation than implied in
the agreement. As a result of the sale of the business of Scailex Vision to Hewlett
Packard, we paid an additional $0.3 million to CDI on account of such contingent
consideration and we expect to pay an additional amount (as a result of Scailex Visions
future distributions). In connection with the purchase agreement, CDI agreed to dismiss
all of the claims asserted by it against us and the other parties.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | In
April 2000, we sold our digital preprint operations and our print-on-demand systems
business to Creo, in return for 13.25 million Creo shares, and became the largest
shareholder in Creo, initially with approximately 28.7% of the outstanding Creo shares.
As part of the transaction, we issued to Creo an unsecured, non-interest bearing note in
the principal amount of $18.8 million, which was fully repaid in April 2003. In November
2001, we sold 7.0 million shares of Creo for gross proceeds of approximately $78 million
as part of a private placement to Canadian institutional investors. In June and August
2003, we sold 3.0 million shares of Creo for gross proceeds of approximately $24 million
and 3.25 million shares of Creo for gross proceeds of approximately $31 million,
respectively, as part of arranged sales to various financial institutions in Canada. We
no longer hold any Creo shares.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|B. | BUSINESS
OVERVIEW
|-- | -----------------

Upon the sale of Scailex
Visions business in November 2005, we ceased substantially all of the operations of
our business as conducted prior thereto. Since then, we have held substantially all of our
assets in financial investments and the remainder is invested in several companies,
including Jemtex, our majority owned subsidiary. Our plan of operation is to explore and
consider strategic alternatives relating to our remaining holdings as well as to other
investments and opportunities, including a possible merger or business combination with a
domestic or foreign, private or public operating entity. While we are actively exploring
strategic transactions and opportunities, we have not targeted any particular industry or
specific business within an industry in which to pursue such opportunities.

JEMTEX INK JET PRINTING
LTD.  CONTINUOUS INKJET INDUSTRIAL DIGITAL PRINTING

General

Jemtex, located in Lod, Israel, was
established in 1995. It employed, as of December 31, 2005, approximately 30 people. We
currently hold an approximate 74.9% interest in Jemtex. Jemtex is a developer of inkjet
based digital systems, printheads and engines for the heavy-duty industrial printing
markets, primarily for the corrugated packaging, and, to a lesser extent, the ceramic
tiles, markets. The printing application for those markets are newly developed markets and
accordingly a slow development of those markets is expected.

Product Overview

Jemtexs Continuous Ink Jet
technology is designed to allow for customization, higher flexibility in design, file
changes during print runs, smaller production runs, and faster turnaround time from print
order to delivery of printed material. Jemtex has developed solutions for nozzle design,
drop assignment and image processing algorithms for multi-nozzle alignment, calibration
and on-line video process control. The design of its printheads and modular implementation
are aimed to assure fast assembly and up time, as well as smooth operation with higher
viscosity inks and colorant concentrations. Jemtexs current strategy is operating
through strategic alliances.

Jemtex has introduced a new digital
printing decoration system for ceramics named Gema II. The Gema II is designed to operate
at productivity levels comparable to conventional printing while providing the advantages
of digital printing. This system is still in its initial stages and may require additional
enhancements or improvements.

Manufacturing & Sales

Jemtex outsources the manufacturing
of part of the components for the systems it develops to its own specifications and also
purchases off-the shelf components for its systems from third party vendors. Other
components are built in Jemtexs premises and final manufacturing, full system
integration and quality assurance testing of Jemtexs systems are conducted at its
facilities in Lod, Israel. Jemtex has not made any commercial sales in the past two years
(i.e., since we commenced to consolidate Jemtexs financial results in our financial
statements).

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Competition

Jemtex believes that the Gema II
system will be competitively positioned vis-à-vis the KERAjet digital system
(produced by Ferro Corporation), in terms of robustness, productivity and decoration
capabilities.

OTHER GROUP COMPANIES

RealTimeImage Ltd.

RTI was formed in 1996. It was
headquartered in San Bruno, California, with research and development operations in
Or-Yehuda, Israel, and employed, before the completion of the July 2005 transaction
described below, about 42 employees (it had no employees as of December 31, 2005). We
currently hold an approximate 14.9% interest in RTI.

RTI was a leading innovator and
developer of Internet-based imaging products and services for healthcare professionals
until July 2005 and, until May 2004, also for the graphic arts market. As discussed in
Item 4A above, in July 2005, RTI sold its healthcare business to IDX and currently does
not conduct any operations.

XMPie Inc.

XMPie,which was formed in
2000, develops and markets software solutions for dynamic publishing in print and
electronic media. The XMPie software platform is designed to allow organizations and
marketing service providers, such as digital commercial printers and direct marketing
agencies, to efficiently create  plan, design and produce  highly customized
and personalized documents, which are becoming essential for direct marketing
communication and any other highly targeted messaging discipline. XMPie is headquartered
in New York, New York and, as of December 31, 2005, employed approximately 50 people. We
currently hold an approximate 3.5% interest in XMPie.

Dor Ventures

Dor Ventures, headquartered in
Brussels, Belgium, is a specialized venture capital fund investing in technology companies
worldwide. As of June 15, 2006, we have invested an aggregate of approximately $3.6
million in one of the funds managed by Dor, and we are generally committed to invest up to
additional $1.4 million in the future upon Dors request. To date, we received
approximately $1.3 million as distributions from the fund. We currently hold approximately
13.2% of Dor.

DISCONTINUED OPERATIONS
 SCAILEX VISION

On November 1, 2005, we completed a
transaction to sell the business of Scailex Vision, as described under Item 10C.
Material Contracts  Sale of Scailex Visions Businessbelow. As a
result of this transaction, the results of operations of Scailex Vision are reported as
discontinued operations and the consolidated results from continuing operations no longer
include revenues and expenses attributable to Scailex Vision. Nevertheless, since the
operations of Scailex Vision comprised one of our principal activities in the past years,
the following is a brief description of Scailex Visions business prior to November
1, 2005. Accordingly, the following description of Scailex Visions business, to the
extent it uses the current tense, does not purport to describe the current operations of
Scailex Vision. For example, since November 2005, Scailex Visions business is
conducted under the name of HP Industrial Printing Ltd., a wholly owned subsidiary of
Hewlett-Packard.

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General

Scailex Vision Ltd. (formerly, Scitex
Vision Ltd.), or Scailex Vision, is our majority owned subsidiary (approximately 78.6%
interest on an issued and outstanding basis), based in Netanya, Israel. It was a
developer, manufacturer and distributor of wide-format and super-wide format, color inkjet
digital printing systems used for point-of-purchase displays, banners and indoor and
outdoor advertising posters. It was also engaged in the design, development, manufacturing
and marketing of advanced digital printing presses and specialized water-based inks for
the packaging and textile markets based on its patented drop-on-demand inkjet technology.
As of November 1, 2005, Scailex Vision employed approximately 570 employees (including
employees of its sales, marketing and support subsidiaries and part-time and temporary
employees).

Product Overview

Scailex Vision printers are dedicated
to a wide array of applications including billboards, fleet marking, banners, street
advertising, point-of-purchase displays and floor and window graphics, and applications
for the packaging display market and, through strategic partners, for the textile market.
Its printing systems are aimed at providing high-quality and cost-effective solutions to
digital printing houses worldwide. Scailex Vision operated principally in the following
fields: wide format systems, super-wide format systems, and flatbed printing systems for
graphic arts, graphic display and textile printing applications.

Manufacturing

Scailex Vision outsourced the
manufacturing of many of the components for its systems to its own specifications and
purchases off-the shelf components for its systems from third party vendors. The most
important third party vendors for its printing systems were the suppliers of the
printheads used in such systems, and the subcontractors for assembly of its wide format
systems.

Final integration and quality control
testing of Scailex Visions wide and super wide format systems was conducted at its
facilities in Netanya, Israel, where it also assembled its wide and super-wide format
systems and conducts full system integration and quality assurance testing.

Sales & Marketing

Scailex Vision had a large customer
base with over 2,000 systems installed globally. It sold its products through its direct
sales force, indirect distribution channels and third party joint sales arrangements.Equipment sales were typically made on terms requiring an advance payment, with the
balance of the purchase price payable in stages, generally on delivery and on or shortly
after installation.

Customer Support

Scailex Vision had a customer service
and support team, consisting of over 100 engineers, technical and application specialists,
and logistics and management personnel. These personnel were located in the United States,
Europe and Asia as well as at the companys headquarters in Israel. The customer
support team was responsible for providing installation services, post-sales support, and
warranty services. Scailex Vision maintained a training facility at its headquarters in
Israel for its customer support team and customers. In addition, its sales demonstration
facilities in Brussels, Belgium and Atlanta, U.S.A., were also used for training purposes.

Scailex Vision offered an equipment
warranty to its customers and distributors that, in most cases, cover defects in the
systems for a period of six to 12 months following installation. At the end of the
warranty period, the customer could enter into a service agreement with Scailex Vision,
which includes equipment and software maintenance. If a customer did not enter into a
service agreement, service was provided and charged on a per-call basis.

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CUSTOMERS & SALES

As explained in Item 3A, we did not
record any revenues from our current continuing operations in the past three years.

GOVERNMENT REGULATIONS

Trade & Export.Israel has
the benefit of a free trade agreement with the United States which, generally, permits
tariff-free access into the United States for products produced in Israel by
Scailexs Israeli Group Companies. In addition, as a result of an agreement entered
into by Israel with the European Union, or the EU, and countries remaining in the European
Free Trade Association, or EFTA, the EU and EFTA have abolished customs duties on Israeli
industrial products. However, there can be no assurance that these agreements will not be
terminated, changed, amended or otherwise declared non-applicable to all or some of our
Israeli subsidiaries, joint ventures and Group Companies, thereby materially harming our
and their businesses.

Government Grants & Benefits.Some of our Israeli Group Companies receive grants from the Office of the Chief
Scientist of the Israeli Ministry of Industry, Trade and Labor for research and
development programs. Some of our Group Companies also receive or may in the future
utilize tax benefits under Israeli law for capital investments that are designated as
Approved Enterprises. The participation in these programs is subject to
compliance with certain conditions and imposes certain restrictions upon these companies.
For more information about the Office of the Chief Scientist, tax benefits for Approved
Enterprises and export controls, see Item 5B  Liquidity and Capital Resources
 Grants from the Office of the Chief Scientist and Item 10E 
Taxation  Israeli Taxation  Tax Benefits under the Law for the Encouragement
of Capital Investments, 1959, respectively.

Banking Regulations.Pursuant
to a directive published by the Israeli Supervisor of Banks, which became effective on
March 31, 2004, we may be deemed part of a group of affiliated borrowers comprised of IDB
Holding Corporation Ltd., the ultimate parent of Discount and Clal, our principal
shareholders, and other companies which may be included in such group of borrowers
pursuant to the directive. The directive generally provides that an entity will be subject
to limitations on the amount of financing available to it from an Israeli bank if such
entity is included within a group of borrowers to which the amount of debt financing that
has been extended from such Israeli bank amounts to 30% of such banks capital, or is
a member of one of the banks six largest borrowers or groups of borrowers to which,
collectively, the amount of debt financing that has been extended from the bank amounts to
150% of such banks capital (gradually reduced to 135% between April 2005 and June
2006). As we are part of the IDB affiliated group of companies which includes many
companies that require, or may in the future require, extensive credit facilities
from Israeli banks for the operation of their businesses, we cannot assure you that our
banks will not exceed these limits (if applicable to us) in the future. Should our
banks exceed these limits, they may limit our ability to draw funds, which may have a
material adverse effect on our financial condition. The directive also provides that a
bank may request that the Israeli Supervisor of Banks exempt certain entities from the
scope of the definition of a group of borrowers. Since we currently do not believe that
the directive will impact us, we do not currently intend to request that our banks seek an
exemption on our behalf from the Israel Supervisor of Banks. Should we decide to make such
a request of our banks, there can be no assurance that our banks would agree to request an
exemption from the Israel Supervisor of Banks on our behalf or that the Israel Supervisor
of Banks would grant an exemption, if requested. See Item 7A, regarding the contemplated
sale by Clal and Discount of their shareholdings to Israel Petrochemicals Enterprise Ltd.

19

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Investment Company Act of 1940.Regulation under the Investment Company Act governs almost every aspect of a
registered investment companys operations and can be very onerous for operating
companies, especially those that conduct business through, or with, partially owned
affiliates.  The Investment Company Act, among other things, limits an investment
companys capital structure, borrowing practices and transactions between an
investment company and its affiliates, and prohibits the issuance of traditional options,
warrants and incentive compensation arrangements, imposes requirements concerning the
composition of an investment companys board of directors and requires shareholder
approval of certain policy changes.  Contracts made in violation of the Investment
Company Act are void unless a court finds otherwise.  An investment company organized
outside of the United States is not permitted to publicly offer or promote its securities
in the United States.

Following the sale of the businesses
of SDP and Scailex Vision and the investment of the cash proceeds of such transactions,
we are not an investment company under the Investment Company Act because
we rely on an exemption from that act which generally exempts transient investment
companies for a one year period, which in our case commenced when we sold the business of
Scailex Vision.  At the end of such one year period, if we have not entered into
a business combination or developed an operating business, the likelihood of being deemed
to be an investment company would increase over time and we may be required to seek
exemptive or other relief from the SEC so as not to be regulated under the
Investment Company Act. No assurance can be made that we will obtain such exemptive
or other relief from the SEC, if and when we seek the same. If we were deemed to be
an investment company, we would not be permitted to register under the Investment Company
Act without obtaining exemptive relief from the SEC because we are incorporated outside of
the United States and, prior to being permitted to register, we would not be permitted
to publicly offer or promote our securities in the United States.

|C. | ORGANIZATIONAL
STRUCTURE
|-- | ------------------------

Scailex is part of a group of which
it is the parent company. The following table sets forth the name, jurisdiction and
ownership and voting interest of our principal subsidiaries, as of the date hereof:

|Name                           | Jurisdiction | Ownership and Voting Interest
|------------------------------ | ------------ | -----------------------------
|Scailex Vision (Tel-Aviv) Ltd. | Israel       | 78.6%(1)(2)                  
|Jemtex Ink Jet Ltd.            | Israel       | 74.9%                        

(1)
          In November 2005, Scailex Vision sold its business to Hewlett-Packard and
          consequently has only minimal operations, primarily related to managing the
          company following the transaction. As a result, our holdings in Scailex Vision
          currently represent primarily our right to share, with the other shareholders
          and employees of Scailex Vision, in the distribution of any cash that Scailex
          Vision makes after payment of all of its commitments and liabilities.

(2)
          After giving effect to contemplated distributions to employees of Scailex Vision
          and outstanding options, equals to approximately 71.8% as if on a fully diluted
          basis.

|D. | PROPERTY,
PLANT AND EQUIPMENT
|-- | -----------------------------

In January 2004, we relocated to new
corporate administrative offices in Tel Aviv, Israel, consisting of approximately 1,780
square feet of floor space pursuant to a Services Agreement between us and Discount.
For more information about the Services Agreement, please see Item 7B. Related
Party Transactions.That lease was terminated in September 2004 and we lease the
same premises from another lessor.

Jemtex leases nearly 15,000 square
feet in Lod, Israel, for use as its administrative, manufacturing and research and
development facility. The term of the lease expired on June 1, 2006 and currently
continues with no specified expiration date, subject to either partys right to
terminate the lease upon four months advance notice.

We believe that the aforesaid offices
and facilities are suitable and adequate for our operations as currently conducted and as
currently foreseen. In the event that additional facilities are required, we believe that
we could obtain such facilities at commercially reasonable rates.

20

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|Item 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

None.

|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The following discussion and analysis
of our financial condition and results of operations are based upon our consolidated
financial statements included elsewhere in this Annual Report, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements requires us to
make estimates, judgments and assumptions, which may affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Accordingly, actual results may differ from these estimates or judgments
under different assumptions or conditions. In this respect, we urge you to read the
discussion under the caption Critical Accounting Policies below.

The discussion below contains
forward-looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including, but not limited to, those set forth in Item
3Key InformationRisk Factors.

You should read the following
discussion with the consolidated financial statements and other financialinformation
included elsewhere in this Annual Report.

OVERVIEW

Our historical operations, carried
out by our then operating subsidiaries, focused on the industrial inkjet digital printing
market. In recent years, we have undergone substantial changes and developments,
including:

| |  | the
combination of the operations of Scailex Vision (formerly, Scitex Vision), a developer of
drop-on demand inkjet technologies, in which we held 42.5% of the share
capital, and Scailex Vision International (formerly, Scitex Vision International), our
wholly owned subsidiary until the consummation of such transaction in January 2003, and
subsequent investments by us in Scailex Vision in July 2003 and May 2004;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
sale of the remainder of our shareholdings in Creo, a provider of solutions for the
graphic arts industry, in the second half of 2003;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | key
changes to the composition of our management team and of our board of directors;
| | - | ------------------------------------------------------------------------------------

| |  | the
sale of the business of SDP to Kodak in January 2004;
| | - | ---------------------------------------------------------

| |  | the
sale of the businesses of Scailex Vision to Hewlett Packard in November 2005;
| | - | ---------------------------------------------------------------------------------

| |  | the
investment of more than $7.1 million in Jemtex, which increased our interest in Jemtex
from 49.8% to 74.9%. In 2006 (through June 15, 2006), we invested an additional $1.5
million in Jemtex in respect of a pending round of financing by Jemtex;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
January 2004, we approved a plan to distribute approximately $118 million to our
shareholders, which was effected through a $28 million repurchase of shares from our
shareholders (a self tender offer that was completed in June 2004) and a $90 million cash
distribution in July 2004;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
February 2005, we entered into an agreement with the U.S.  Internal Revenue  Service,  or
IRS,          to resolve a U.S.  federal income tax audit of our U.S.  subsidiaries  for
the years 1992 through          1996;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| |  | in
May 2005, we and our two largest shareholders, Clal and Discount, purchased all of CDIs
interest in Scailex Vision for $1.9 million (including additional contingent
consideration we paid to CDI following the closing). In the framework of the purchase
agreement, CDI agreed to dismiss all of the claims asserted by it against us and other
parties;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
July 2005, IDX acquired the assets of RTI for an estimated purchase price of $15.5
million. In 2006, we received a dividend of approximately $2.6 million as a result of
this sale; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
June 2005, we sold all of our holdings in Objet to several shareholders of Objet for $3.0
million in cash, which was paid in two installments, and additional contingent
consideration if Objet undergoes specified exit events prior to the end of
2007.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In November 2005, we ended our
involvement in the industrial inkjet digital printing market through the sale of the
business of Scailex Vision to Hewlett-Packard for approximately $236.6 million in cash
(see Item 10C below). Since then, we hold substantially all of our assets in
financial investments and the remainder is invested in several companies, including
Jemtex, our majority owned development stage subsidiary. Our current plan of operation is
to explore and consider strategic alternatives relating to our remaining holdings as well
as to other investments and opportunities, including a possible merger or business
combination with a domestic or foreign, private or public operating entity.

FINANCIAL HIGHLIGHTS

In 2001 and 2002, we recorded net
losses in the respective amounts of approximately $253 million and $32 million,
respectively, primarily as a result of write-downs and losses of $215.9 million (in 2001)
and write-downs of $22.3 million (in 2002) associated with our holdings in Creo.

In 2003, we recorded net income of
approximately $1.4 million, which was primarily derived from a net loss of $8 million from
continuing operations that was offset by approximately $9.4 million of net income from
discontinued operations.

In 2004, we recorded net income of
approximately $47.3 million, which was primarily derived from net losses of $5.2 million
from continuing operations (mainly out of operating expenses incurred by our headquarters
and Jemtex) that was offset by net income from discontinued operations of $52.4 million
(approximately $51.6 million of which as a result of the sale of the business of SDP to
Kodak).

In 2005, we recorded net income of
approximately $106.1 million, which was primarily derived from net income of $0.7 million
from continuing operations (mainly from a capital gain from the sale of our interests in
Objet and financial income from our investments that was offset by operating expenses
incurred by our headquarters and Jemtex), and net income from discontinued operations of
$105.4 million (of which $92.3 million relate to the capital gain from the sale of Scailex
Visions business, $4.3 million relate to the activities of Scailex Vision through
the closing of the transaction in November 2005 and $8.8 million related to the sale of
SDPs business).

Since we are exploring our
strategic alternatives, including engaging in new areas of operations, the data presented
below are not indicative of our future operating results or financial position.

|A. | OPERATING
RESULTS
|-- | -----------------

EXPLANATORY NOTES

| | Consolidation
of Jemtex:As a result of further investments in Jemtex, Jemtex became a
majority owned subsidiary of ours and, commencing with the first quarter of 2004, we have
been consolidating the results of Jemtex with ours; our investment in Jemtex was
previously treated by us as an investment accounted for under the equity method.
See Note 3a to our consolidatedfinancial statements included in this Annual
Report.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Discontinued
Operations (SDP):In January 2004, we completed the sale of substantially
all of the assets and business of SDP to Kodak. As a result of the sale, the results of
operations of SDP are reported as discontinued operations and the consolidated results
from continuing operations no longer include revenues and expenses attributable to SDP.
Similarly, assets and liabilities relating to SDP are presented in our balance sheet
separately as assets and liabilities of discontinued operations. Our consolidated
financial statements for prior periods have been reclassified to reflect these changes.
See Note 1b1to our consolidated financial statementsincluded in this
Annual Report.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Discontinued
Operations (Scailex Vision):In November 2005, we completed the sale of
substantially all of the assets and business of Scailex Vision to HP. As a result of the
sale, the results of operations of Scailex Vision are reported as discontinued operations
and the consolidated results from continuing operations no longer include revenues and
expenses attributable to Scailex Vision. Similarly, assets and liabilities relating to
Scailex Vision are presented in our balance sheet separately as assets and liabilities of
discontinued operations. Our consolidated financial statements for prior periods have
been reclassified to reflect these changes. See Note 1b2 to our consolidated
financial statements included in this Annual Report.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Definition
of Segments:Prior to the sale of SDPs and Scailex Visions
businesses, we had been reporting in two segments: high speed digital printing (SDP) and
wide format digital printing (Scailex Vision). In conjunction with the commencement of
reporting the results of operations of SDP and Scailex Vision as discontinued operations
and consolidating the results of Jemtex, we have modified the definition of our business
segments and our results of operations are now reported in two different segments  Corporate
(Scailex Corporation) and continuous inkjet industrial digital printing (Jemtex). See
Notes 1a and 13 to our consolidated financial statements included in thisAnnual
Report.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
Revenues.As described above, as result of the sale of SDPs and
Scailex Visions businesses, our consolidated financial statements for prior periods
have been reclassified to reflect the discontinuation of such operations. Since Jemtex,
our remaining operating subsidiary, did not generate revenues in 2003 through 2005, no
data regarding revenues or cost of revenues is presented below.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2005 FINANCIAL HIGHLIGHTS

Some of the key aspects of our
operating results in 2005 are as follows:

| | No
revenues from continuing operations were recorded.
|- | -----------------------------------------------------

| | Net
income (including from discontinued operations) was $106.1 million, comprised primarily
of income of $92.3 million from the sale of substantially all of the assets and business
of Scailex Vision to Hewlett-Packard.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
income from continuing operations of $0.7 million compared to a net loss from continuing
operations of $5.2 million in 2004, mainly due to a capital gain on the sale of our
interest in Objet and an increase in financial income due to an increase in the value of
our cash and cash equivalents.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
improvement in our cash balance related to continued operations (comprised of cash, cash
equivalents and short term investments) from approximately $147.6 million (including a
restricted deposit of $5.0 million) at December 31, 2004 to approximately $235.9 million
(including a restricted deposit of $5.2 million) at December 31, 2005 primarily due to
the sale of Scailex Visions business, which was partially offset by $53.9 million
that was allocated to discontinued operations, $29.7 million that was classified as
non-current assets, $35.9 million used for loan repayments by Scailex Vision throughout
2005 and payments of approximately $4.2 million on account of transaction expenses.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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COMPARISON OF 2003, 2004
AND 2005 FINANCIAL RESULTS

Revenues; Cost of Revenues

As explained above, as a result of
the reclassification of our financial results, we did not recognize any revenues in those
years.

Operating Expenses

|                                   | Year ended December 31,*
|---------------------------------- | ------------------------
|
|
|
|
|Research and development, gross    |                         
|Less Royalty-bearing participation |                         
|                                   |                         
|Research and development, net      |                         
|Marketing                          |                         
|General and administrative         |                         
|                                   |                         
|Total operating expenses           |                         
|                                   |                         

* See Notes 12c and 12d to our
consolidated financial statements included in this Annual Report.

Operating
expenses.Operating expenses comprise costs and expenses associated with research and
development, marketing, and general and administrative.

In
2005, operating expenses were $6.2 million, compared to $7.1 million in 2004. A portion of
these expenses ($2.5 million and $2.2 million in 2005 and 2004, respectively) was related
to research and development expenses of Jemtex. The balance of the expenses ($3.7 million
and $4.9 million in 2005 and 2004, respectively) were related to general and
administrative expenses and were mainly used for payment of salaries and related expenses,
investor relations expenses and consultant fees.

In
2005, the operating expenses of Jemtex totaled $3.2 million, compared to $2.8 million in
2004. The majority of these expenses ($2.5 million and $2.2 million in 2005 and 2004,
respectively) were related to research and development expenses. The balance of the
expenses ($0.7 million and $0.6 million in 2005 and 2004, respectively) were related to
general and administrative expenses and were mainly used for payment of salaries and
related expenses.

In
2003, the operation expenses comprised of only general and administrative expenses
relating to Scailex Corporations headquarters because the financial results
(including operating expenses) of Jemtex were not consolidated with ours in 2003.

Research
and development expenses.Research and development, or R&D, expenses consist
primarily of costs associated with the design, technology development, product
development, pre-manufacture and testing of new products and enhancements of existing
products, salaries and related personnel costs, patent prosecution and maintenance costs,
and other expenses related to product development and research programs. We expense all
research and development costs as they are incurred.

All
of the R&D expenses relate to Jemtex. In 2005, these expenses were relatively the same
as in 2004 mainly because of similar level of activity in Jemtex.

Marketing
expenses. Marketing expenses consist primarily of travel expenses and of promotional
and investor relations activities. All of the marketing expenses relate to Jemtexs
operations.

24

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General
and administrative expenses. General and administrative, or G&A, expenses consist
primarily of salaries and related costs for our executive and administrative staff, and
insurance, legal and accounting expenses, both in Israel and abroad, as well as investor
relations expenses.

G&A
expenses in 2004 were higher compared to the G&A expenses in 2005 mainly due to the
reduction in Jemtexs workforce in 2005. In 2004, the G&A expenses increased
compared to 2003 mainly because we commenced the consolidation of Jemtexs results
during that year.

Amortization Charges

The
amortization expenses in 2005 and 2004 remained at the same level of $1.2 million. The
amortization expenses during 2005 and 2004 resulted primarily from the periodic
amortization charges resulting from investments in Jemtex.

Financial and Other
Income and Expenses

Financial income (expenses), net,
consists primarily of interest earned on bank overnight deposits and on marketable bonds
(especially U.S. government and U.S. agency bonds), interest incurred on bank and other
loans and exchange rate differences.

|                                          | Year ended December 31,
|----------------------------------------- | -----------------------
|
|
|
|
|Interest income                           |                        
|Loss on marketable securities             |                        
|                                          |                        
|Interest on loan from associated company  |                        
|Bank charges and other (including         |                        
|foreign exchange transaction losses, net) |                        
|                                          |                        
|Total financial income, net               |                        
|                                          |                        

Net financial income increased from
$2.7 million in 2004 to $4.3 million in 2005, due primarily to the increase in our cash
balance due to the sale of the business of Scailex Vision. Furthermore, the overnight
LIBOR rate which we receive on our cash deposits has increased in 2005 from 2.3% in the
beginning of the year to 4.3% at the end of the year resulting in a relatively significant
impact on the financial income. Net financial income increased from $0.1 million in
2003 to $2.7 million in 2004, due primarily to interest earned on the funds received from
the sale of SDP in the beginning of 2004.

Other income, net, in 2005 totaled
$0.9 million, compared to $0.7 million in 2004. In 2005, the income resulted primarily
from a dividend received from an associated investee (Dor Ventures) and in 2004 the income
resulted primarily from a forfeiture of a shareholder loan in Jemtex. In 2003, there were
several sales that resulted in capital gains, primarily the sale of Creo shares.

Taxes

Israeli companies are generally
subject to income tax at the corporate rate of 34% for 2005 (compared to 36% in 2003 and
35% for 2004). Following an amendment to the Israeli Income Tax Ordinance [New Version],
1961, which came into effect on January 1, 2006, the corporate tax rate is scheduled to
decrease as follows: 31% for the 2006 tax year, 29% for the 2007 tax year, 27% for the
2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter.

Capital gains derived after January
1, 2003, are subject to capital gains tax at a rate of 25% (other than with respect to
gains deriving from the sale of listed securities). See in Item 5B 
Corporate Tax Rate below for more information.

25

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As of the end of 2005, our deferred
income tax assets were reduced from $146 million at December 31, 2004 to $141 million,
mainly due to the sale of our interests in Objet and the utilization of carry-forward
losses. We have created a valuation allowance on almost all of our deferred tax assets,
since we believe that it is not more likely than not that these deferred tax assets will
be utilized.

A number of factors may impact future
taxable income, including those discussed under Risk Factors in Item 3D, as
well as any tax planning strategies. To the extent that estimates of future taxable income
are reduced or not realized, the amount of the deferred tax asset considered realizable
could be adversely affected.

Equity Investments

Our share in the results of
associated companies was income of $2.9 million in 2005 that derived mainly from the
capital gain generated from the sale of our interests in Objet. In 2004, our share in
losses of associated companies was $1.4 million compared with $5.6 million in 2003. The
decrease was due to the fact that in 2004 Objet was the sole investment accounted for
under the equity method (the book value of our investment in Objet was recorded at close
to zero on our balance sheet as of March 31, 2005), compared to 2003 in which Jemtex was
also accounted for under the equity method.

IMPACT OF RELATED PARTY
TRANSACTIONS

We have entered into a number of
agreements with certain companies with whom our principal shareholders, Clal and/or
Discount, are affiliated.

In December 2002, we entered into a
Share Exchange Agreement with Scailex Vision, in which Clal and Discount each held
approximately 14% of the share capital, and Scailex Vision International, pursuant to
which we combined the operations of these companies. Among other factors considered in
deciding to approve the transaction, our board of directors received a written opinion
from its financial advisor in connection with the transaction, as to the fairness, from a
financial point of view, of the consideration to be paid by us in connection with the
transaction. In July 2003 and May 2004 we, CEI and Discount invested in Scailex Vision by
participating in rights offerings conducted by Scailex Vision. In addition, we entered
into additional agreements with Scailex Vision, Clal and Discount which are incidental to
the sale of Scailex Visions business to Hewlett-Packard.

Please see Item 7B 
Related Party Transactions below for specific details as to these transactions and
certain other related party transactions entered into by us.

We believe that the terms of these
related party transactions are not different in any material respect than the terms we
could receive from unaffiliated third parties. The pricing and/or value of such
transactions were arrived based on arms-length negotiations between the parties and,
in certain cases, based upon, among other things, opinions of third party financial
advisors. Our management reviewed the pricing of such transactions and confirmed that they
were not materially different than could have been obtained from unaffiliated third
parties.

Under the Companies Law and recently
issued NASDAQ rules, certain transactions and arrangements with interested parties require
approval by our board of directors and our audit committee and, in some cases, also
require approval by our shareholders. In this respect, see the discussion in Item 6C
 Approval of Specified Related Party Transactions under Israeli Law below.

26

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IMPACT OF INFLATION AND
EXCHANGE RISKS

New
Israeli Shekel.Historically, the New Israeli Shekel, the Israeli currency, has been
devalued in relation to the U.S. dollar and other major currencies principally to reflect
the extent to which inflation in Israel exceeds average inflation rates in Western
economies. Such devaluations in any particular fiscal period are never completely
synchronized with the rate of inflation and therefore may lag behind or exceed the
underlying inflation rate. The table below sets forth the annual rate of inflation, the
annual rate of devaluation (or revaluation) of the NIS against the U.S. dollar and the gap
between the two for the periods indicated:

|                            | Year Ended December 31,
|--------------------------- | -----------------------
|
|
|
|
|Inflation (Deflation)       |                        
|Devaluation (Revaluation)   |                        
|Inflation (devaluation) gap |                        

Costs not denominated in, or linked
to, dollars are translated to dollars, when recorded, at prevailing exchange rates for the
purposes of our financial statements. To the extent such costs are linked to the Israeli
Consumer Price Index, such costs may increase if the rate of inflation in Israel exceeds
the rate of devaluation of the shekel against the dollar or if the timing of such
devaluations were to lag considerably behind inflation. Conversely, such costs may, in
dollar terms, decrease if the rate of inflation is lower than the rate of devaluation of
the shekel against the dollar. Accordingly, our Israeli operations experienced an increase
in dollar costs in 2003 and 2004, and a decrease in 2001, 2002 and 2005. The
representative dollar exchange rate for converting the shekel to dollars, as reported by
the Bank of Israel, was NIS 4.603 on December 31, 2005 (NIS 4.308 on
December 31, 2004).

Other
currencies.Until the Creo transaction in April 2000, we had substantial operations
outside the United States and Israel, and accordingly maintained substantial non-dollar
balances of assets, including substantial accounts receivable balances related to sales
made in non-dollar currencies, mostly European currencies and Japanese yen. Our general
policy was to hedge against the exchange rate exposure arising from the existence of such
non-dollar business activities. Subsequent to the Creo transaction, SDP and Scailex Vision
established operations of their own outside the United States and Israel, primarily in
Europe, but the volume of activity in non-dollar currencies was significantly reduced
compared to previous years and, following the sale of Scailex Visions operations in
November 2005, was eliminated altogether.

See also Item 11.
Quantitative and Qualitative Disclosures about Market Risk.

CRITICAL ACCOUNTING
POLICIES

Our discussion and analysis of our
financial condition and results of operations included in this Item 5 and elsewhere in
this Annual Report are based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these financial statements often
requires us to make estimates, judgments and assumptions, which may affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures as of the date
of the financial statements and during the reported period. On a regular basis, we
evaluate and may revise our estimates. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent. Some of those judgments can be complex, and
consequently, actual results may differ from those estimates. For any given individual
estimate, judgment or assumption made by our management, there may be alternative
estimates, judgments or assumptions, which are also reasonable. We believe that the
estimates, assumptions and judgments described below have the greatest potential impact on
our financial statements and consider these to be our critical accounting policies:

Deferred tax valuation
allowance. Deferred taxes are determined utilizing the asset and liability
method, based on the estimated future tax effect resulting from differences between the
amounts presented in our financial statements and those taken into account for tax
purposes, in accordance with the related tax laws, and from tax losses carryforward.
Valuation allowances are included in respect of deferred tax assets when it is more likely
than not that all or a portion of such assets will not be realized. We have considered
future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. Due to the uncertainty as to utilization
of the tax losses carryforward, a valuation allowance was provided to reduce our deferred
tax assets, because we expect that for the foreseeable future it is not more likely than
not that all of the deferred tax assets will be realized. Conversely, the carrying value
of our net deferred tax assets assumes that we will be able to generate sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions. A number
of factors may impact future taxable income, including those discussed under Risk
Factors in Item 3D, as well as any tax planning strategies. To the extent that
estimates of future taxable income are reduced or not realized, we could be required to
establish additional valuation allowances and the amount of the deferred tax asset
considered realizable could be adversely affected by a material amount. If it were
determined that we would be able to realize a deferred tax asset in excess of its net
recorded amount, an adjustment to deferred tax assets would increase our income.

27

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Treatment of income
tax. Our tax returns as well as those of our subsidiaries are subject to
examination by tax authorities in various jurisdictions. In general, our management
considers tax provisions based on its reasonable estimate of the outcome of the
examination. Our management believes that the estimates reflected in the financial
statements reflect our tax liabilities. However, our actual tax liabilities may ultimately
differ from those estimates if taxing authorities successfully challenge our tax treatment
or if we were to prevail in matters for which provisions have been established.
Accordingly, our effective tax rate in a given financial statement period may materially
change.

Impairment of goodwill,
intangible assets and other long-lived assets. Under current accounting
standards, we make judgments about the useful lives and fair value of goodwill, other
intangible assets and other long-lived assets, including assumptions about estimated
future cash flows and other factors to determine the fair value of the respective assets.
On January 1, 2002, we adopted FAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and FAS 142, Goodwill and Other Intangible
Assets. FAS 144 requires that long-lived assets be reviewed for impairment and, if
necessary, written down to the estimated fair values, whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable
through undiscounted future cash flows. FAS 142 generally provides that goodwill and
intangible assets (1) with indefinite lives will no longer be amortized and (2) deemed to
have an indefinite life will be tested for impairment at least annually. Judgments and
assumptions about future cash flows and remaining lives are complex and often subjective
and can be affected by a variety of external and internal factors. If these estimates or
related assumptions change in the future, we may be required to record impairment charges
related to these assets.

RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS:

SFAS No. 123. In
December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based
Payment (SFAS No. 123(R)). SFAS No. 123(R) addresses all forms
of share-based payment (SBP) awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS
No. 123(R) supersedes our current accounting for SBP awards under APB No. 25 and
requires us to recognize compensation expense for all SBP awards based on fair value. In
March 2005, the SEC released Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB No. 107) relating to the adoption of
SFAS No. 123(R). Beginning in the first quarter of 2006, the Company will adopt the
provisions of SFAS No. 123(R) under the modified prospective transition method. Under
the new standard, our estimate of compensation expense will require a number of complex
and subjective assumptions including our stock price volatility, employee exercise
patterns (expected life of the options), future forfeitures and related tax effects. The
Company recognize SBP compensation expense based on FASB Interpretation 28
Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans an interpretation of APB Opinions No. 15 and 25", which provides for
accelerated expensing and will continue to do so after the adoption of SFAS
No. 123(R). SFAS 123R requires the Company to estimate the number of forfeitures
expected to occur and record expense based upon the number of awards expected to vest.
Currently, the Company accounts for forfeitures as they accrue as permitted under previous
accounting standard. The Company does not expect the statement to have a material effect
on its consolidated financial position, results of operations or cash flows. In addition,
the Company estimates that the cumulative effect of adopting SFAS No. 123R as of its
adoption date (January 1, 2006), based on the awards outstanding as of December 31, 2005,
will not be material. This estimate does not include the impact of additional awards,
which may be granted, or forfeitures, which may occur after December 31, 2005 and prior to
the Companys adoption of SFAS No. 123R.

28

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SFAS No. 154. In
June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS No. 154). SFAS No. 154 supercedes of
Accounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application as the required method for reporting
a change in accounting principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting principle is impracticable and
for reporting a change when retrospective application is impracticable. SFAS No. 154
also addresses the reporting of a correction of an error by restating previously issued
financial statements. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. SFAS
No. 154 applies to accounting changes and error corrections that are made in fiscal years
beginning after December 15, 2005. The Company will be adopting this pronouncement
beginning in the fiscal year 2006 and does not currently believe that it will have a
material impact on its consolidated financial position, results of operations or cash
flows.

FAS 155. In February 2006, the
FASB issued FAS 155, accounting for certain Hybrid Financial Instruments, an amendment of
FASB statements No. 133 and 140. This statement permits fair value measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise would
require bifurcation. This statement is effective for all financial instruments acquired or
issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys
fiscal year, provided that no interim period financial statements have bee issued for the
financial year. Management is currently evaluating the impact of this statement, if any,
on the Companys financial statements or its results of operations.

FAS 115-1 and
FAS 124-1. In November 2005, the FASB issued FSP FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments (FSP 115-1 and 124-1), which clarifies when an
investment is considered impaired, whether the impairment is other than temporary, and the
measurement of an impairment loss. It also includes accounting considerations subsequent
to the recognition of an other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as other-than-temporary impairments.
FSP 115-1 and 124-1 are effective for all reporting periods beginning after
December 15, 2005. The Company does not believe adoption of FSP FAS 115-1 and
FAS 124-1 will have a material effect on its consolidated financial position, results
of operations or cash flows.

|B. | LIQUIDITY
&CAPITAL RESOURCES
|-- | ----------------------------

OVERVIEW

On December 31, 2005, our net
working capital from continuing operations was $222.3 million, compared to
$134.0 million on December 31, 2004. The net working capital increased primarily as a
result of an increase of approximately $88.0 million in cash and short term investments
that resulted from the proceeds we received in connection with the sale of Scailex
Visions business.

We have financed our operations
through cash generated from operations, including the proceeds from the sale of SDPs
business in January 2004 which generated, in the aggregate, approximately $262 million in
cash. Cash, cash equivalents, short-term investments and a restricted deposit at
December 31, 2005 were $235.9 million compared to $147.6 million at
December 31, 2004. The increase in cash, cash equivalents and short-term investments
is attributable primarily to the proceeds received from the sale of Scailex Visions
business, which was off-set by repayments of loans drawn by Scailex Vision.

29

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Cash Flows

We had negative net cash used in
operations in 2005. The net cash flow used in operations in 2005 was approximately
$27 million, compared to approximately $10.3 million in 2004 (and $6.2 million in
2003). The negative cash flows from operations were due primarily to the sale of Scailex
Visions business.

Our investment activities currently
consist primarily of investments and redemptions of short-term bank deposits and U.S.
government securities. In 2005, $179.8 million was generated from investment activities
(excluding $4.8 million of reduction in restricted deposit) compared to $183.2 million
that was generated from investment activities (excluding $10.0 million of restricted
deposit) in 2004 and $50.9 million in 2003. The cash generated from investment activities
in 2005 is related primarily to the proceeds received from the sale of Scailex
Visions business while the cash generated from investment activities in 2004 was
related primarily to the proceeds received from the sale of SDPs business. The cash
generated form these sales in 2004 and 2005 was offset by cash used for investments in
marketable securities, which were significantly higher in 2004 than in 2005. The increase
in cash generated from investment activities in 2004 compared to 2003 is related primarily
to cash generated from the sale of SDPs business and the follow-on investments and
redemptions of short-term bank deposits and U.S. government securities. Major uses of cash
for investing activities during 2005 included investments in U.S. government securities.

Net cash used in financing activities
in 2005 was approximately $43.2 million, consisting mainly of repayments of loans drawn by
Scailex Vision. Net cash used in financing activities in 2004 was approximately $133.7
million, consisting mainly of $117.9 million used in the cash distribution and tender
offer and a further $15.8 million used for repayments of long and short term loans. Net
cash used in financing activities in 2003 was approximately $9.7 million, consisting
mainly of the repayment of the $18.8 million note we issued to Creo, which was offset by
Scailex Visions borrowings under its credit facilities.

In sum, the net cash flow (cash and
cash equivalents) increase in 2005 amounted to $114.5 million.

The ability of our subsidiaries to
transfer funds to us in the form of cash dividends is generally subject to restrictions
imposed by the corporation laws of the respective jurisdiction in which they are
incorporated. For example, our Israeli subsidiaries and Group Companies may not pay
dividends unless they meet specified criteria or, in certain cases, only with the approval
of the court. We do not believe that such restrictions or any other restrictions imposed
by law on our subsidiaries have had or are expected to have any material adverse impact on
our ability to meet our cash obligations.

Capital Expenditures

Capital expenditures in fixed assets
of continuing operations in 2003, 2004 and 2005 were approximately $0, $0.01 million and
$0.02 million, respectively. Our capital expenditures by way of equity and convertible
debt investments in our Group Companies (other than our consolidated subsidiaries) in
2003, 2004 and 2005 were approximately $3.1 million, $0.6 million and $0.3 million,
respectively. There are commitments for investment in Dor Ventures in total amount of
approximately $1.4 million as of June 15, 2006.

Credit Facilities

As of November 1, 2005, Scailex
Visions borrowings under its revolving lines of credit and long-term loans for
working capital and investments purposes from banks in Israel amounted to
approximately $27.9 million. These amounts were repaid in full following the closing
of the sale of Scailex Visions business.

In 2000, Scailex Vision borrowed from
one of its suppliers a long-term convertible loan of $5 million. As of June 1, 2006, the
principal amount outstanding is $2.75 million. This loan does not bear any interest.

30

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Tax Audits

Not all of the tax returns of our
operations are final and, from time to time, we are subject to further audit and
assessment by the applicable tax authorities, including the following:

| |  | In
Israel, we have received, or are considered to have received, final tax assessments
through the 2000 tax year and Scailex Vision is being audited for the years 2001 through
2005, including with respect to the sale of its business to Hewlett-Packard.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the United States, in partial settlement of an audit by the Internal Revenue Service
(IRS) of our U.S. subsidiaries for the years 1992 through 1996, we consented to a partial
assessment by the IRS for approximately $10.6 million of federal taxes on certain
agreed upon issues. In February 2004, we reached a settlement with the IRS, whereby we
agreed to an assessment of $5.9 million of additional federal income taxes for these
years (rather than $29.6 million as initially proposed by the IRS, excluding interest
accrued thereon). We had previously established balance sheet reserves on account of this
audit which turned out to be sufficient. Accordingly, we paid as a final additional cash
cost of the IRS audit (taking into consideration the full federal tax assessment, state
taxes and interest thereon, and after application of a $21.5 million advance payment), an
amount of approximately $11.6 million. In December 2004, as a result of the conclusion of
the said IRS audit, we filed amended federal tax returns for the years 1994, 1995 and
1997, requesting a refund of $7.8 million of federal taxes. Since we estimate that there
is a high likelihood that we will receive the refund, we recorded a federal income tax
receivable of $7.8 million as part of discontinued operations on 2005. SDP currently is
being audited for the year 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
mid-2001, Scailex Vision International filed an application for an advance ruling by Hong
Kongs Inland Revenue Department (IRD). In general, this application sought the IRDs
agreement that Scailex Vision Internationals sales outside of Hong Kong will be
exempt from tax in Hong Kong and that sales within Hong Kong will be subject to a lower
tax rate. During 2003, the IRD declined the application. Thereafter, Scailex
Vision International sold the local subsidiary and ceased the relevant activity
in Hong Kong. Scailex Vision International believes that it has appropriate
provisions relating to this matter.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

While we believe that we established
sufficient reserves for these matters, additional payments may be required at the
conclusion of these matters. It is not possible to predict at this time whether and when
any eventual payments will be made.

Cash Outlook for 2006

In 2006, we do not expect that our
majority owned subsidiary, Jemtex, will generate sufficient cash for our operations. Our
investment activities, which may include continued investment in Jemtex and investments in
our Group Companies, contingent payments for past acquisitions and investments in capital
assets, may be higher than the amount of cash generated from our financial income.
However, our management believes that existing cash and short-term investments will be
sufficient to meet operating requirements in the year 2006

EFFECTIVE CORPORATE TAX
RATE

Israeli companies are generally
subject to corporate tax on their taxable income at the rate of 34% for the 2005 tax year
(compared to 35% for the 2004 tax year and 36% for the 2003 tax year). Following an
amendment to the Israeli Income Tax Ordinance [New Version], 1961, which came into effect
on January 1, 2006, the corporate tax rate is scheduled to decrease as follows: 31% for
the 2006 tax year, 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009
tax year and 25% for the 2010 tax year and thereafter. Israeli companies are generally
subject to capital gains tax at a rate of 25% for capital gains derived after January 1,
2003 (other than with respect to gains deriving from the sale of listed securities).
However, the manufacturing facilities in Israel of Jemtex have been granted Approved
Enterprise status under the Law for the Encouragement of Capital Investments, 1959.
Consequently, these facilities are eligible for tax benefits. The tax benefit is afforded
for seven years from the year the relevant facility first earns taxable income, but no
later than 12 years from the first year of operating or 14 years from the year in which
the approval was granted. Subject to compliance with applicable requirements, the income
derived from these Approved Enterprise facilities will be fully tax-exempt during the
first two years of the seven-year tax benefit, and will be subject to a reduced tax rate
of a maximum of 25% during the remaining five years, but in any event not later than 2006
regarding Approved Enterprise facilities that are already approved and effective. The
actual tax rate will depend upon the percentage of non-Israeli holders of the share
capital of these companies.

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See below under Item 10E  Taxation and in Note 12 to our
consolidated financial statements for more information on our income taxes.

The above benefits are conditioned
upon our fulfillment of conditions stipulated by the Law for the Encouragement of Capital
Investments, the regulations promulgated thereunder and the instruments of approval for
the specific investments in Approved Enterprises. If we fail to comply with these
conditions, our benefits may be canceled and we may be required to refund the amount of
the benefits received, in whole or in part.

MARKET RISK

For information on our market risk
and the use of financial instruments for hedging purposes, see below under Item 11
 Quantitative and Qualitative Disclosures About Market Risk.

GRANTS FROM THE OFFICE OF
THE CHIEF SCIENTIST

The Government of Israel encourages
research and development projects through the Office of Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to
the Law for the Encouragement of Industrial Research and Development, 1984, and the
regulations promulgated thereunder, commonly referred to as the R&D Law. This
governmental support is conditioned upon the participants ability to comply with
certain applicable requirements and conditions specified in the Chief Scientists
program and with the provisions of the R&D Law. In June 2005, an amendment to the
R&D Law came into effect, which intends to make the law more compatible with the
global business environment by, among other things, relaxing restrictions on the transfer
of manufacturing rights outside Israel and on the transfer of Chief Scientist-funded
know-how outside of Israel, as described below

Generally, grants from the Office of
the Chief Scientist constitute up to usually 50% of qualifying research and development
expenditures for particular approved projects. Grants received are generally repaid
through a mandatory royalty based on revenues from products (and ancillary services)
incorporating know-how developed, in whole or in part, with the grants. Royalty
obligations vary between 100% and 150% of the dollar-linked amount of the grant. Royalties
on grants recorded for programs beginning on or after January 1, 1999 bear interest linked
to the LIBOR. The Israeli government is currently in the process of formulating a
proposed amendment to the royalty regulations promulgated under the Research and
Development Law. The amendment is expected to include changes to the
royalty rates, which would vary from company to company based on the amount of its
revenues and approval date of its program, up to a rate of 6%, and, as of 2006,
to increase the rate of interest accruing on grants by 1% per
year. The amendment is expected to have retroactive effect from January
1, 2006, although there is no assurance as to whether and when it will
be adopted.

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The R&D Law and the terms of the
Office of the Chief Scientist grants generally prohibit participants from manufacturing
products or transferring technologies developed using these grants outside of Israel
without special approvals. Even if approval to manufacture the products outside of Israel
is obtained, the participant would generally be required to pay an increased total amount
of royalties, which may be up to 300% of the grant amount plus interest, depending on the
portion of the total manufacturing volume that is performed outside of Israel. The
amendment to the R&D Law further permits the Chief Scientist, among other things, to
approve the transfer of manufacturing rights outside Israel in exchange for an import of
different manufacturing into Israel as a substitute, in lieu of the increased royalties.
Effective April 1, 2003, the R&D Law also allows for the approval of grants in cases
in which the applicant declares that part of the manufacturing will be performed outside
of Israel or by non-Israeli residents and the research committee is convinced that doing
so is essential for the execution of the program. This declaration will be a significant
factor in the determination of the Chief Scientist whether to approve a program and the
amount and other terms of benefits to be granted. For example, the increased royalty rate
and repayment amount will be required in such cases.

The R&D Law also provides that
know-how developed under an approved research and development program may not be
transferred to third parties in Israel without the approval of the research committee.
Such approval is not required for the export of any products resulting from such research
or development. The R&D Law further provides that the know-how developed under an
approved research and development program may not be transferred to any third parties
outside Israel, except in certain circumstances and subject to the Chief Scientists
prior approval. The Chief Scientist may approve the transfer of Chief Scientist-funded
know-how outside Israel, generally in the following cases: (a) the grant recipient pays to
the Chief Scientist a portion of the sale price paid in consideration for such Chief
Scientist-funded know-how (according to certain formulas), or (b) the grant recipient
receives know-how from a third party in exchange for its Chief Scientist-funded know-how,
or (c) such transfer of Chief Scientist-funded know-how arises in connection with certain
types of cooperation in research and development activities.

The R&D Law imposes reporting
requirements with respect to certain changes in the ownership of a grant recipient. The
law requires the grant recipient and its controlling shareholders and interested parties
to notify the Office of the Chief Scientist of any change in control of the recipient or a
change in the holdings of the means of control of the recipient that results in a
non-Israeli becoming an interested party directly in the recipient and requires the new
interested party to undertake to the Office of the Chief Scientist to comply with the
R&D Law. In addition, the rules of the Office of the Chief Scientist may require prior
approval of the Office of the Chief Scientist or additional information or representations
in respect of certain of such events. For this purpose, control is defined as
the ability to direct the activities of a company other than any ability arising solely
from serving as an officer or director of the company. A person is presumed to have
control if such person holds 50% or more of the means of control of a company. Means
of control refers to voting rights or the right to appoint directors or the chief
executive officer. An interested party of a company includes a holder of 5% or
more of its outstanding share capital or voting rights, its chief executive officer and
directors, someone who has the right to appoint its chief executive officer or at least
one director, and a company with respect to which any of the foregoing interested parties
owns 25% or more of the outstanding share capital or voting rights or has the right to
appoint 25% or more of the directors. Since Scailex currently participates in these
programs solely through some of its Group Companies, we do not believe that any
non-Israeli who becomes a holder of 5% or more of our outstanding shares is required to
comply with the aforesaid notification and undertaking requirements.

We recorded grant participation from
the Office of the Chief Scientist totaling approximately $0.18 million in 2004 and $0.06
million in 2005 on account of Jemtexs operations. Pursuant to the terms of these
grants, Jemtex is obligated to pay royalties in the range of 3% to 5% of revenues derived
from sales of products funded with these grants. As of December 31, 2005, our overall
contingent liability to the Office of the Chief Scientist in respect of grants received by
Jemtex was approximately $3.2 million. The continued decrease in level of grants since
2002 is due to the respective reduction in the business and development activities of
Jemtex.

33

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|C. | RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
|-- | ----------------------------------------------------

Following the sale of Scailex
Visions business in November 2005, research and development activities are being
conducted only through Jemtex.

Our research and development
activities primarily consisted of approximately 11 employees.

As part of the SDP transaction in
January 2004 and the Scailex Vision transaction in November 2005, Kodak and
Hewlett-Packard acquired all the intellectual property of these subsidiaries relating to
the digital printing business. A number of issued patents and pending applications are
still held by our other Group Companies.

|D. | TREND
INFORMATION
|-- | -----------------

Our plan of operation is to explore
and consider strategic alternatives relating to our remaining holdings as well as to other
investments and opportunities, including a possible merger or business combination with a
domestic or foreign, private or public operating entity. There is no assurance that any of
these alternatives will be pursued or, if one is pursued, the timing thereof or terms on
which it would occur. Since this may result in the engagement of new areas of operations,
our financial data reported in this Annual Report is not necessarily indicative of our
future operating results or financial position.

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

We are not a party to any off-balance sheet
arrangements that have or are reasonably likely to have a current or future material
effect on our financial condition, changes therein, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.

|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

The table below summarizes, as of
December 31, 2005, our following contractual obligations to third parties for the periods
indicated:

|                                           | Payments Due by Period (in $ millions)
|------------------------------------------ | --------------------------------------
|
|
|
|
|Long-term debt                             |                                       
|                                           |                                       
|Operating leases (facilities and vehicles) |                                       
|                                           |                                       
|                                           |                                       
|Total contractual cash obligations         |                                       
|                                           |                                       

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As to our royalty obligations and
outstanding guarantees as at December 31, 2005, see Note 8 to our consolidated financial
statements included in this Annual Report.

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

|A. | DIRECTORS
AND SENIOR MANAGEMENT
|-- | -------------------------------

The following table sets forth
certain information with respect to our directors and senior management:

|Name                              | Age | Director Since | Position                                       
|--------------------------------- | --- | -------------- | -----------------------------------------------
|
|
|
|
|Arie Mientkavich                  | 63  | 2006           | Chairman of the Board of Directors*            
|Raanan Cohen (1) (2) (3)          | 38  | 2002           | President and Chief Executive Officer; Director
|Yahel Shachar                     | 44  | --             | Chief Financial Officer & Corporate Secretary  
|Avraham Asheri (2) (4) (5)        | 68  | 2000           | Director; Chairman of the Audit Committee*     
|Ophira Rosolio-Aharonson (2) (4)  | 56  | 2000           | Director*                                      
|Yoav Biran (4) (6)                | 67  | 2005           | Director*                                      
|Avraham Fischer (7) (8) (10)      | 49  | 2003           | Director*                                      
|Shay Livnat (8) (9)               | 47  | 2003           | Director*                                      
|Shimon Alon                       | 56  | 2003           | Director*                                      
|Gerald Dogon (2) (4) (6) (7) (10) | 66  | 2003           | Director*                                      
|Nachum Shamir                     | 52  | 2004           | Director                                       

|* | Designated
as independent director in accordance with NASDAQ Marketplace Rules.
|- | ---------------------------------------------------------------------------------

|(1) | Nominee
of Discount and its wholly owned subsidiary.
|--- | ----------------------------------------------------

|(2) | Member
of the Financial Investments Committee of the Board of Directors.
|--- | ------------------------------------------------------------------------

|(3) | Seconded
to us by Discount pursuant to the Services Agreement described under                Item
7B  Services Agreements below. Mr. Cohen is the son of                Mr.
Eliahu Cohen, a member of the board of directors of Clal, Discount and IDB
               Holding Corporation Ltd. (IDB Holding), and Chief Executive
Officer                and a director of IDB Development Corporation Ltd. (IDB
               Development).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Member
of the Audit Committee of the Board of Directors.
|--- | --------------------------------------------------------

|(5) | Initially
proposed for election as a director by Discount.
|--- | ----------------------------------------------------------

|(6) | An
Outside Director pursuant to the Companies Law.
|--- | ----------------------------------------------------

|(7) | Member
of the Remuneration Committee of the Board of Directors.
|--- | ---------------------------------------------------------------

|(8) | Nominee
of Clal through CEI, its wholly owned subsidiary.
|--- | ---------------------------------------------------------

|(9) | Mr.
Livnat is the son of Avraham Livnat, an affiliate of IDB Holding, and the
               brother of Zvi Livnat, a co-CEO of Clal and a director of several
companies                within the IDB group, including IDB Holding, IDB Development and
Discount.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Member
of the Nominating Committee of the Board of Directors.
|---- | -------------------------------------------------------------

Arie Mientkavich was appointed
Chairman of our board of directors in June 2006. He has been the Deputy Chairman of
Gazit-Globe Ltd. since May 2005. From November 1997 to January 2006, he served as an
active Chairman of Israel Discount Bank Ltd. and its major subsidiaries. Prior to joining
Israel Discount Bank, Mr. Mientkavich was the active Chairman of the Israeli
Securities Authority from 1987 to 1997 and the General Counsel of the Israeli Ministry of
Finance from 1979 to 1987. Mr. Mientkavich holds bachelors degrees in political
sciences and in law from the Hebrew University, Jerusalem, Israel.

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Raanan Cohen was appointed as
Interim President and Chief Executive Officer of Scailex in January 2004. He has also
served as Vice President of Discount since August 2001, having previously served as
Executive Assistant to the Chief Executive Officer of Discount from 1999. Prior to joining
Discount, he was an associate with McKinsey & Company, Inc. in London from 1997. Mr.
Cohen is a lawyer, admitted to the Israeli Bar, and from 1994 to 1995 he served as an
attorney with S. Horowitz & Co., an Israeli law firm. He is a director of a number of
companies in the Discount group, including Cellcom Israel Ltd. and Property & Building
Corporation Ltd. Mr. Cohen holds bachelors degrees in law and in economics from Tel Aviv
University and a masters degree in management from J.L. Kellogg Graduate School of
Management, Northwestern University, Evanston, Illinois.

Yahel Shachar joined Scailex
in December 2001 and was appointed Chief Financial Officer and Corporate Secretary in
February 2002. Before he joined Scailex, Mr. Shachar served as Chief Operating Officer at
BVR Technologies Ltd. from 1998 to 2001. From 1995 to 1998, he was an attorney with
Goldfarb, Levy, Eran & Co., an Israeli law firm. Mr. Shachar holds an LL.M. degree
from Georgetown University (specializing in corporate, tax and securities law) in
Washington, D.C., and an LL.B. degree from the Tel Aviv University, and is a member of the
Israeli and New York bar associations.

Avraham Asheriis an economics advisor. He served as President and Chief Executive Officer of Israel
Discount Bank Ltd. from 1991 until 1998, having previously held the position of Executive
Vice President and a member of the banks Management Committee from 1983. Prior to
joining Israel Discount Bank, during a period of 23 years Mr. Asheri held
various offices at the Ministries of Industry and Finance, including Director General of
the Ministry of Industry and Trade, Managing Director of the Investment Center in Israel
and Trade Commissioner of Israel to the United States. He is a member of the boards of
directors of several companies, including Elron Electronic Industries Ltd., Elbit Systems
Ltd., Africa-Israel Investments Ltd. and Discount Mortgage Bank Ltd. Mr. Asheri holds
a bachelors degree in economics and political science from the Hebrew University,
Jerusalem, Israel.

Ophira Rosolio-Aharonson is an
executive director at several private and publicly traded high-tech companies, a strategic
business consultant and a partner and advisor to several venture capital firms in Israel
and in the U.S. She was a co-founder of Seagull Technology, Inc. and served as CEO of
Terra Computers, Inc. in the U.S. from 1992 to 1999. Prior to that she served as a senior
executive, holding various managerial positions at Clal Computers & Technology. She is
a member of the board of directors of Cimatron Ltd. and OptiSign Ltd. Ms.
Rosolio-Aharonson has a bachelors degree in applied mathematics and physics and completed
courses required for a masters degree in bio-medical engineering from the Technion 
Israel Institute of Technology in Haifa, and is a graduate of the executive business and
management program of Tel Aviv University.

Yoav Biran was Director
General of the Israel Ministry of Foreign Affairs from 2002 until 2004. Prior thereto,
from 1998 to 2002, he served as Senior Deputy Director General of the Ministry of Foreign
Affairs with special responsibility for the Middle East and the coordination of the peace
process and, from 1999 to 2001, he also acted as a Deputy National Security Advisor
(Foreign Policy) in the Israel Prime Ministers Office. From 1988 to 1993,
Mr. Biran was Israels Ambassador to the United Kingdom. He joined the Israel
Ministry of Foreign Affairs in 1963 and served in a number of increasingly senior
positions, both in Israel and abroad, until his appointment as Ambassador in 1988. He
holds bachelors degrees in International Relations and History and studied for a masters
degree in International Relations from the Hebrew University, Jerusalem, Israel.

36

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Avraham Fischer is the
Executive Vice President of IDB Holding, the deputy Chairman of IDB Development and a
co-Chief Executive Officer of Clal. In addition, he is a partner of Fischer, Behar, Chen,
Well, Orion & Co., an Israeli law firm. Mr. Fischer is the co-founder and co-Chairman
of Ganden Tourism and Aviation Ltd., a company holding investments in Israeli companies
operating primarily in the field of tourism and aviation, and is the co-founder and
Vice-Chairman of Ganden Holdings Ltd., a company holding investments in companies
operating primarily in the fields of real estate, communications and technologies. He
serves as a director of Clal, Discount, ECI Telecom Ltd., American Israeli Paper Mills
Ltd., Elron Electronic Industries Ltd., Vyyo Inc. and several other companies. Mr. Fischer
is a co- Chairman of Matan  Your Way to Give, a non-profit organization.  Mr.
Fischer holds an LL.B. degree from the Tel Aviv University, and is a member of the Israeli
bar association.

Shay Livnat is the Chief
Executive Officer of Zoe Holdings Ltd., a company he founded in 1988, which is primarily
engaged in investments in telecom and high-tech companies. He is a co-Chairman of UPS
Israel (United Parcel Service Israel) and UTI (Isuzu GM trucks) Ltd. and serves as a
director of Taavura Holdings Ltd., IDB Development, Clal and other companies in the IDB
group. From 1988 to 1998, Mr. Livnat served as CEO of Tashtit Group. He holds a bachelor
degree in electrical engineering from Fairleigh Dickinson University, New Jersey, USA.

Shimon Alon is the Chairman of
the Board of Directors of Attunity Ltd. He served, until June 2003, as Chief Executive
Officer of Precise Software Solutions Ltd., a provider of application performance
management, having held such position since September 1997, and was also President of
Precise from September 1997 until December 2000. He also served as a director of Precise
from December 1998. Following the acquisition of Precise by Veritas Software Corp. in June
2003, Mr. Alon served as an executive advisor to Veritas until January 2004. From October
1982 to August 1996, he worked at Scailex and its subsidiaries in various executive
management, sales, marketing and customer support capacities, including Senior Executive
Vice President of Scailex and President of its Graphic Art Group from November 1995 to
August 1996, President and Chief Executive Officer of Scitex America Corp. from May 1995
to July 1996, and Managing Director of Scitex Europe S.A. from February 1993 to May 1995.
He holds a degree from the Executive Management Program at the Harvard Business School in
Cambridge, Massachusetts.

Gerald Dogon was Chief
Financial Officer of DSP Communications, Inc. from August 1994 through October 1998,
during which period he also served DSP as Executive Vice President from July 1996 through
October 1998 and as Senior Vice President from August 1994 through July 1996. Mr. Dogon
also served as a director of DSP from November 1997 to January 1999. From December 1987 to
August 1994, he held various senior financial positions with several Israeli companies,
including Nilit Ltd., Mul-T-Lock Ltd., Israel General Bank Ltd. and Indigo Ltd. Prior
thereto, Mr. Dogon was employed for 16 years by Scailex, where he served as Executive Vice
President and Chief Financial Officer from October 1986 to August 1987, Corporate Vice
President  Finance from September 1971 to October 1986, and Corporate Secretary from
December 1972 to May 1987. He is a director of several private companies and served as a
director of Nogatech, Inc. from 1999 to 2000, of Mul-T-Lock Ltd. from 1997 to 1999, and of
Contahal Ltd. from 1993 to 1998, and acted as chairman of the audit committee at both
Nogatech and Contahal. Mr. Dogon holds a bachelors degree in economics and commerce from
the University of Cape Town, South Africa.

Nachum Shamir is the Chief
Executive Officer and a director of Given Imaging Ltd. since April 2006. Prior thereto, he
served as the President and Chief Executive Officer of Kodak Versamark, Inc. (whose
operations were previously those of SDP) and as Vice President of Eastman Kodak Company
since January 2004. From June 2003 to January 2004, Mr. Shamir served as the
President and Chief Executive Officer of Scailex. From January 2001 to January 2004, he
served as the President and Chief Executive Officer of SDP, having previously served as
its Chief Operating Officer since July 2000. Prior thereto, Mr. Shamir was Managing
Director and General Manager of Scitex Digital Printing (Asia Pacific) Pte Ltd., from the
incorporation of this Singapore-based company in 1994. His prior position was with the
Hong Kong based Scitex Asia Pacific (H.K.) Ltd. (now Creo Asia Pacific (H.K.) Ltd.) from
1993. Mr. Shamir holds a bachelors degree in science from the Hebrew University of
Jerusalem and a masters degree in public administration from Harvard University.

37

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Additional Information

In November 2005, Mr. Dov Ofer, who
served as the President and Chief Executive Officer of Scailex Vision since January 2002,
joined Hewlett-Packard as part of the sale of Scailex Visions business.

Mr.
          Yoav Biran was elected as one of our outside directors at our 2005 Annual
          General Meeting which was held on December 29, 2005. He succeeded Ariella
          Zochovitzky, who had been our outside director since 2002.

Mr.
          Arie Mientkavich was appointed Chairman of our Board of Directors, effective
          June 1, 2006, replacing Mr. Ami Erel, who had been our Chairman since June 2003.

There are no family relationships
between any of the directors or members of senior management named above.

See Item 7A. Major
Shareholders  1980 Voting Agreement for details of an agreement among major
shareholders relating to the election of directors. See Item 8A under the caption
Legal Proceedings for additional information regarding a lawsuit that concerns
certain of our directors and executive officers.

|B. | COMPENSATION
|-- | ------------

General

The following table sets forth with
respect to all directors and senior management of Scailex as a group all cash and
cash-equivalent forms of remuneration paid by Scailex during the fiscal year ended
December 31, 2004 and 2005:

|                                               | Salaries, fees, directors' fees,
commissions and bonuses | Other benefits**
|---------------------------------------------- | -------------------------------------------------------- | ----------------
|
|
|
|
|All directors and senior management as a group |                                                          |                 
|(consisting of 11 persons in 2005)*            |                                                          |                 
|All directors and senior management as a group |                                                          |                 
|(consisting of 11 persons in 2004)*            |                                                          |                 

* Excludes compensation of one person
who is part of our discontinued operations (Scailex Vision).

** These sums were set aside by us
to provide pension, retirement and severance benefits to members of our senior
management.

In accordance with the approval of
our shareholders on December 27, 2000, our outside directors receive annual
directors fees and participation fees equivalent to the maximum fees that were
generally permitted for each outside director under regulations issued pursuant to the
Companies Law (which equate to approximately $10,200 per annum and a participation fee of
approximately $400 per board or committee meeting), although new regulations were approved
in 2003, which would, in certain circumstances, permit us to pay higher fees.
Directors fees and participation fees of a similar amount are paid to all our other
directors, other than directors who are office holders of our principal shareholders.
Except as aforesaid, we did not compensate any of our other directors in 2005 (excluding
compensation for directors who are also our officers).

As of December 31, 2005, one of
our officers held options to purchase our ordinary shares. See Item 6E below.

There are no arrangements or
understandings between us and any of our directors for benefits upon termination of
service.

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CEO Compensation

See the description under DIC
Services Agreement in Item 7B below for details relating to the compensation terms
of Mr. Raanan Cohen, our President and Chief Executive Officer. In addition, in connection
with the sale of the business of Scailex Vision to Hewlett-Packard in November 2005, our
shareholders approved the grant of a special cash bonus in the amount of $168,600 to
Mr. Cohen. In addition to the bonus paid by Scailex, each of Discount and Clal agreed
to pay Mr. Cohen a bonus in an amount of $15,700. These amounts reflect the
respective proportional holdings of Scailex, Clal and Discount in Scailex Vision. The
overall bonus amount paid to Mr. Cohen was $200,000.

|C. | BOARD
PRACTICES
|-- | ---------------

INTRODUCTION

According to the Israeli Companies
Law and our articles of association, the management of our business is vested in our board
of directors. The board of directors may exercise all powers and may take all actions that
are not specifically granted to our shareholders. As part of its powers, our board of
directors may cause us to borrow or secure payment of any sum or sums of money for our
purposes, at times and upon terms and conditions as it determines, including the grant of
security interests in all or any part of our property.

ELECTION OF DIRECTORS

Our directors are elected at annual
meetings of our shareholders. Except for our outside directors (as described below), our
directors hold office until the next annual meeting of shareholders following the annual
meeting at which they were appointed, which is required to be held at least once during
every calendar year and not more than fifteen months after the last preceding meeting.
Directors may be removed earlier from office by resolution passed at a general meeting of
our shareholders. Our board of directors may temporarily fill vacancies in the board until
the next annual meeting of shareholders.

Under an amendment to the Israeli
Companies Law, our board of directors was required to determine, by April 19, 2006, the
minimum number of directors who must have accounting and financial expertise
(as such term is defined in regulations promulgated under the Companies Law). Our board
determined that the board should consist of at least two directors who have
accounting and financial expertise. We have determined that Messrs. Asheri and
Dogon have the requisite accounting and financial expertise.

ALTERNATE DIRECTORS

Our articles of association provide
that a director may appoint another person to serve as an alternate director.An outside director may not appoint an alternate director, except in very
limited circumstances. To qualify as an alternate director, a person must be qualified to
serve as a director but cannot be a director or the alternate director of another
director. An alternate director shall have all the rights and obligations of the director
who appointed him or her. The alternate director may not act for such director at any
meeting at which the director appointing him or her is present. Unless the time or scope
of any appointment is limited by the appointing director, the appointment is effective for
all purposes until the appointing director ceases to be a director or terminates the
appointment. Notwithstanding the foregoing, a director may serve as an alternate director
on any committee of our board of directors of which he or she is not already a member. At
present, there are no appointments of alternate directors.

OUTSIDE DIRECTORS

Under the Companies Law, Israeli
companies whose shares are listed for trading on a stock exchange or have been offered as
securities to the public in or outside of Israel are required to appoint at least two
outside directors. Our outside directors are Yoav Biran and Gerald Dogon.

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The Companies Law provides that a
person may not be appointed as an outside director of a company if the person or the
persons relative, partner, employer or any entity under the persons control
has, as of the date of the persons appointment to serve as an outside director, or
had, during the two years preceding that date any affiliation with:

| |  | the
company;
| | - | ------------

| |  | any
entity controlling the company; or
| | - | --------------------------------------

| |  | any
entity controlled by the company or by its controlling entity.
| | - | ------------------------------------------------------------------

The term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder, excluding service as an outside director of a company that is
offering its shares to the public for the first time. The Companies Law defines the term
office holder of a company to include a director, the chief executive
officer, the chief business manager, a vice president and any officer that reports
directly to the chief executive officer.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to an amendment to the
Companies Law, effective as of January 19, 2006, (1) an outside director must have either
accounting and financial expertise or professional qualifications
(as such terms are defined in regulations promulgated under the Companies Law) and (2) at
least one of the outside directors must have accounting and financial
expertise. While these requirements will apply to us only upon the next
election of one or more outside directors, we believe that Mr. Dogon has the
requisite accounting and financial expertise and that Mr. Biran has the
requisite professional qualifications.

No person can serve as an outside
director if the persons position or other business creates, or may create a conflict
of interests with the persons responsibilities as an outside director or may
otherwise interfere with the persons ability to serve as an outside director. Until
the lapse of two years from termination of office, a company may not engage an outside
director to serve as an office holder and cannot employ or receive services from that
person, either directly or indirectly, including through a corporation controlled by that
person.

Outside directors are to be elected
by a majority vote at a shareholders meeting, provided that either:

| |  | at
least one-third of the shares of non-controlling  shareholders voted at the meeting vote
              in favor of the election; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares voted against the election of the outside director does not exceed
one percent of the aggregate voting rights in the company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

The initial term of an Outside
director is three years and may be extended for an additional three years. The term of
office of Mr. Dogon and Mr. Biran commenced in December 2003 and December 2005,
respectively.

Outside directors may be removed from
office only by the same percentage of shareholders as is required for their election, or
by a court, and then only if the outside directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty to the
company. Each committee of a companys board of directors empowered with powers of
the board of directors is required to include at least one outside director except for the
audit committee, which is required to include all outside directors.

INDEPENDENT DIRECTORS

The NASDAQ Marketplace Rules
currently require us to have at least two independent directors on our Board of Directors.
Under new NASDAQ Marketplace Rules promulgated pursuant to the Sarbanes-Oxley Act of 2002,
effective as of July 31, 2005, a majority of our board of directors must qualify as
independent directors within the meaning of the NASDAQ Marketplace Rules and our Audit
Committee must have at least three members and be comprised only of independent directors
each of whom satisfies the respective independence requirements of the SEC and
NASDAQ.

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Of the ten (10) members of our board
of directors, our board of directors has determined that (1) all, except for Mr. Cohen,
our chief executive officer, and Mr. Shamir, our former chief executive officer, qualify
as independent directors within the meaning of the NASDAQ Marketplace Rules
and (2) Mr. Asheri, Mr. Biran, Mr. Dogon and Ms. Rosolio-Aharonson, being all of the
members of out Audit Committee (see below), also qualify as independent
directors under SEC rules.

COMMITTEES OF THE BOARD

Subject to the provisions of the
Companies Law, our board of directors may delegate its powers to committees consisting of
board members. Our board of directors has established the following committees:

Audit Committee.
Under the Companies Law, our board of directors is required to appoint an audit committee,
which must be comprised of at least three directors, including all of the outside
directors, but may not include:

| |  | the
chairman of the board,
| | - | --------------------------

| |  | a
controlling shareholder or any relative thereof, or
| | - | -----------------------------------------------------

| |  | any
director who is employed by the company or provides services to the company on a
              regular basis.
| | - | -----------------------------------------------------------------------------------------------------------------

Under the Companies Law, the role of
the audit committee is:

| |  | to
examine irregularities in the management of the companys business, including in
consultation with the internal auditor and/or the companys independent accountants,
and to recommend remedial measures to the board, and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
review, and, where appropriate, approve certain related party transactions specified
under the Companies Law, which it may not approve unless at the time of approval the two
outside directors are serving as members of the audit committee and at least one of whom
was present at the meeting in which an approval was granted, as more fully described
below.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since our ordinary shares are listed
on NASDAQ, we are also subject to NASDAQ rules which currently provide that a listed
company is required to have an audit committee consisting of at least three independent
directors, all of whom are financially literate and one of whom has accounting or related
financial management expertise. In addition, pursuant to SEC rules, effective as of July
31, 2005, the members of the Audit Committee are generally required to be independent
within the meaning of the SEC rules. Our Audit Committee comprises Mr. Asheri (chairman of
the Audit Committee), Messrs. Dogon and Biran (our Outside Directors) and Ms.
Rosolio-Aharonson, all of whom are independent within the meaning of applicable NASDAQ and
SEC rules. In addition, we have adopted a charter as required by the NASDAQ rules.

Our Audit Committee assists the
board in fulfilling its responsibility for oversight of the quality and integrity of our
accounting, auditing and financial reporting practices and financial statements and the
independence qualifications and performance of our outside auditors. Our Audit Committee
also has the authority and responsibility to oversee our outside auditors, to recommend
for shareholder approval the appointment and, where appropriate, replacement of our
outside auditors and to pre-approve audit engagement fees and all permitted non-audit
services and fees.

In May 2004, our Board of Directors
resolved to designate the Audit Committee as our Qualified Legal Compliance Committee, or
the QLCC. In its capacity as the QLCC, the Audit Committee is responsible for
investigating reports made by attorneys appearing and practicing before the SEC in
representing us of perceived material violations of U.S. federal or state securities laws,
breaches of fiduciary duty or similar violations by us or any of our agents.

41

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Remuneration
Committee.Our board of directors has also appointed a remuneration
committee, which is currently comprised of Avraham Fischer and Gerald Dogon, all of whom
are independent within the meaning of applicable NASDAQ rules. The role of the
remuneration committee is to review the salaries and incentive compensation of our
executive officers and to make recommendations on such matters for approval by the board
of directors. The members of the remuneration committee also administer our share
incentive and stock option plans, subject to additional board approval where required
pursuant to the Companies Law.

Financial Investments
Committee.Our board of directors has also appointed a financial
investments committee, which is currently comprised of Avraham Asheri, Raanan Cohen,
Gerald Dogon and Ophira Rosolio-Aharonson. The role of the financial investments committee
is to review and manage our financial investments and cash management in accordance with
the principles approved by the board of directors.

Nominating
Committee.In March 2005, our board of directors established a nominating
committee, which is currently comprised of Avi Fischer and Gerald Dogon, all of whom are
independent within the meaning of applicable NASDAQ rules. The role of the nominating
committee is to recommend to our board nominees for election as directors at the annual
meetings of shareholders and to identify candidates to fill any vacancies on the board.

INTERNAL AUDITOR

Under the Companies Law, our board of
directors is also required to appoint an internal auditor proposed by the audit committee.
The role of the internal auditor is to examine, among other things, whether our activities
comply with the law and orderly business procedure. The internal auditor may not be an
interested party or officer holder, or a relative of any interested party or office
holder, and may not be a member of our independent accounting firm. The Companies Law
defines the term interested party to include a person who holds 5% or more of
the companys outstanding share capital or voting rights, a person who has the right
to appoint one or more directors or the general manager, or any person who serves as a
director or as the general manager. Mr. Joseph Ginossar of Fahn, Kanne & Co., an
Israeli accounting firm, serves as our internal auditor.

APPROVAL OF SPECIFIED
RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

Fiduciary Duties of Office
Holders.The Companies Law imposes a duty of care and a duty of loyalty on all office
holders of a company.

The duty of care requires an office
holder to act with the level of care with which a reasonable office holder in the same
position would have acted under the same circumstances. The duty of care includes a duty
to use reasonable means to obtain:

| |  | information
on the advisability of a given action brought for his approval or performed by him
         by virtue of his position; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The duty of loyalty of an office
holder includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from exploiting any business opportunity of the company to receive a personal gain for
         himself or others; and
| | - | ------------------------------------------------------------------------------------------------------------------------------

42

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| |  | disclose
to the company any information or documents relating to the companys affairs which
the office holder has received due to his position as an office holder.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Disclosure of Personal
Interests of an Office Holder. The Companies Law requires that an office holder
disclose to the company any personal interest that he or she may have, and all related
material information known to him or her, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and in any
event no later than the board of directors meeting at which the transaction is first
discussed. A personal interest of an office holder includes an interest of a company in
which the office holder is, directly or indirectly, a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or
the general manager. In the case of an extraordinary transaction, the office holders
duty to disclose applies also to a personal interest of a relative of the office holder.
An extraordinary transaction is a transaction not in the ordinary course of business, not
on market terms, or likely to have a material impact on the companys profitability,
assets or liabilities.

Under the Companies Law, once the
office holder complies with the above disclosure requirement, the board of directors is
authorized to approve the transaction, unless the articles of association provide
otherwise. Nevertheless, a transaction that is adverse to the companys interest may
not be approved.

If the transaction is an
extraordinary transaction, then it also must be approved by the companys audit
committee and board of directors, and, under certain circumstances, by the shareholders of
the company. When an extraordinary transaction is considered by the audit committee and
board of directors, the interested director may not be present or vote, unless a majority
of the members of the board of directors or the audit committee, as the case may be, has a
personal interest in the matter. If a majority of the members of the board of directors
have a personal interest therein, shareholder approval is also required.

Under the Companies Law, all
arrangements as to compensation of directors in public companies such as ours generally
require the approvals of the audit committee, the board of directors and the shareholders,
in that order.

INSURANCE &
INDEMNIFICATION OF DIRECTORS AND SENIOR MANAGEMENT

Insurance.Under the Companies Law, a company may, if its articles of association so
          provide and subject to the provisions set forth in the law, enter into a
          contract to insure the liability of an office holder for acts or omissions
          committed in his or her capacity as an office holder of the company for:

| |  | the
breach of his or her duty of care to the company or to another person;
| | - | --------------------------------------------------------------------------

| |  | the
breach of his or her duty of loyalty to the company, provided that he or she acted in
good faith and had reasonable cause to assume that such act would not prejudice the
interests of the company; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Our articles were amended in December
2000 to contain provisions in line with the aforesaid provisions and, having obtained the
approvals required under the Companies Law and our articles, we have procured the
permitted insurance for our office holders. In December 2003, the Companys
shareholders set the maximum annual premium for such insurance at $1,000,000.

Indemnification.Subject to certain qualifications, the Companies Law also permits us,
          provided that our articles of association allow us to do so, to indemnify an
          office holder for acts or omissions committed in his or her capacity as an
          office holder of the company, retroactively (after the liability has been
          incurred) or in advance, for:

| |  | a
financial liability imposed on him or her in favor of another person by any judgment,
including a settlement or an arbitration award approved by a court; provided that our
undertaking to indemnify is limited to events that our board of directors believes are
foreseeable in light of our actual operations at the time of providing the undertaking
and to a sum or criterion that our board of directors determines to be reasonable under
the circumstances;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | reasonable
litigation expenses, including attorneys fees, incurred by the office holder or
charged to him or her by a court, resulting from the following: proceedings we institute
against him or her or instituted on our behalf or by another person; a criminal
indictment from which he or she was acquitted; or a criminal indictment in which he or
she was convicted for a criminal offense that does not require proof of intent.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, our articles of
association provide that:

| |  | we
may indemnify an office holder following a determination to this effect made by us after
the occurrence of the event in respect of which the office holder will be indemnified;
and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
may undertake in advance to indemnify an office holder, provided that the undertaking is
limited to types of occurrences, which, in the opinion of our board of directors, are, at
the time of giving the undertaking, foreseeable and to an amount the board of directors
has determined is reasonable in the circumstances.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In April 2004, the Companys
audit committee, board of directors and shareholders, in that order, also resolved to
indemnify the Companys office holders, including any future director or officer of
the Company who may be considered a controlling shareholder (as such term is
defined under the Companies Law), by providing them with a Letter of Indemnification to be
substantially in the form approved by the shareholders. In December 2005, the
Companys audit committee, board of directors and shareholders, in that order,
approved certain revisions to such letter (See Exhibit 4(c)(3) in Item 19 for the form
of the Letter of Indemnification to office holders.)

Limitations on Exculpation,
Insurance and Indemnification. The Companies Law provides that a company may not
exculpate or indemnify an office holder, or enter into an insurance contract which would
provide coverage for any monetary liability incurred as a result of any of the following:

| |  | a
breach by the office holder of his or her duty of loyalty unless, with respect to
insurance coverage or indemnification, the office holder acted in good faith and had a
reasonable basis to believe that the act would not prejudice the company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
 breach  by the  office  holder  of his or  her  duty  of  care  if the  breach  was
 committed          intentionally or recklessly. unless it was committed only negligently;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | any
fine imposed against the office holder.
| | - | -------------------------------------------

In addition, under the Companies Law,
exculpation of, an undertaking to indemnify or indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit committee and our
board of directors and, in specified circumstances, such as if the beneficiary is a
director, by our shareholders.

Our articles also provide that,
subject to the provisions of applicable law, we may procure insurance for or indemnify any
person who is not an office holder, including without limitation, any of our employees,
agents, consultants or contractors.

44

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|D. | EMPLOYEES
|-- | ---------

The following table details certain
data on the workforce of Scailex and its consolidated subsidiaries for the periods
indicated*:

|                                                         | As at December 31,
|-------------------------------------------------------- | ------------------
|
|
|
|
|Approximate numbers of employees by geographic location  |                   
|United States                                            |                   
|Israel                                                   |                   
|                                                         |                   
|Total workforce                                          |                   
|                                                         |                   
|Approximate numbers of employees by category of activity |                   
|Research and development                                 |                   
|Customer support                                         |                   
|Operations and logistics                                 |                   
|General and administrative                               |                   
|                                                         |                   
|Total workforce                                          |                   
|                                                         |                   

* Excludes the employees of SDP and
Scailex Vision for these years that were transferred to Kodak and Hewlett-Packard,
respectively, in connection with the sale of SDPs business in January 2004 and the
sale of Scailex Visions business in November 2005.

The increase in the number of our
employees from 2003 to 2004 resulted mainly due to the beginning of our consolidating the
results of Jemtex. The decrease in the number of our employees from 2004 to 2005 resulted
mainly due to a slower activity in Jemtex in 2005.

We consider our relations with our
employees to be good and we have never experienced a strike or work stoppage.

Our employees are not generally
represented by labor unions. Nevertheless, with respect to our employees in Israel,
certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and Israels Coordination Bureau of Economic
Organizations (including the Manufacturers Association) are applicable to such
employees by Israeli governmental order. These provisions principally concern
cost-of-living wage increases, paid vacation and holidays, length of the workday, wage
tariffs, termination, severance payments and other conditions of employment. However, we
generally provide our employees with benefits and conditions beyond the required minimums,
including contributing to funds to provide severance.

|E. | SHARE
OWNERSHIP
|-- | ---------------

SECURITY OWNERSHIP OF OUR
DIRECTORS AND EXECUTIVE OFFICERS

None of our directors own any of our
shares or hold any stock options for the purchase of our shares. Although several of our
directors are directors or officers of our major shareholders or their affiliates, such
individuals disclaim beneficial ownership of any of the shares held by these major
shareholders.

None of our executive officers own
any of our shares or hold any stock options for the purchase of our shares, except for our
CFO, Yahel Shachar, who beneficially owns 80,000 shares, all of which are in the form of
stock options, which are exercisable within 60 days of the date of this Annual Report. The
exercise price of all the stock options held by Mr. Shachar is $3.70 per share and
they expire in September 2014.

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STOCK OPTION PLANS

From time to time, we grant our
employees and directors options to purchase our shares pursuant to our share option plans:

| | 1991
Plans. In September 1991, our shareholders approved two plans, the Israel
Key Employee Share Incentive Plan 1991, primarily designed for employees of Scailex and
its subsidiaries located in Israel, and the International Key Employee Stock Option Plan
1991 (as amended, 1995), primarily designed for employees of Scailexs non-Israeli
subsidiaries. Terms of the options granted under the plans, such as length of term,
exercise price, vesting and exercisability, were determined by our board of directors.
These plans expired in September 2001, except with respect to outstanding options granted
under such plans. Accordingly, no further options can be granted under these plans.
Outstanding options under the 1991 plans expire at various dates from December 2006
through December 2008.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2001
and 2003 Plans.In December 2001, our shareholders approved the adoption
of the 2001 Stock Option Plan, primarily designed for key employees of Scailex and its
subsidiaries. The aggregate number of shares that were initially authorized and reserved
for issuance under the 2001 plan was 750,000 shares. In December 2003, our shareholders
approved the adoption of the 2003 Share Option Plan for our employees, directors and
consultants who are Israeli residents. When the shareholders adopted the 2003 plan, they
also adopted an amendment to the 2001 plan, as a result of which the number of shares
reserved for issuance under the 2001 plan was increased from 750,000 to 1,900,000 with
all such reserved shares being available for issuance under either the 2001 plan or the
2003 plan. Terms of the options granted under the plans, such as length of term, exercise
price, vesting and exercisability, are determined by our board of directors. There have
been no option grants under the 2001 plan. Currently, all outstanding options under the
2003 plan expire in September 2014.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table details certain
information with respect to the foregoing plans:

|                                                       | 1991 Share
Option Plans* | 2001 and 2003
Share Option
Plans**
|------------------------------------------------------ | ------------------------ | ----------------------------------
|
|
|
|
|Number of shares available for future option awards    |                          |                                   
|Number of options outstanding                          |                          |                                   
|Weighted average exercise price of options outstanding |                          |                                   

*
The data presented in this column are as of June 14, 2006.

**
The data presented in this column are as of the date of this Annual Report.

The
foregoing description is qualified in its entirety by reference to the Israel Key Employee
Share Incentive Plan 1991, the International Key Employee Stock Option Plan 1991 (as
amended, 1995), the 2001 Stock Option Plan (as amended, 2003), and to the 2003 Share
Option Plan which are filed as exhibits in Item 19 of this Annual Report, all of which are
hereby incorporated by reference.

Subsidiaries
Stock Option Plans. Jemtex adopted a share option plan, primarily designed
for employees of Jemtex. The plan permits the grant of options for the purchase of shares
in Jemtex. As of June 1, 2006, Jemtex granted options under its plan to employees,
directors and officers, exercisable, in the aggregate, for approximately 1.9% of its share
capital (on a fully-diluted basis).

REPURCHASE PROGRAM

In May 1998, our board of directors
approved a program for our repurchase of up to two million of our ordinary shares, to be
held for the benefit of employees within the framework of our stock option plans. These
ordinary shares are held by a trustee for reissuance to employees upon the exercise of
existing stock options. Under the approved program, we may not purchase ordinary shares
from our major shareholders. A balance of 448,975 ordinary shares are held by the trustee
pursuant to the program, purchased with funds provided by us. No ordinary shares have been
repurchased under this program since August 5, 1999.

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|ITEM 7. |  | MAJOR SHAREHOLDERS & RELATED PARTY TRANSACTIONS
|------- |  | -----------------------------------------------

|A. | MAJOR
SHAREHOLDERS
|-- | ------------------

Unless otherwise stated, all data in
this Item 7 is as of June 15, 2006, at which date there were 38,066,363 of our ordinary
shares outstanding, excluding:

| |  | the
448,975 ordinary shares purchased by the trustee pursuant to the repurchase program
described in Item 6E above; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | the
4,952,050 ordinary shares purchased by us in the self tender offer described in Item 4A
above which are deemed issued but considered treasury shares (or dormant shares as
such term is defined under the Israeli Companies Law) that carry no rights, including
voting rights and the right to receive dividends, while owned by us. These shares will be
available for us to sell in the future without further shareholder action (except as
required by applicable law).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In all instances, the percentage of
ownership is equal to the voting rights of our ordinary shares and all ordinary shares
have identical voting rights. In particular, the ordinary shares held by our principal
shareholders do not carry different voting rights.

To our knowledge, except as described
below, we are not directly or indirectly owned or controlled (i) by any corporation, (ii)
by any foreign government or (iii) by any other natural or legal person, nor are there any
arrangements, the operation of which may at a subsequent date result in a change in
control of Scailex.

The following table sets forth the
number of our ordinary shares owned by any person who is known to us to own beneficially
more than 5% of our ordinary shares or otherwise affiliated with Discount and/or Clal:

|Name and Address                                    | Number ofSharesOwned* | Percent ofSharesOutstanding*
|--------------------------------------------------- | --------------------- | ----------------------------
|
|
|
|
|Clal Electronics Industries Ltd. ("CEI")(1)         |                       |                             
|Discount Investment Corporation Ltd. ("Discount")   |                       |                             
|Suny Electronics Ltd. ("Suny") (3)                  |                       |                             
|Mivtach Shamir Holdings Ltd. ("Mivtach Shamir") (4) |                       |                             
|Clal Insurance Enterprise Holdings Company Ltd. (5) |                       |                             

| | * | The
number of shares owned by a shareholder or a group includes shares, if any, that such
shareholder or group has the right to receive upon the exercise of options which are
exercisable within 60 days as of June 6, 2005.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Less
than 1%.
| | -- | -------------

| | (1) | CEI
is a wholly owned subsidiary of Clal. Clal may be deemed to share with its
               wholly owned subsidiary, CEI, an Israeli company, the power to vote and
dispose                of our outstanding ordinary shares held by CEI.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consists
of 9,458,838 ordinary shares owned by CEI and 9,341,417 ordinary shares
               owned by Discount, representing approximately 24.85% and 24.54% of our
               outstanding shares, respectively. Each of Clal and Discount may be deemed
to                share the power to vote the shares held by the other by virtue of the
Voting                Agreement between them, as described below.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Based
upon a Schedule 13D/A filed by Suny with the SEC on May 31, 2006.
               Consists of 4,725,935 shares held directly by Suny, 2,127,536 shares held
               directly by Tao Tsuot Ltd., or Tao, 32,218 shares held directly by Ben Dov
               Holdings Ltd, 42,910 shares held directly by Harmony (Ben Dov) Ltd, and
16,773                shares held directly by Mr. Ilan Ben Dov. Ben Dov Holdings
Ltd., a company                100% owned by Mr. Ben Dov, holds 68% of the shares of
Suny. Mr. Ben                Dov holds 81.30% of the shares of Tao. Accordingly, Mr. Ben
Dov may be                deemed to have the sole voting and dispositive power as to the
Scailex shares                held by himself, Tao, Suny and Ben Dov Holdings.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (4) | Based
on Schedule 13G filed by Mivtach Shamir with the SEC on                March 10,
2005. The 2,092,200 shares are held by a wholly owned subsidiary                of
Mivtach Shamir. Mr. Shamir, Chairman of Mivtach Shamir and owner of
               40.02% of its shares, has entered into a shareholders agreement with
Ashtrum                Industries Ltd., which owns 16.97% of Mivtach Shamirs
shares, and may be                deemed to beneficially own the 2,092,200 Scailex shares
held by Mivtach Shamir.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Based
on a report received by Scailex on June 26, 2006. Clal Insurance is a
               majority owned subsidiary of IDB Development.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

Clal, CEI, Discount, IDB
Development and IDB Holding

Both
Clal and CEI are Israeli companies, holding investments in Israeli companies that operate
primarily in the fields of high-tech and electronics. Clal also operates in the fields of
cement, textiles, paper and cartons, biotechnology and management of venture capital
funds. Discount is an Israeli company holding investments, predominantly in companies
located in Israel or that are Israel-related that operate mainly in the fields of
communications, advanced technology, industry, real estate and commerce.

Clal
and Discount are both controlled by IDB Development Corporation Ltd. (IDB
Development), a majority owned subsidiary of IDB Holding Corporation Ltd. (IDB
Holding). Both IDB Development and IDB Holding are Israeli companies. IDB
Development holds investments in various entities, operating primarily in the fields of
insurance, real estate, high-tech and electronics. IDB Holding is a holding company that,
through IDB Development, holds investments in various entities, operating primarily in the
fields of insurance, real estate, high-tech and electronics.

Each
of IDB Developments, IDB Holdings, Discounts and Clals respective
shares are listed on the TASE.

Based
upon reports received by Scailex, as of June 18, 2006, IDB Holding is controlled by a
group comprised of:

| |  | Ganden
Investments I.D.B. Ltd. (Ganden), a private Israeli company controlled by
Ganden Holdings Ltd. (Ganden Holdings), a private Israeli company which in
turn is controlled by Nochi Dankner (who is also the Chairman of IDB Holding, IDB
Development, Clal and Discount and a director of Clal Insurance) and his sister Shelly
Bergman, that holds 31.02% of the equity and approximately 31.03% of the voting power of
IDB Holding. Avraham Fischer, a director of Scailex (and who also serves as executive
vice president of IDB Holding, deputy chairman of IDB Development, a director of Discount
and a director and co-chief executive officer of Clal), holds 9.67% of the shares of
Ganden Holdings;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Manor
Investments  IDB Ltd. (Manor), a private Israeli company controlled by
Ruth Manor (whose husband, Isaac Manor, and their son, Dori Manor, are directors of IDB
Holding, IDB Development, Clal and Discount, and Isaac Manor is also a director of Clal
Insurance), that holds 10.34% of the equity and voting power of IDB Holding; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Avraham
Livnat Investments (2002) Ltd. (Livnat), a private Israeli company controlled
by Avraham Livnat (one of whose sons, Zvi Livnat, is a director and executive vice
president of IDB Holding, deputy Chairman of IDB Development, co-chief executive officer
of Clal and a director of Discount, and another son, Shay Livnat, is one of our directors
and a director of IDB Development, Clal and Clal Insurance), that holds 10.34% of the
equity and voting power of IDB Holding.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Ganden,
Manor and Livnat, in respect of the above aggregate 51.7% of the equity and voting power
of IDB Holding owned by them, have entered into a shareholders agreement relating to,
among other things, their joint control of IDB Holding, the term of which is until May 19,
2023. In addition, there are the following holdings, as of June 18, 2006, which are not
included in the said shareholders agreement: (a) Ganden Holdings, the parent company of
Ganden, holds 11.38% of the equity and approximately 11.39% of the voting power of IDB
Holding; (b) Ganden holds a further approximately 6.71% of the equity and voting
power of IDB Holding; (c) Manor Holdings B.A. Ltd., the parent company of Manor,
holds approximately 0.03% of the equity and voting power of IDB Holding; (d) Avraham
Livnat Ltd., the parent company of Livnat, holds approximately 0.04% of the equity and
voting power of IDB Holding; and (e) Shelly Bergman owns, through a private company which
is wholly owned by her, approximately 7.23% of the equity and voting power of IDB Holding.

48

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Based
on the foregoing, IDB Holding and IDB Development (by reason of their control of Clal and
Discount), Ganden, Manor and Livnat (by reason of their control of IDB Holding) and Nochi
Dankner, Shelly Bergman, Ruth Manor, and Avraham Livnat (by reason of their control of
Ganden, Manor and Livnat, respectively) may be deemed to share with CEI and Discount the
power to vote and dispose of Scailexs shares beneficially owned by CEI and Discount
(including Discounts wholly owned subsidiary) amounting, in the aggregate, as of
June 18, 2006, to 49.39% of such shares.

1980 Voting Agreement

On December 1, 1980, Clal (whose
holdings of our shares are held by CEI), Discount and PEC Israel Economic Corporation, a
company that is currently a wholly owned subsidiary of Discount but not currently holding
any of our shares, entered into a Voting Agreement. Under this agreement, they agreed to
vote our shares in concert with respect to the election of our directors and with respect
to any ordinary resolution submitted to our shareholders. The agreement also grants rights
of first refusal if one of the parties wishes to sell its shares of Scailex to a third
party. The agreement was for an initial term of ten years, subject to renewal for
additional periods of ten years each unless and until prior notice was given by one party
of its intention not to renew. The agreement was automatically renewed and is currently in
effect until November 30, 2010.

The foregoing description is
qualified in its entirety by reference to the Voting Agreement, dated December 1, 1980, by
and among Discount, PEC and Clal which is filed as Exhibit 10.h to our Registration
Statement on Form F-1 (filed May 26, 1983) and which is hereby incorporated by reference.

Significant changes in
percentage ownership by major shareholders during last three years

Based upon public filings by Suny
with the SEC, in July 2004, Suny became the beneficial owner of 2,043,997 ordinary shares,
representing 5.37% of our outstanding ordinary shares at the time. Since July 2004, Suny
and/or its affiliates purchased, from time to time, additional ordinary shares in the open
market, and, as of May 31, 2006, beneficially owns 18.24% of our outstanding ordinary
shares.

In late May 2006, our principal
shareholders, Clal and Discount, informed us that they entered into an agreement for the
sale of their entire shareholdings in the Company to Israel Petrochemicals Enterprise
Ltd., an Israeli holding company whose shares are traded on the TASE. Under the agreement,
Clal and Discount agreed to sell to Israel Petrochemicals all of the 18,800,255 Scailex
shares held by them, for an aggregate purchase price of $165 million, or $8.78 per share,
subject to certain purchase price adjustments. The closing of the transaction, which is
expected to occur by the end of August 2006, is subject to customary closing conditions,
including the approval of the Israeli Restrictive Trade Commissioner.

Record Holders

Based on a review of the information
provided to us primarily by our transfer agent, as of June 6, 2006, we had 314
shareholders of record, of whom 276 were registered with addresses in the United States,
representing approximately 42.3% of our outstanding ordinary shares. These numbers are not
representative of the number of beneficial holders of our shares nor are they
representative of where such beneficial holders reside since many of these ordinary shares
were held of record by brokers or other nominees (including one U.S. nominee company, CEDE
& Co., which held approximately 42.1% of our outstanding ordinary shares as of said
date).

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Duties of Shareholders

Disclosure by Controlling
Shareholders. Under the Companies Law, the disclosure requirements that apply to an
office holder also apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of a company,
including a shareholder that owns 25% or more of the voting rights if no other shareholder
owns more than 50% of the voting rights, but excluding a shareholder whose power derives
solely from his or her position on the board of directors or any other position with the
company.

Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest, and
the engagement of a controlling shareholder as an office holder or employee, generally
require the approval of the audit committee, the board of directors and the shareholders,
in that order. The shareholder approval must include at least one-third of the shares of
non-interested shareholders voted on the matter. However, the transaction can be approved
by shareholders without this one-third approval if the total shares of non-interested
shareholders voted against the transaction do not represent more than one percent of the
voting rights in the company.

General Duties of
Shareholders. In addition, under the Companies Law, each shareholder has a duty to act
in good faith towards the company and other shareholders and to refrain from abusing his
or her power in the company, such as in shareholder votes. In addition, specified
shareholders have a duty of fairness toward the company. These shareholders include any
controlling shareholder, any shareholder who knows that it possesses the power to
determine the outcome of a shareholder vote and any shareholder who, pursuant to the
provisions of the articles of association, has the power to appoint an office holder or
any other power with respect to the company. However, the Companies Law does not define
the substance of this duty of fairness.

|B. | RELATED
PARTY TRANSACTIONS
|-- | --------------------------

Clal Insurance

We purchase insurance policies in Israel
from a number of insurance companies in respect of some of which Clal Insurance Company
Ltd., an affiliate of CEI and Discount, acted as leader. In certain instances, we were a
beneficiary of insurance policies purchased from Clal Insurance Company by a subsidiary of
Creo Inc., in which we no longer hold an equity interest. During 2005, we paid premiums on
such insurance in insignificant amounts. The extent to which Clal Insurance Company, or
other insurance companies with whom it is affiliated, participated, varied from policy to
policy. All insurance was effected at normal business rates.

Services Agreements

Clal
Services Agreement. In November 2001, we entered into a Services Agreement with Clal
in connection with the transfer of our corporate offices to facilities leased to Clal at
the Azrieli Center, Tel Aviv and the seconding of personnel. Pursuant to the Clal Services
Agreement, Clal provided us with office space for our personnel, together with other
services, such as accounting, security, information management services (MIS) and
cleaning. In addition, Clal seconded certain executives to serve in various management
positions with us. In addition, with effect from January 1, 2003, two other Scailex
employees became employees of Clal and were seconded back to us for 100% of their work
hours. Pursuant to the Clal Services Agreement, other employees of Clal and Scailex may be
seconded to each other (on a full time or part time basis) on an as-needed basis, as
agreed from time to time between the parties.

The Clal Services Agreement provided
that certain services may be provided by subsidiaries of Clal or directly from third party
suppliers, and Clal may assign its rights and obligations under the Clal Services
Agreement, in whole or in part, to its affiliates. Generally, the services rendered (other
than the seconding of employees) were to be provided by Clal at the actual cost incurred
by Clal for the services and do not include any overhead expense, or general and
administrative cost. However, if the actual cost incurred by Clal may not be determined
with respect to any service, the cost to us will generally be calculated either (i) on the
basis of the proportion of office space occupied by us at Azrieli Center (including,
proportionally, by employees seconded to us by Clal and excluding, proportionally,
employees seconded to Clal by us), for rental of the facilities and common parts,
cleaning, security, local taxes, electricity and all other expenses associated with
facility maintenance; or (ii) on the basis of the number of our employees located at
Azrieli Center (including, proportionally, those seconded to us by Clal and excluding,
proportionally, those seconded to Clal by us) for other, generally unspecified, services.
Certain services, such as accounting and MIS services, are at a fixed rate. See Note 8b
to our consolidated financial statements included in this Annual Report.

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The audit committees of both Scailex
and Clal agreed to periodically review and adjust the services rendered and amounts paid
pursuant to the Clal Services Agreement. However, the aggregate changes in respect of (i)
the amount payable for seconded employees may not exceed an additional $300,000 per annum
and (ii) the amount payable for other services provided to us may not exceed an additional
$20,000 per quarter, in each case, in excess of the amount envisaged at the commencement
of the Clal Services Agreement.

In light of the Discount Services
Agreement (described below), which became effective in January 2004, we and Clal have
agreed to suspend substantially all the services provided by Clal to us pursuant to the
Clal Services Agreement, including the termination of (1) the use by us of the office
space provided by Clal, including related ancillary services (such as cleaning, security
and MIS), and (2) the seconding of personnel by Clal to us, which is no longer
required. The other provisions of the Clal Services Agreement continue in full force and
effect, and Clal may continue to provide certain other services to us pursuant to the Clal
Services Agreement.

The Clal Services Agreement was
submitted to and approved by our audit committee, our board of directors and our
shareholders, in that order. Similarly, the suspension of certain services under the
Services Agreement was also submitted to and approved by our audit committee, our board of
directors and our shareholders, in that order.

The foregoing description of the
Clal Services Agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the Clal Services Agreement and the amendment
thereto filed by us as Exhibit 4(d)(1) in Item 19.

Discount Services Agreement. We
entered into a Services Agreement with Discount in connection with the transfer of our
corporate offices to facilities leased by Discount at the Azrieli Center, Tel Aviv, and
the seconding of one of Discounts senior officers to serve as our President and/or
Chief Executive Officer. The Agreement became effective as of January 15, 2004.

Pursuant to the Discount Services
Agreement, Discount provides us with office space at the Azrieli Center for our personnel,
together with ancillary services, such as cleaning, security and MIS, similar to that
previously provided by Clal pursuant to the Clal Services Agreement. In addition, with
effect from January 5, 2004, Discount seconded Mr. Raanan Cohen, Vice President
of Discount (or another senior officer of Discount if agreed upon by us and Discount) to
serve as Interim President and Chief Executive Officer of Scailex, dedicating
approximately 40% of his work hours to us. We are required to provide to such person an
indemnity letter in connection with personal liabilities that may arise from serving in
such capacity similar to the letter provided by us to our other executive officers.
Mr. Raanan Cohen currently is also a director of Scailex.

Certain services may be provided by
Discount through its subsidiaries or directly from third party suppliers. Discount may
assign its rights and obligations under the Discount Services Agreement, in whole or in
part, to its affiliates. Generally, the services rendered will be provided by Discount at
the actual cost incurred by Discount for the services and will not include any overhead
expense, or general and administrative cost. However, if the actual cost incurred by
Discount may not be determined with respect to any service, the cost to us will generally
be calculated either (i) on the basis of the proportion of the office space occupied
by us at Azrieli Center (including a relative part of common areas) for cleaning,
security, local taxes, electricity and all other expenses associated with facility
maintenance or (ii) on the basis of the number of our employees located at Azrieli
Center for other, generally unspecified, services, according to the nature of the service.
Certain services, such as MIS, will be charged to us at a fixed rate.

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Our audit committee will periodically
review the services rendered and amounts paid under the Discount Services Agreement. The
specific approval of our audit committees is required for any material increases in the
amounts paid under the Discount Services Agreement. However, in no event shall the
aggregate increase in the office space occupied by us at Azrieli Center exceed 175% of the
office space occupied by us at the commencement of the agreement. Initially, the aggregate
cost of the services (including the leased office space, but excluding the seconding of
Mr. Cohen) was approximately $17,000 per fiscal quarter. However, since September
2004, we no longer lease the office space from Discount. As for the services of
Mr. Cohen as our President and CEO, we are required to pay Discount the sum of
NIS 500,000 (equivalent to approximately $112,000 based on the current exchange rate)
per annum. This sum is based upon the actual cost incurred by Discount with respect to the
services of Mr. Cohen. In the event of a change in the cost of such services to
Discount or, having regard to our needs, if the parties agree upon a change in the
percentage of the work hours to be dedicated to us by Mr. Cohen (or such other senior
officer of Discount who may serve as President and/or Chief Executive Officer of Scailex),
the consideration payable for these services shall be increased or decreased accordingly,
subject to the approval of our Audit Committee, provided that in no event may the sum
payable in respect of such services exceed NIS 750,000 (equivalent to approximately
$170,000 based on the current exchange rate) per annum. Discount has waived its right to
receive payments in respect of Mr. Cohens fees for the period commencing on January
1, 2006 and thereafter.

If either of the parties wish to
cease to provide or receive any or all of the services (including the office space), it
may do so by giving prior written notice of at least three months to the other party,
unless otherwise agreed by the parties. In such circumstances, Discount is required to
provide us reasonable cooperation and assistance in order to enable us to implement such
service by ourselves, but in no event will such assistance be for more than 30 days from
the date of termination.

The Discount Services Agreement was
submitted to and approved by our audit committee, our board of directors and our
shareholders, in that order.

The foregoing description of the
Discount Services Agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the Discount Services Agreement filed by us as
Exhibit 4(d)(3) in Item 19.

Combination of Scailex
Vision and Scailex Vision International

In January 2003, we completed a
transaction to combine the operations of Scailex Vision International (our then wholly
owned subsidiary) and Scailex Vision (in which we held approximately 42.5% of the
outstanding share capital) through a share exchange. Pursuant to the Share Exchange
Agreement, (1) we sold all of our shares in Scailex Vision International to Scailex Vision
(so that Scailex Vision International became a wholly owned subsidiary of Scailex Vision),
and (2) Scailex Vision issued to us shares representing approximately 67% of Scailex
Visions outstanding share capital, and agreed to reserve up to approximately 5.9% of
its share capital, on a fully diluted and as converted basis, for the issuance of stock
options to Scailex Vision Internationals employees (collectively, the
Consideration). The Consideration is subject to adjustments in our favor, if,
at any time prior to the earlier to occur of (1) January 1, 2010 and (2) the closing of an
initial public offering of Scailex Visions equity securities (with minimum
requirements as to Scailex Visions valuation at, and the proceeds of, such
offering), any of a number of specified adverse events occur in respect of Scailex Vision.
As required by the Share Exchange Agreement, we transferred $15 million to Scailex
Vision International as an investment therein. Immediately following this transaction, we
held, in the aggregate, approximately 75.5% of Scailex Visions outstanding share
capital.

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Each of Scailex Vision International
(for the benefit of Scailex Vision) and Scailex Vision (for our benefit) made customary
representations and warranties in the Share Exchange Agreement with respect to each
partys respective business operations. We also made limited representations and
warranties for the benefit of Scailex Vision. The representations and warranties made by
the parties survived for a limited period of one year (until January 2004), except for
certain representations that survive until the earlier of the (i) expiration date of the
applicable statute of limitations and (ii) closing of an initial public offering of
Scailex Visions equity securities. In the event of damages incurred as result of
breach of the representations and warranties made by us or Scailex Vision International or
failure to perform covenants or agreements, we are required to indemnify Scailex Vision.
Similarly, in the event of damages incurred as result of breach of the representations and
warranties made by Scailex Vision or failure to perform covenants or agreements, Scailex
Vision is required to indemnify us. The indemnification will be paid out solely in shares
of Scailex Vision and is capped, in the aggregate, at $7 million (if we are required to
indemnify Scailex Vision) or $6 million (if Scailex Vision is required to indemnify us).

This transaction was a related
party transaction because CEI and Discount, who are our principal shareholders, may
have had a personal interest in the transaction by virtue of their shareholdings in
Scailex Vision (prior to the transaction, each of CEI and Discount held approximately 14%
of Scailex Visions share capital). Accordingly, as required by the Companies Law,
the transaction was approved by our audit committee, board of directors and a special
majority of our shareholders, in that order. In addition, the financial advisor in
connection with the transaction delivered to our board of directors a written opinion as
to the fairness, from a financial point of view, of the consideration to be paid by us in
connection with the transaction.

The foregoing description of the
Share Exchange Agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement filed by us as Exhibit 4(d)(2) to
Item 19.

Rights Offerings by
Scailex Vision

In July 2003 and May 2004, Scailex
Vision concluded rights offerings to its shareholders in which we invested approximately
$5.0 million and $4.2 million, respectively, in accordance with our pro rata share of such
offering. Clal and Discount, our two principal shareholders who are also shareholders of
Scailex Vision, invested their pro rata share of the rights offerings in an aggregate of
approximately $0.9 million each.

The investments were made in the form
of convertible loans, which have a five year maturity and bear interest at the annual rate
of the greater of (i) LIBOR + 1% and (ii) the Israeli consumer price index. The principal
amount of the loans, including interest accrued thereon, may be converted into shares of
Scailex Vision at a specified conversion price (subject to adjustments for specified
events). In addition, we and the other lenders received warrants to purchase additional
shares of Scailex Vision with 25% coverage of the principal amount of the loans,
exercisable for a period of five years at an exercise price equal to the conversion price
of the loans, as applicable. Other key terms of the loans include the subordination of the
loans to senior bank loans and the grant of registration rights with respect to the
securities underlying the loans and warrants.

Prior to the July 2003 rights
offering, Scailex Visions share capital was divided into ordinary shares and several
series of preferred shares. In conjunction with the rights offering, Scailex Vision
reclassified its share capital by way of converting all preferred shares into ordinary
shares and currently has only one class of shares, the ordinary shares, outstanding.

In February 2006, prior to the
distribution of $135 million to Scailex Visions shareholders and employees, we and
the other lenders converted the loans and exercised all of the warrants. We now hold an
approximate 78.6% interest in Scailex Vision whereas Clal and Discount each hold an
approximate 7.3% interest.

53

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Sale of Scailex
Visions Business

In connection with the sale of
Scailex Visions business to Hewlett-Packard, we entered into non-material agreements
with Scailex Vision regarding the management thereof following the sale, as well as with
Clal and Discount. See Item 10C. Material Contracts  Sale of Scailex Vision
below.

Other

During 2005, we maintained business
relationships and entered into various other transactions in the ordinary course of
business with a number of other companies affiliated with our major shareholders, all on
terms which management believes were no less favorable to us than would be obtained in
transactions with unaffiliated third parties.

|C. | INTERESTS
OF EXPERT AND COUNSEL.
|-- | --------------------------------

Not
applicable.

|ITEM 8. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

|A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | -------------------------------------------------------

FINANCIAL STATEMENTS

Our consolidated financial statements
are set forth in Item 18.

LEGAL PROCEEDINGS

We are from time to time named as a
defendant in certain routine litigation incidental to our business. Except as described
above, we are currently not party to any legal proceedings which would reasonably be
expected to have a material adverse effect on our financial position. For a description
of other pending legal proceedings, see Note 8b to our consolidated financial statements
included in this Annual Report.

DIVIDEND POLICY

Except as described below, we did not
distribute any dividends (in cash or otherwise), bonus shares or declared any split,
recapitalization or make any rights offerings to the holders of our shares since the third
quarter of 1996. We continually review our dividend policy and the payment, or
non-payment, of a dividend should not be considered indicative as to the payment of future
dividends. For general information on the applicable tax rate on dividends, please see
in Item10E. Tax below.

On July 12, 2004, we distributed
$2.36 per ordinary share, or approximately $90 million in the aggregate, to our
shareholders of record as of June 30, 2004.

|B. | SIGNIFICANT
CHANGES
|-- | -------------------

Except as otherwise disclosed in
this Annual Report, no significant change has occurred since December 31, 2005.

54

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|ITEM 9. |  | THE OFFER AND LISTING
|------- |  | ---------------------

|A. | OFFER
AND LISTING DETAILS
|-- | -------------------------

Our ordinary shares are listed and
traded on the NASDAQ National Market, or NASDAQ, and the Tel Aviv Stock Exchange, or the
TASE, both under the symbol SCIX. The shares commenced trading on the TASE on
January 7, 2001 and on NASDAQ on May 20, 1980.

All share prices on NASDAQ are
reported in U.S. dollars and all share prices on the TASE are reported in NIS. As of
December 31, 2005, the exchange rate was equal to NIS 4.603 per $1.00 (NIS 4.308 on
December 31, 2004).

The following table sets forth, for
the periods indicated, the high and low closing sales prices per ordinary share on NASDAQ
and on the TASE as reported in published financial sources:

|Annual High and Low    | NASDAQ National Market | The Tel Aviv Stock Exchange
|---------------------- | ---------------------- | ---------------------------
|
|
|
|
|2001                   |                        |                            
|2002                   |                        |                            
|2003                   |                        |                            
|2004*                  |                        |                            
|2005                   |                        |                            
|Quarterly High and Low |                        |                            
|2004                   |                        |                            
|First Quarter          |                        |                            
|Second Quarter         |                        |                            
|Third Quarter*         |                        |                            
|Fourth Quarter         |                        |                            
|2005                   |                        |                            
|First Quarter          |                        |                            
|Second Quarter         |                        |                            
|Third Quarter          |                        |                            
|Fourth Quarter         |                        |                            
|Most Recent Six Months |                        |                            
|December 2005          |                        |                            
|January 2006           |                        |                            
|February 2006          |                        |                            
|March 2006             |                        |                            
|April 2006             |                        |                            
|May 2006               |                        |                            

* On June 22, 2004, we announced a
distribution of $2.36 per ordinary shares and, effective July 1, 2004, the ordinary shares
were traded ex-dividend, as a result of which NASDAQ and the TASE adjusted
(downwards) the opening price of our shares in the respective markets.

On June 27, 2006, the last reported
sale price of our ordinary shares on NASDAQ was $6.90 per share and on TASE was
NIS 30.09 per share.

55

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|B. | PLAN
OF DISTRIBUTION.
|-- | ---------------------

Not Applicable.

|C. | MARKETS.
|-- | --------

Our ordinary shares trade on NASDAQ
and, with effect from January 7, 2001, the TASE. The shares trade on both markets under
the symbol SCIX.

|D. | SELLING
SHAREHOLDERS.
|-- | ---------------------

Not Applicable.

|E. | DILUTION.
|-- | ---------

Not Applicable.

|F. | EXPENSES
OF THE ISSUE.
|-- | ----------------------

Not Applicable.

|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not Applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

Set out below is a description of
certain provisions of our Memorandum of Association and Articles of Association, and of
the Israeli Companies Law related to such provisions. This description is only a summary
and does not purport to be complete and is qualified by reference to the full text of the
Memorandum and Articles which are incorporated by reference as exhibits to this Annual
Report and to Israeli law.

We were first registered under
Israeli law on November 2, 1971 as a private company, succeeding a predecessor
corporation, Scientific Technology Ltd., which was founded on September 5, 1968. In May
1980 we became a public company. In December 2005, we changed our name from Scitex
Corporation Ltd. to Scailex Corporation Ltd. We are registered with the
Registrar of Companies in Israel under number 52-003180-0.

OBJECTS AND PURPOSES

Pursuant to Section 2(I)(a) of our
Memorandum of Association, the principal object for which we are established is to engage
in the activity or business of, inter alia, developing, manufacturing, producing,
vending, purchasing, licensing, leasing, importing, exporting, or otherwise dealing in any
products and moveable property of every kind and description, and to engage in selling,
promoting, leasing, licensing, importing, exporting, or otherwise dealing in, any
services. We may also acquire, create, form, operate, encourage or otherwise promote or
manage any kind of enterprise.

56

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DIRECTORS

The Companies Law requires that
transactions between a company and its office holders (which term includes directors) or
that benefit its office holders, including arrangements as to the compensation of office
holders, be approved as provided for in the Companies Law and the companys articles
of association. (For further information as to such approval provisions, see Item
6. Directors, Senior Management and Employees  Board Practices  Approval of
Specified Related Party Transactions under Israeli Law.)

Under our Articles, in general, the
management of our business is vested in the Board of Directors, which may exercise all
such powers, including the power to borrow or secure the payment of any sum or sums of
money for the purposes of the Company, in such manner, at such times and upon such terms
and conditions in all respects, as it thinks fit.

There is no requirement under our
Articles or Israeli law for directors to retire on attaining a specific age. The Articles
do not require directors to hold our ordinary shares to qualify for election.

SHARES

Our registered capital is divided
into 48,000,000 ordinary shares of nominal (par) value NIS 0.12 each. There are no other
classes of shares. All of our outstanding shares are fully paid and non-assessable. The
shares do not entitle their holders to preemptive rights.

Subject to the rights of holders of
shares with special rights (which may be issued in the future), holders of paid up
ordinary shares are entitled to participate in the payment of dividends and, in the event
of our winding-up, in the distribution of assets available for distribution, in proportion
to the nominal value of their respective holdings of the shares in respect of which such
dividend is being paid or such distribution is being made. Our Articles do not specify any
time limit after which dividend entitlement lapses.

Each ordinary share is entitled to
one vote on all matters to be voted on by shareholders, including the election of
directors. Our ordinary shares do not have cumulative voting rights. As a result, the
holders of our ordinary shares that represent a simple majority of the voting power
represented at a shareholders meeting and voting at the meeting have the power to elect
all of the directors put forward for election, subject to specific requirements under the
Companies Law with respect to the election of Outside Directors. (For
further information as to these requirements, see Item 6C. Board Practices 
Outside Directors.)

The Companies Law requires that
extraordinary transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest, and the engagement of a controlling shareholder as an
office holder or employee, be approved as provided for in the Companies Law, which may
necessitate the approval of at least one-third of the shares of non-interested
shareholders voting on the matter. (For further information as to such provisions, see
Item 7A. Major Shareholders  Duties of Shareholders.)

VARIATION OF RIGHTS

Shares with preferential rights
relating, among other things, to dividends, voting and repayment of share capital can be
created by adoption of a special resolution, which requires approval by at
least 75% of the voting power represented at the meeting in person or by proxy and voting
thereon. In addition, through a special resolution, we can subdivide issued and
outstanding ordinary shares. Modification or abrogation of the rights of any class of
shares requires the written consent of the holders of 75% of the issued shares of such a
class or adoption of a special resolution by affected shareholders voting separately as a
class.

GENERAL MEETINGS

Our Articles provide that an annual
general meeting must be held at least once in every calendar year at such time within a
period of not more than 15 months after the holding of the last preceding annual general
meeting, and at such place, as may be determined by the Board of Directors. Our Board of
Directors may, in its discretion, convene additional shareholder meetings and, pursuant to
the Companies Law, must convene a meeting upon the demand of two directors or one-quarter
of the directors in office or upon the demand of the holder or holders of five percent of
our issued share capital and one percent of our voting rights or upon the demand of the
holder or holders of five percent of our voting rights.

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Under the Companies Law, shareholder
meetings generally require prior notice of not less than 21 days. The function of the
annual general meeting is to receive and consider the directors report, profit and
loss account and balance sheet, to elect directors and appoint auditors and fix their
fees, and to transact any other business which under the Articles or by law are to be
transacted at our annual general meeting.

The quorum required for either an
ordinary (regular) or an extraordinary (special) meeting of shareholders consists of at
least two shareholders present in person or by proxy and holding or representing between
them at least one-third of our voting power. If a meeting is convened at the request of
shareholders and no quorum is present, it shall be dissolved. If a meeting is otherwise
called and no quorum is present, the meeting is adjourned to the same day one week later
at the same time and place, or to such other day time and place as our Chairman may
determine with the consent of a majority of the voting power represented at the meeting
and voting on the question of an adjournment. Consistent with an exemption we received
from NASDAQ in respect of NASDAQ Marketplace Rule 4350(f), which requires that the quorum
for meetings of shareholders consists of at least one-third of our voting power, our
Articles provide that, at adjourned meetings, any two or more shareholders present in
person or by proxy shall constitute a quorum. We believe this provision in our Articles
regarding the quorum at adjourned meetings complies with Israeli law and practice.

Generally, under the Companies Law
and our Articles, shareholder resolutions are deemed adopted if approved by the holders of
a simple majority of the voting rights represented at a meeting unless a different
majority is required by law or pursuant to our Articles. The Companies Law provides that
resolutions on certain matters, such as amending a companys articles of association,
assuming the authority of the board of directors in certain circumstances, appointing
auditors, appointing external directors, approving certain transactions, increasing or
decreasing the registered share capital and approving a merger with another company must
be made by the shareholders at a general meeting. A company may determine in its articles
of association certain additional matters in respect of which resolutions by the
shareholders in a general meeting will be required.

A company such as Scailex,
incorporated prior to February 1, 2000, is subject to various rules with respect to the
transition from being governed by the Israeli Companies Ordinance [New Version], 5743
 1983, to being governed by the Companies Law. These rules provide, among other
things, that any amendment to the Memorandum or Articles will generally require a
resolution adopted by the holders of 75% or more of the voting power represented and
voting at a general meeting, and that the approval of a merger will require a resolution
adopted by the holders of 75% or more of the voting power represented and voting at a
general meeting, unless and until we amend our Articles in such manner to provide for a
different majority.

Subject to the Companies Law, a
resolution in writing signed by the holders of all of our ordinary shares entitled to vote
at a meeting of shareholders or to which all such shareholders have given their written
consent will be sufficient to adopt the resolution in lieu of a meeting.

LIMITATION ON RIGHTS TO
OWN SHARES

Our Memorandum of Association, our
Articles and Israeli law do not restrict in any way the ownership or voting of ordinary
shares by non-residents or persons who are not citizens of Israel, except with respect to
subjects of nations which are in a state of war with Israel. Fully paid ordinary shares
may be freely transferred pursuant to our Articles unless the transfer is restricted or
prohibited by another instrument.

58

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DIVIDEND AND LIQUIDATION
RIGHTS

Dividends on our ordinary shares may
be paid only out of profits and other surplus, as defined in the Companies Law, as of the
end of the most recent fiscal year or as accrued over a period of two years, whichever is
higher. Our board of directors is authorized to declare dividends, provided that there is
no reasonable concern that payment of the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. Notwithstanding the foregoing,
dividends may be paid with the approval of a court, provided that there is no reasonable
concern that payment of the dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the holders of
ordinary shares in proportion to their respective holdings. This liquidation right may be
affected by the grant of preferential dividends or distribution rights to the holders of a
class of shares with preferential rights that may be authorized in the future.

CHANGE OF CONTROL

There are no specific provisions of
our Memorandum or Articles that would have an effect of delaying, deferring or preventing
a change in control of Scailex or that would operate only with respect to a merger,
acquisition or corporate restructuring involving us (or any of our subsidiaries). However,
certain provisions of the Companies Law may have such effect.

The Companies Law includes provisions
that allow a merger transaction and requires that each company that is a party to the
merger have the transaction approved by its board of directors and a vote of the majority
of its shares. For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if shares representing a majority of the
voting power present at the shareholders meeting and which are not held by the other party
to the merger (or by any person who holds 25% or more of the voting power or the right to
appoint 25% or more of the directors of the other party) vote against the merger. Upon the
request of a creditor of either party to the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that as a result
of the merger the surviving company will be unable to satisfy the obligations of any of
the parties to the merger. In addition, a merger may not be completed unless at least (i)
50 days have passed from the time that the requisite proposals for approval of the merger
have been filed with the Israeli Registrar of Companies by each merging company and (ii)
30 days have passed since the merger was approved by the shareholders of each merging
company.

The Companies Law also provides that
an acquisition of shares in a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater shareholder
of the company. Similarly, the Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the acquisition
the purchaser would become a 45% or greater shareholder of the company, unless there is
already a 45% or greater shareholder of the company. These requirements do not apply if,
in general, the acquisition (1) was made in a private placement that received shareholder
approval, (2) was from a 25% or greater shareholder of the company which resulted in the
acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or
greater shareholder of the company which resulted in the acquirer becoming a 45% or
greater shareholder of the company. The tender offer must be extended to all shareholders,
but the offeror is not required to purchase more than 5% of the companys outstanding
shares, regardless of how many shares are tendered by shareholders. The tender offer may
be consummated only if (i) at least 5% of the companys outstanding shares will be
acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the
number of shares whose holders objected to the offer.

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If, as a result of an acquisition of
shares, the acquirer will hold more than 90% of a companys outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares. If
less than 5% of the outstanding shares are not tendered in the tender offer, all the
shares that the acquirer offered to purchase will be transferred to it. The Companies Law
provides for appraisal rights if any shareholder files a request in court within three
months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquiror may not acquire
shares in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares.

Lastly, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign
company, less favorably than U.S. tax laws. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares for shares
in another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.

NOTIFICATION OF
SHAREHOLDING

There are no specific provisions of
our Memorandum or Articles governing the ownership threshold above which shareholder
ownership must be disclosed.

CHANGES IN CAPITAL

Our Articles require that changes in
capitalization must be adopted by special resolution, approved by the holders of 75% or
more of the voting power represented and voting at a general meeting. Subject thereto, the
conditions imposed by our Memorandum and Articles governing changes in the capital, are no
more stringent than is required by Israeli law.

|C. | MATERIAL
CONTRACTS
|-- | ------------------

SALE OF SCAILEX
VISIONS BUSINESS

We currently own approximately 78.6%
of Scailex Visions share capital, and each of our principal shareholders, Clal and
Discount, holds approximately 7.3% of Scailex Visions share capital, each on an
issued and outstanding basis (see Item 4C above).

On August 11, 2005, Scailex Vision
entered into an Asset Purchase Agreement with Hewlett-Packard, whereby Hewlett-Packard
agreed to acquire substantially all of the assets and business of Scailex Vision for $230
million (subject to net working capital adjustments) in cash and to assume substantially
all of Scailex Visions liabilities related to the ongoing business. The sale was
completed on November 1, 2005. At closing, $23 million of the proceeds was retained in
escrow for 24 months to cover possible indemnification claims, $1 million was retained to
cover tax liabilities of the year 2005, and an additional $27 million was utilized to
repay Scailex Visions retained liabilities, mainly to Israeli banks. In April 2006,
Hewlett-Packard paid Scailex Vision an additional approximately $6.6 million to
account for the net working capital adjustment in the purchase price, i.e., in addition to
the $230 million. Hewlett-Packard also transferred to Scailex Vision funds in an aggregate
amount of $1.1 million that were retained by Scailex Visions subsidiaries
following the closing.

Scailex Vision made representations
and warranties in the purchase agreement for the benefit of Hewlett-Packard, which
generally survive for a period of two years following the closing of the transaction or,
for certain matters, the expiration of the applicable statute of limitations. Scailex
Vision agreed to indemnify Hewlett-Packard against damages or losses arising from any
breach of the representations and warranties, subject to certain limitations (including
customary de minimis exceptions and caps) detailed in the purchase agreement. Scailex
Vision also agreed to indemnify Hewlett-Packard against any damages or losses arising from
any breach of a covenant or agreement made by it in the purchase agreement or from any
liability of Scailex Vision that Scailex Vision retained under the terms of the purchase
agreement. Scailex Vision is generally obligated to satisfy these indemnification
obligations only out of amounts deposited in the escrow discussed above. Scailex Vision
also agreed to certain ongoing covenants, including non-compete and non-solicitation
restrictions on its operations.

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In connection with the transaction,
we entered into incidental agreements with Hewlett-Packard, as follows:

| |  | We,
Discount and Clal entered into an agreement, whereby, among other things, each of us
agreed not to solicit certain employees of Scailex Vision for a period of 18 months
following the closing and not to compete with Hewlett-Packard in the business of Scailex
Vision for a period of 24 months following the closing; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
entered into a Trademark License and Domain Name Assignment Agreement, whereby, among
other things, we granted to Hewlett-Packard a license to our rights to the Scitex tradename
and agreed, subject to shareholder approval, to change our corporate name. Our
shareholders approved the change in our name in December 2005 and, accordingly, we
changed our name from Scitex Corporation Ltd. to our present name.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The foregoing description of the
Asset Purchase Agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement filed by us as Exhibit 4(a)(5) in
Item 19.

SALE OF SDPS
BUSINESS

On November 24, 2003, we entered into
an Asset Purchase Agreement with Eastman Kodak Company (Kodak), whereby Kodak agreed to
acquire substantially all of the assets and business of Scitex Digital Printing, Inc.
(SDP), a wholly-owned US subsidiary of Scailex, for $250 million in cash and to assume
substantially all of SDPs liabilities related to the ongoing business. In addition,
as part of the transaction, we retained $12 million of SDPs cash balance at closing,
producing total cash consideration for the transaction of $262 million.

We completed the sale on January 5,
2004. At closing, $15 million of the proceeds of the sale, which amount was released 20
business days after closing, was placed in a custody account to cover unknown federal tax
liens. Furthermore, $10 million of the proceeds of the sale was placed in a custody
account to cover possible indemnification claims, $5 million of which was released to
Scailexs account in January 2005 and the remaining $5 million of which was released
in January 2006. We made representations and warranties in the purchase agreement for the
benefit of Kodak, which generally survive for a period of two years following the closing
of the transaction (i.e., until January 2006) or, for certain matters, the expiration of
the applicable statute of limitations. We also agreed to a certain non-compete restriction
on our operations. We agreed to indemnify Kodak against damages or losses arising from any
breach of the representations and warranties, subject to certain limitations (including
customary deductibles, de minimis exceptions and caps) detailed in the purchase agreement.
We also agreed to indemnify Kodak against any damages or losses arising from any breach of
a covenant or agreement made by us in the purchase agreement or from any liability of SDP
that we retained under the terms of the purchase agreement. We are obligated to satisfy
these indemnification obligations to the extent not satisfied out of amounts in the
custody account discussed above.

The foregoing description of the
Asset Purchase Agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement incorporated herein by reference
as Exhibit 4(a)(2) in Item 19.

COMBINATION OF SCAILEX
VISION AND SCAILEX VISION INTERNATIONAL

On December 22, 2002, we entered into
a Share Exchange Agreement with Scailex Vision Ltd. and Aprion Digital Ltd. For a
discussion of this agreement, see Item 7B  Related Party Transaction under the
caption Combination of Scailex Vision and Scailex Vision International.

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|D. | EXCHANGE
CONTROLS
|-- | -----------------

There are currently no Israeli
currency control restrictions on payments of dividends or other distributions with respect
to our ordinary shares or the proceeds from the sale of the shares, except for the
obligation of Israeli residents to file reports with the Bank of Israel regarding certain
transactions. However, legislation remains in effect pursuant to which currency controls
can be imposed by administrative action at any time.

|E. | TAXATION
|-- | --------

The following is a general summary
only and should not be considered as income tax advice or relied upon for tax planning
purposes. Holders of our ordinary shares should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign,
federal, state or local taxes.

# U.S. TAX CONSIDERATIONS

Subject to the limitations described
herein, the following discussion describes certain material U.S. federal income tax
considerations applicable to a U.S. holder (as defined below) regarding the acquisition,
ownership and disposition of our ordinary shares. A U.S. holder means a holder of our
ordinary shares who is:

| |  | an
individual citizen or resident of the United States;
| | - | -------------------------------------------------------

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

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

| |  | in
general, a trust, if a U.S. court is able to exercise primary supervision over the
         administration of the trust and one or more United States persons have the
authority to control          all substantial decisions of the trust.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unless otherwise specifically
indicated, this discussion does not consider the United States tax consequences to a
person that is not a U.S. holder (a non-U.S. holder) and considers only U.S.
holders that will own our ordinary shares as capital assets. This discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended, referred to as the
Code, current and proposed Treasury regulations promulgated under the Code, administrative
pronouncements and judicial decisions, all as in effect today and all of which are subject
to change, possibly with a retroactive effect, which change could materially affect the
U.S. federal income tax considerations described herein. This discussion does not address
all aspects of U.S. federal income taxation that may be relevant to any particular U.S.
holder based on the U.S. holders individual circumstances. In particular, this
discussion does not address the potential application of the alternative minimum tax or
the U.S. federal income tax consequences to U.S. holders that are subject to special
treatment, including, without limitation, U.S. holders who:

| |  | are
broker-dealers or insurance companies;
| | - | ------------------------------------------

| |  | are
tax-exempt organizations or retirement plans;
| | - | -------------------------------------------------

| |  | are
financial institutions or financial services entities;
| | - | ----------------------------------------------------------

| |  | hold
 ordinary  shares  as part  of a  straddle,  hedge  or  conversion  transaction  with
 other          investments;
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | have
 acquired  their  shares  upon the  exercise  of  employee  stock  options or  otherwise
 as          compensation;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | hold
their shares through partnerships or other pass-through entities;
| | - | ----------------------------------------------------------------------

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

62

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| |  | have
a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------

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

U.S.
          holders should review the summary below under Israeli Taxation for a
          discussion of Israeli tax consequences and certain other tax consequences
          pursuant to the income tax treaty between the governments of Israel and the
          U.S., which may be applicable to them.

U.S.
          holders should consult their own tax advisors with respect to the specific U.S.
          federal, state and local income tax consequences and any applicable non-U.S. tax
          consequences to them of purchasing, holding or disposing of the ordinary shares.
          U.S. holders are also urged to consult their own tax advisors concerning whether
          they will be eligible for benefits under the income tax treaty between the
          governments of Israel and the U.S.

U.S.
          HOLDERS OF ORDINARY SHARES

TAXATION OF DIVIDENDS
PAID ON ORDINARY SHARES

Subject to the discussion below under
Tax Consequences if We are a Passive Foreign Investment Company, a U.S. holder
generally will be required to include in gross income as ordinary dividend income the
amount of any distribution paid on our ordinary shares, including the amount of any
Israeli taxes withheld in respect of such distribution, on the date the distribution is
received, to the extent the distribution is paid out of our current or accumulated
earnings and profits, as determined for U.S. federal income tax purposes. Distributions in
excess of our earnings and profits will first be treated as a tax-free return of capital
and will reduce the U.S. holders basis in our ordinary shares and, to the extent in
excess of the basis, will be treated as gain from the sale or exchange of our ordinary
shares. At this time, however, the Company does not maintain calculations of its earnings
and profits under U.S. federal income tax principles, and therefore, U.S. holders will
generally be required to treat all distributions as taxable dividends. Distributions of
our current or accumulated earnings and profits will not qualify for the
dividends-received deduction applicable in certain cases to U.S. corporations.

Distributions of our current or
accumulated earnings and profits paid in foreign currency to a U.S. holder, and the amount
of any Israeli withholding tax thereon, will be included in the gross income of a U.S.
holder in an amount equal to the U.S. dollar value of such foreign currency calculated by
reference to the exchange rate in effect on the day the distribution is received by the
U.S. holder, regardless of whether such foreign currency is converted into U.S. dollars.
If a U.S. holder converts dividends paid in foreign currency into U.S. dollars on the day
such dividends are received, the U.S. holder generally should not be required to recognize
foreign currency gain or loss with respect to such conversion. If the foreign currency
received in the distribution is not converted into U.S. dollars on the date of receipt,
the U.S. holder will have a basis in the Israeli currency equal to the U.S. dollar value
on the date of receipt and any foreign currency gain or loss recognized upon a subsequent
conversion or other disposition of such foreign currency generally will be treated as U.S.
source ordinary income or loss.

Subject to certain conditions and
limitations, any Israeli withholding tax imposed with respect to a distribution of our
current or accumulated earnings and profits generally will be eligible for credit against
the recipient U.S. holders U.S. federal income tax liability or, at the U.S.
holders election, may be claimed as a deduction against income in determining such
tax liability. Distributions of our current or accumulated earnings and profits to U.S.
holders will be treated as foreign source income and generally will be categorized as
passive income or, in the case of certain holders, financial services
income for purposes of computing the U.S. foreign tax credit allowable to U.S.
holders. However, for taxable years beginning after December 31, 2006, dividends
distributed by the Company to U.S. holders would generally constitute passive
category income but could, in the case of certain U.S. holders, constitute
general category income. U.S. holders are advised that any Israeli tax paid
under circumstances in which an exemption from such tax was available will not give rise
to a deduction or credit for foreign taxes paid for U.S. federal income tax purposes. The
calculation of allowable foreign tax credits and, in the case of a U.S. holder that elects
to deduct foreign taxes, the availability of deductions for foreign taxes paid involve the
application of complex rules that depend on a U.S. holders particular circumstances.
Accordingly, U.S. holders should consult their own tax advisors regarding their
eligibility for foreign tax credits or deductions.

63

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TAXATION OF THE
DISPOSITION OF ORDINARY SHARES

Subject to the discussion below under
Tax Consequences if We are a Passive Foreign Investment Company, upon the
sale, exchange or other disposition of our ordinary shares, a U.S. holder generally will
recognize capital gain or loss in an amount equal to the difference between the U.S.
dollar value of the amount realized on the sale, exchange or other disposition and the
U.S. holders adjusted tax basis, determined in U.S. dollars, in the ordinary shares.
Capital gain from the sale, exchange or other disposition of ordinary shares held for one
year or less will be short-term capital gain or, if held for more than one year, long-term
capital gain. In the case of individual U.S. holders, long-term capital gains generally
are subject to U.S. federal income tax at preferential rates (generally, a maximum rate of
15%) and short-term capital gains generally are subject to tax at ordinary income rates.

Gain or loss recognized by a U.S.
holder on a sale, exchange or other disposition of our ordinary shares generally will be
treated as U.S. source income or loss for U.S. foreign tax credit purposes. However, under
certain circumstances and subject to the limitations specified in the income tax treaty
between the governments of Israel and the U.S., such gain or loss recognized by a U.S.
holder who qualifies as a resident of the U.S. (within the meaning of such treaty) and who
is entitled to claim the benefits afforded to such resident under such treaty may be
treated as foreign-source for U.S. foreign tax credit purposes. U.S. holders should
consult their own tax advisors regarding the application of the U.S. foreign tax credit
limitations to gain or loss recognized on the sale, exchange or other disposition of our
ordinary shares.

The deductibility of a capital loss
recognized on the sale, exchange or other disposition of ordinary shares is subject to
significant limitations. U.S. holders should consult their own tax advisors in this
regard.

A U.S. holder that receives foreign
currency upon disposition of ordinary shares and converts the foreign currency into U.S.
dollars after the settlement date or trade date (whichever date the U.S. holder is
required to use to calculate the value of the proceeds of sale) generally will have
foreign exchange gain or loss based on any appreciation or depreciation in the value of
the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary
income or loss.

Tax Rates. The Jobs and Growth
Tax Relief Reconciliation Act of 2003 (effective for tax years after December 31, 2002
through December 31, 2008 which has been extended to December 31, 2010 by the Tax Increase
Prevention and Reconciliation Act of 2005), reduces the individual tax rates on both
capital gains and certain dividend income (qualified dividend income). The top
individual rate on adjusted capital gains is generally reduced from 20% to 15% (5% for
taxpayers in the lower brackets) and on qualified dividend income from 38.6%
to 15%. The reduced rates on long-term capital gains and qualified dividend
income apply to (i) sales and exchanges (and payments received) on or after May 6,
2003 and (ii) qualified dividend income received after December 31, 2002,
respectively.

Qualified dividend income generally
includes dividends paid by non-U.S. corporations if, among other things, certain minimum
holding periods are met and either (i) the shares with respect to which the dividend has
been paid are readily tradable on an established securities market in the U.S. or (ii) the
non-U.S. corporation paying such a dividend is eligible for the benefits of a
comprehensive U.S. income tax treaty (such as the income tax treaty between the
governments of Israel and the U.S.) which provides for the exchange of information. We
currently believe that if we were to pay any dividends with respect to our ordinary
shares, the dividends would constitute qualified dividend income for U.S. federal income
tax purposes; provided, however, that we are not treated as a passive foreign
investment company for U.S. federal income tax purposes (see discussion below under
Tax Consequences if We are a Passive Foreign Investment Company). The top U.S.
federal income tax rate applicable to income received by U.S. holders who are corporations
for U.S. federal income tax purposes is 35%. U.S. holders should consult their own tax
advisor regarding the specific U.S. tax rates applicable to any distribution made by us
with respect to our ordinary shares or gain realized on the sale, exchange or other
disposition of our ordinary shares, based on their particular circumstances.

64

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TAX CONSEQUENCES IF WE
ARE A PASSIVE FOREIGN INVESTMENT COMPANY

We will be a passive foreign
investment company, or PFIC, if 75% or more of our gross income in a taxable year,
including the pro rata share of the gross income of any company, U.S. or foreign, in which
we are considered to own, directly or indirectly, 25% or more of the shares by value, is
passive income. Alternatively, we will be considered to be a PFIC if at least 50% of our
assets in a taxable year, averaged over the year and ordinarily determined based on fair
market value and including the pro rata share of the assets of any company in which we are
considered to own, directly or indirectly, 25% or more of the shares by value, are held
for the production of, or produce, passive income.

Following the sale of Scailex
Visions business in November 2005, it is likely that we will become a PFIC in 2006.
U.S. holders who hold ordinary shares during a period when we are a PFIC will be subject
to the rules described below, even if we cease to be a PFIC, subject to specified
exceptions for U.S. holders who made a qualified electing fund (a QEF)
election.

If we were a PFIC, and a U.S. holder
did not make an election to treat us as a QEF as described below, excess distributions by
us to a U.S. holder would be taxed in a special way. Excess distributions are amounts
received by a U.S. holder on shares in a PFIC in any taxable year that exceed 125% of the
average distributions received by the U.S. holder from the PFIC in the shorter of:

| |  | the
three previous taxable years; or
| | - | ------------------------------------

| |  | the
U.S. holder's holding period for ordinary shares before the present taxable year.
| | - | -------------------------------------------------------------------------------------

Excess distributions must be
allocated ratably to each day that a U.S. holder has held shares in a PFIC. A U.S. holder
would then be required to include amounts allocated to the current taxable year in its
gross income as ordinary income for that year. Further, a U.S. holder would be required to
pay tax on amounts allocated to each prior taxable year at the highest rate in effect for
that year on ordinary income and the tax would be subject to an interest charge at the
rate applicable to deficiencies for income tax.

The entire amount of gain that is
realized by a U.S. holder upon the sale or other disposition of our ordinary shares will
also be treated as an excess distribution and will be subject to tax as described above.

A U.S. holders tax basis in our
ordinary shares that were inherited from a deceased person who was a U.S. holder would not
receive a step-up to fair market value as of the date of the deceaseds death but
would instead be equal to the deceaseds basis, if lower.

The special PFIC rules described
above will not apply to a U.S. holder if the U.S. holder makes an election to treat us as
a QEF in the first taxable year in which the U.S. holder owns ordinary shares or in which
we are a PFIC, whichever is later, and if we comply with specified reporting requirements.
Instead, a shareholder of a QEF is required for each taxable year in which we are a PFIC
to include in income a pro rata share of the ordinary earnings of the QEF as ordinary
income and a pro rata share of the net capital gain of the QEF as long-term capital gain,
subject to a separate election to defer payment of taxes. If deferred, the taxes will be
subject to an interest charge. We will supply U.S. holders with the information needed to
report income and gain under a QEF election if we are classified as a PFIC. There can be
no assurance, however, that we will be able to make a determination of our PFIC status and
inform our U.S. holders of such determination until after the due date for the filing of
such holders tax returns has passed. U.S. holders should consult their tax advisors
about the availability and procedure for filing a retroactive QEF election or amended
return.

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The QEF election is made on a
shareholder-by-shareholder basis. Once made, the election applies to all subsequent
taxable years of the U.S. holder in which it holds our ordinary shares and for which we
are a PFIC and can be revoked only with the consent of the Internal Revenue Service, or
IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including
the required election statement and the PFIC annual information statement, to a timely
filed U.S. federal income tax return for the year of the election. The election statement
also must be filed with the IRS Service Center in Philadelphia, Pennsylvania. In addition,
an electing U.S. holder must act each year to maintain a QEF election by attaching a Form
8621 to the U.S. holders timely filed tax return and comply with any other
requirements as specified by the IRS.

A U.S. holder of PFIC shares which
are publicly traded could elect to mark the stock to market annually, recognizing as
ordinary income or loss each year an amount equal to the difference as of the close of the
taxable year between the fair market value of the PFIC shares and the U.S. holders
adjusted tax basis in the PFIC shares. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. holder under the election for prior
taxable years. If the mark-to-market election were made, then the rules presented above
would not apply for periods covered by the election.

If a QEF election or mark-to-market
election is not made for the first taxable year in which the U.S. holder holds our
ordinary shares or in which we are a PFIC, whichever is later, then special rules will
apply and U.S. holders should consult their tax advisors regarding the application of
those rules.

We intend to waive a certain benefit
that we are entitled to under the U.S.-Israel income tax treaty that would otherwise
exempt us from the application of the U.S. accumulated earnings tax (the AET).
Under the AET, we will generally be subject to a 15% tax on certain accumulated earnings
if we accumulate earnings and profits beyond the reasonable needs of the
business (as defined in the Code). By electing to exercise this waiver, we should be
subject to special look-through rules under the Code for determining our PFIC status.
Although no assurance can be given after applying these special look-through rules, we do
not believe that we were a PFIC in 2005, nor do we believe that we should have tax
liability under the AET in 2005.

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

NON-U.S. HOLDERS OF
ORDINARY SHARES

Except as described in
Information Reporting and Backup Withholding below, a non-U.S. holder of
ordinary shares generally will not be subject to U.S. federal income or withholding tax on
the payment of dividends on, and the proceeds from the disposition of, ordinary shares,
unless:

| |  | the
 item is  effectively  connected  with  the  conduct  by the  non-U.S.  holder  of a
trade or          business in the United States;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the case of a resident  of a country  which has a treaty with the United  States,  the
item is          attributable to a permanent establishment;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | in
the case of an  individual,  the item is  attributable  to a fixed  place of  business
 in the          United States;
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | the
non-U.S.  holder is an  individual  who holds the ordinary  shares as a capital  asset
and is          present in the United  States for 183 days or more in the  taxable  year
of the  disposition  and          does not qualify for an exemption; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
non-U.S.  holder is subject to tax under the  provisions  of U.S. tax law  applicable to
U.S.          expatriates.
| | - | -----------------------------------------------------------------------------------------------------------------------

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INFORMATION REPORTING AND
BACKUP WITHHOLDING

Dividend payments with respect to
ordinary shares and proceeds from the sale or other disposition of ordinary shares may be
subject to information reporting to the IRS and possible U.S. backup withholding at a
current rate of 28%. Backup withholding will not apply, however, to a holder who furnishes
a correct taxpayer identification number or certificate of foreign status and makes any
other required certification or who is otherwise exempt from backup withholding. U.S.
persons who are required to establish their exempt status generally must provide IRS Form
W-9 (Request for Taxpayer Identification Number and Certification). Non-U.S. holders
generally will not be subject to U.S. information reporting or backup withholding.
However, such holders may be required to provide certification of non-U.S. status
(generally on IRS Form W-8BEN) in connection with payments received in the U.S. or through
certain U.S.-related financial intermediaries.

Backup withholding is not an
additional tax. Amounts withheld as backup withholding may be credited against a
holders U.S. federal income tax liability, and a holder may obtain a refund of any
excess amounts withheld by filing the appropriate claim for refund with the IRS and
furnishing any required information.

# ISRAELI TAX
CONSIDERATIONS

The following summary describes the
current tax structure applicable to companies incorporated in Israel, with special
reference to its effect on us. It also discusses Israeli tax consequences material to
persons purchasing our ordinary shares. To the extent that the summary is based on new tax
legislation yet to be judicially or administratively interpreted, we cannot be sure that
the views expressed will accord with any future interpretation by the Israeli tax
authorities or courts. The summary is not intended, and should not be construed, as legal
or professional advice and does not exhaust all possible tax considerations. Accordingly,
you should consult your tax advisor as to the particular tax consequences of an investment
in our ordinary shares.

GENERAL CORPORATE TAX
STRUCTURE

Generally, Israeli companies are
subject to corporate tax on their taxable income at the rate of 34% for the 2005 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows: 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. Israeli companies are generally subject to capital gains tax at a rate of
25% for capital gains (other than gains deriving from the sale of listed securities),
derived after January 1, 2003. However, the effective tax rate payable by a company that
derives income from an approved enterprise (as defined below) may be considerably less, as
further discussed below.

STAMP DUTY

The Israeli Stamp Duty on Documents
Law, 1961, or the Stamp Duty Law, provides that any document (or part thereof) that is
signed in Israel or that is signed outside of Israel and refers to an asset or other thing
in Israel or to an action that is executed or will be executed in Israel is subject to a
stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter
of such document. De facto, it has been common practice in Israel not to pay such stamp
duty unless a document is filed with a governmental authority. An amendment to the Stamp
Duty Law that came into effect on June 1, 2003, determines, among other things, that stamp
duty on most agreements shall be paid by the parties that signed such agreement, jointly
or severally, or by the party that undertook under such agreement to pay the stamp duty.
As a result of the aforementioned amendment to the Stamp Duty Law, the Israeli tax
authorities have approached many companies in Israel, including us, and requested
disclosure of all agreements signed by such companies after June 1, 2003, with the aim of
collecting stamp duty on such agreements.

Based on our assessment and advice
from our Israeli counsel, we believe that we may only be required to pay stamp duty on
documents signed on or after August 2004. However, we cannot assure you that the tax
authorities or the courts will accept this view. Although at this stage it is not yet
possible to evaluate the effect, if any, on us of the amendment to the Stamp Duty Law, the
amendment could materially adversely affect our results of operations. Under an order
published in December 2005, the said requirement to pay stamp duty is cancelled with
respect to documents signed on or after January 1, 2006.

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TAX BENEFITS UNDER THE
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

The Law for the Encouragement of
Capital Investments, 1959, as amended, or the Investment Law, provides that upon
application to the Investment Center of the Israeli Ministry of Industry, Trade and Labor,
a proposed capital investment in eligible facilities may be designated as an
Approved Enterprise. See the discussion below regarding a recent amendment to
the Investments Law.

Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by its
financial scope, including its capital sources, and by its physical characteristics, such
as the equipment to be purchased and utilized pursuant to the program. The tax benefits
derived from any such certificate of approval relate only to taxable income derived from
the specific Approved Enterprise. If a company has more than one approval or only a
portion of its capital investments are approved, its effective tax rate is the result of a
weighted combination of the applicable rates. The tax benefits under the law are not
generally available with respect to income derived from products manufactured outside of
Israel.

Taxable income of a company derived
from an Approved Enterprise, including income generated by a company from the grant of a
usage right with respect to know-how developed by the Approved Enterprise, income
generated from royalties and income derived from a service which is auxiliary to such
usage right or royalties, provided that such income is generated within the Approved
Enterprises ordinary course of business, is subject to corporate tax at the maximum
rate of 25%, rather than the usual corporate tax rate, for the Benefit Period.
The Benefit Period is seven years (and under certain circumstances, as further detailed
below, ten years), commencing with the year in which the Approved Enterprise first
generates taxable income, and is limited to 12 years from commencement of production or 14
years from the date of approval, whichever is earlier.

A company that has an Approved
Enterprise program is eligible for further tax benefits if it qualifies as a foreign
investors company. A foreign investors company is a company
that more than 25% of its shares of capital stock and combined share and loan capital is
owned by non-Israeli residents. A company that qualifies as a foreign investors
company and has an Approved Enterprise program is eligible for tax benefits for a ten-year
benefit period and to a reduced tax rate of 10% to 25% depending on the level of foreign
investment in each year.

A company owning an Approved
Enterprise may elect to forego certain government grants extended to Approved Enterprises
in return for an alternative package of benefits. Under the alternative package, the
companys undistributed income derived from an Approved Enterprise will be exempt
from tax for a period of between two and ten years from the first year of taxable income,
depending on the geographic location of the Approved Enterprise within Israel, and the
company will be eligible for the tax benefits under the law for the remainder of the
Benefit Period.

The benefits available to an Approved
Enterprise are conditioned on compliance with the conditions stipulated in the law and
related regulations and the criteria set forth in the specific certificate of approval. In
the event that a company violates these conditions, in whole or in part, it may be
required to refund the amount of tax benefits, in whole or in part, plus an amount linked
to the Israeli consumer price index and interest.

Under the Investments Law, income
arising from our Approved Enterprises facilities is tax-free under the alternative package
of benefits described above for a period of two years beginning with the first year in
which the company generated taxable income, and thereafter, entitled to reduced tax rates
based on the level of foreign ownership for specified periods. Jemtex has received the
approval of the Investment Center for its facility in Lod, Israel under the alternative
package of benefits. These benefits generally provide Jemtex with an exemption from income
taxes on income from such facility for a period of two years followed by reduced tax rates
of 25% for an additional period of five years from the first year in which it generated
taxable income, up to the earlier of 12 years from the time the facility was first made
operational, or 14 years from the Investment Centers approval.

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All dividends are considered to be
attributable to the entire enterprise and their effective tax rate is the result of a
weighted combination of the applicable tax rates. In the event that we do pay a cash
dividend from income that is derived from our Approved Enterprises pursuant to the
alternative package of benefits, which income would normally be tax-exempt, we would be
required to pay tax on the amount intended to be distributed as dividends at the rate
which would have been applicable had we not elected the alternative package of benefits,
which rate is ordinarily in the range of 10%-25%, and to withhold at source on behalf of
the dividend recipient an additional 15% of the amount distributed as dividends.

The law also provides that an
Approved Enterprise is entitled to accelerated depreciation on its property and equipment
that are included in an approved investment program.

Amendment to the
Investments Law

On April 1, 2005, an amendment to the
Investments Law came into effect. Pursuant to the amendment, a companys facility
will be granted the status of Approved Enterprise only if it is proven to be
an industrial facility (as defined in the Investments Law) that contributes to the
economic independence of the Israeli economy and is a competitive facility that
contributes to the Israeli gross domestic product. The amendment provides that the Israeli
Tax Authority and not the Investments Center will be responsible for an Approved
Enterprise under the alternative package of benefits, referred to as a Benefiting
Facility. A company wishing to receive the tax benefits afforded to a Benefiting Facility
is required to select the tax year from which the period of benefits under the Investment
Law are to commence by simply notifying the Israeli Tax Authority within 12 months of the
end of that year. In order to be recognized as owning a Benefiting Facility, a company is
required to meet a number of conditions set forth in the amendment, includingmaking a minimal investment in manufacturing assets for the Benefiting Facility and
having completed a cooling-off period of no less than two to four years from the
companys previous year of commencement of benefits under the Investments Law.

Pursuant to the amendment, a company
with a Benefiting Facility is entitled, in each tax year, to accelerated depreciation for
the manufacturing assets used by the Benefiting Facility and to certain tax benefits,
provided that no more than 12 to 14 years have passed since the beginning of the year of
commencement of benefits under the Investments Law. The tax benefits granted to a
Benefiting Factory, as applicable to us, are determined according to one of the following
new tax routes:

| |  | Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefiting Facility within Israel, and a reduced corporate tax rate of 10
to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefiting Facility during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%).
The company is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefiting Facility.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax route enabling companies owning facilities in certain geographic locations in
developing areas in Israel to pay corporate tax at the rate of 11.5% on income of the
Benefiting Facility. The benefits period is ten years. Upon payment of dividends, the
company is required to withhold tax at source at a rate of 15% for Israeli residents and
at a rate of 4% for foreign residents.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally, a company that is Abundant
in Foreign Investment (as defined in the Investments Law) is entitled to an extension of
the benefits period by an additional five years, depending on the rate of its income that
is derived in foreign currency.

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The amendment changes the definition
of foreign investment in the Investments Law so that instead of an investment
of foreign currency in the company, the definition now requires a minimum investment of
NIS 5 million by foreign investors. Furthermore, such definition now also includes the
purchase of shares of a company from another shareholder, provided that the companys
outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the
aforementioned definition will take effect retroactively from 2003.

The amendment will apply to Approved
Enterprise programs in which the year of commencement of benefits under the Investments
Law is 2004 or later, unless such programs received approval from the Investment Center on
or prior to December 31, 2004 in which case the provisions of the amendment will not
apply.

As a result of the amendment,
tax-exempt income that will be 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.

TAX BENEFITS FOR RESEARCH
AND DEVELOPMENT

Israeli tax law allows, under
specified circumstances, a tax deduction for expenditures, including capital expenditures,
for the year in which they are incurred. These expenses must relate to scientific research
and development projects, and must be approved by the relevant Israeli government ministry
determined by the field of research, and the research and development must be for the
promotion of the company and carried out by or on behalf of the company seeking such
deduction. However, the amount of such deductible expenses must be reduced by the sum of
any funds received through government grants for the finance of such scientific research
and development projects. Expenditures not so approved are deductible over a three-year
period.

SPECIAL PROVISIONS
RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS

The Income Tax Law (Inflationary
Adjustments), 1985 represents an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing inflation. The features of the law that
are material to us are summarized below:

| |  | A
special tax adjustment for the preservation of equity whereby certain corporate assets
are classified broadly into fixed (inflation immune) assets and non-fixed (soft) assets.
Where a companys equity, as defined in the law, exceeds the depreciated cost of its
fixed assets, as defined in the law, the company may take a deduction from taxable income
that reflects the effect of multiplication of the annual rate of inflation on such
excess, up to a ceiling of 70% of taxable income in any single tax year, with the unused
portion carried forward, linked to the increase in the consumer price index. If the
depreciated cost of fixed assets exceeds a companys equity, then the excess
multiplied by the annual rate of inflation is added to taxable income;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to certain limitations set forth in the law, depreciation deductions on fixed assets and
losses carried forward are adjusted for inflation based on the increase in the Israeli
consumer price index; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Capital
gains on specific traded securities are normally subject to reduced tax rates for
individuals and are taxable at corporate tax rates for companies. As of January 1, 2006,
the relevant provisions governing taxation of companies on capital gains deriving from
the sale of traded securities are included in the Tax Ordinance and the Adjustments Law
no longer includes provisions in this regard.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CAPITAL GAINS TAX

Israeli law generally imposes a
capital gains tax on the sale of any capital assets by residents of Israel, as defined for
Israeli tax purposes, and on the sale of assets in Israel, including shares in Israeli
companies (and our ordinary shares), by both residents and non-residents of Israel, unless
a specific exemption is available or unless a tax treaty between Israel and the
shareholders country of residence provides otherwise. The law distinguishes between
the inflationary surplus and the real gain. The inflationary surplus is a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price that is attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the date of
purchase and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.

70

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Generally, up until the 2006 tax
year, capital gains tax was imposed on individual Israeli residents at a rate of 15% on
real gains derived on or after January 1, 2003, from the sale of shares in, among others,
companies dually traded on both the TASE and NASDAQ, such as Scailex, or on a recognized
stock exchange or a regulated market outside of Israel. This tax rate was contingent upon
the shareholder not claiming a deduction for financing expenses, and did not apply to:
(i) the sale of shares to a relative (as defined in the Israeli Income Tax
Ordinance); (ii) the sale of shares by dealers in securities; (iii) the sale of shares by
shareholders that report in accordance with the Inflationary Adjustment Law (that were
taxed at corporate tax rates for corporations and at marginal tax rates for individuals);
or (iv) the sale of shares by shareholders who acquired their shares prior to an
initial public offering (that may be subject to a different tax arrangement). As of
January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares,
whether listed on a stock exchange or not, is 20% for Israeli individuals, unless such
shareholder claims a deduction for financing expenses in connection with such shares, in
which case the gain will generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a principal shareholder at any time during the
12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the tax rate
will be 25%.

Israeli companies are subject to a
corporate tax rate on capital gains derived from the sale of shares, unless such companies
were not subject to the Adjustments Law (or certain regulations) at the time of
publication of the aforementioned amendment to the Tax Ordinance, in which case the
applicable tax rate is 25%. However, the foregoing tax rates will not apply to: (i)
dealers in securities; and (ii) shareholders who acquired their shares prior to an initial
public offering of the company (that may be subject to a different tax arrangement).

The tax basis of shares acquired
prior to January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a taxpayer may elect
the actual adjusted cost of the shares as the tax basis provided he can provide sufficient
proof of such adjusted cost.

Non-Israeli residents are generally
exempt from Israeli capital gains tax on any gains derived from the sale of shares
publicly traded on the TASE, provided such gains do not derive from a permanent
establishment of such shareholders in Israel, and are exempt from Israeli capital gains
tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock exchange outside of Israel, provided, however, that such capital gains
are not derived from a permanent establishment in Israel, that such shareholders are not
subject to the Inflationary Adjustment Law and that such shareholders did not acquire
their shares prior to an initial public offering. In addition, non-Israeli companies will
not be entitled to such exemption if an Israeli resident (i) has a controlling interest of
25% or more in such non-Israeli company, or (ii) is the beneficiary or is entitled to 25%
or more of the revenues or profits of such non-Israeli company, whether directly or
indirectly.

In some instances, where our
shareholders may be liable to Israeli tax on the sale of our ordinary shares, the payment
of the consideration may be subject to the withholding of Israeli tax at the source.

U.S.-Israel Income Tax
Treaty

Pursuant to the income tax treaty
between the governments of the United States and Israel, referred to as the U.S.-Israel
tax treaty, the sale of shares by a person who qualifies as a resident of the United
States within the meaning of the treaty and who is entitled to claim the benefits afforded
to a resident by the treaty will not be subject to Israeli capital gains tax. This
exemption does not apply if (i) the person holds, directly or indirectly, shares
representing 10% or more of our voting power during any part of the 12-month period
preceding the applicable sale, or (ii) the capital gains from such sale can be allocated
to a permanent establishment of such shareholder in Israel. However, under the
circumstances and subject to the limitations specified in the U.S.-Israel tax treaty, the
person would be permitted to claim a credit for the capital gains tax paid in Israel
against the U.S. income tax imposed with respect to the applicable sale, subject to the
limitations in U.S. laws applicable to foreign tax credits.

71

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TAXATION OF DIVIDENDS

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, we would be required to withhold income tax at the following
rates: (i) for dividends distributed prior to January 1, 2006  25%; (ii) for
dividends distributed on or after January 1, 2006  20%. If the income out of which
the dividend is being paid is attributable to an Approved Enterprise under the Investments
Law, the rate is 15%. A different rate may be provided in a treaty between Israel and the
shareholders country of residence.

Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident is
25%; provided, however, that dividends generated by an Approved Enterprise are taxed at
the rate of 15%. Furthermore, dividends not generated by an Approved Enterprise paid to a
U.S. company holding at least 10% of our issued voting power during the part of the tax
year which precedes the date of payment of the dividend and during the whole of its prior
tax year, are taxed at a rate of 12.5% in certain circumstances. However, since the
maximum tax rate of 25% under the U.S.-Israel tax treaty is higher than the current
maximum Israeli withholding tax rate on dividends effective as of January 1, 2006 (20%),
the applicable rate of withholding is 20%.

For information with respect to
the applicability of Israeli capital gains taxes on the sale of ordinary shares by United
States residents, see Capital Gains Tax above.

|F. | DIVIDENDS
AND PAYING AGENTS.
|-- | ----------------------------

Not Applicable.

|G. | STATEMENT
BY EXPERTS.
|-- | ---------------------

Not Applicable.

|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, applicable to
foreign private issuers and, in accordance therewith, are obligated to file
reports, including annual reports on Form 20-F, and other information with the SEC
relating to our business, financial condition and other matters. You may examine such
reports, exhibits and other information filed by us with the SEC, without charge, at the
public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C., 20549. You may also receive copies of these materials by mail from the
SECs Public Reference Branch at 100 F Street, N.E., Room 1580, Washington, D.C.,
20549, at prescribed rates. For more information on the public reference rooms, call the
SEC at 1-800-SEC-0330. The SEC maintains an Internet website at http://www.sec.gov that
contains reports, proxy statements, information statements and other material that are
filed through the SECs Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. We began filing through the EDGAR system on November 6, 2002.

72

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As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the SEC as frequently or as promptly as
United States companies whose securities are registered under the Exchange Act.

Notwithstanding the foregoing, we
solicit proxies and furnish proxy statements for all meetings of shareholders pursuant to
NASDAQ Marketplace Rule 4350(g), a copy of which proxy statement is filed promptly
thereafter with the SEC under the cover of a Current Report on Form 6-K. However, in
accordance with NASDAQ Marketplace Rule 4350(a)(1) we have received an exemption from the
requirement to distribute an annual report to our shareholders prior to our annual meeting
of shareholders. The basis for the exemption is that the generally accepted business
practice in Israel, where we are incorporated, is not to distribute an annual report to
shareholders. We post our Annual Report on Form 20-F on our web site (www.scailex.com) as
soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.

|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not Applicable.

|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

Our functional currency and that of
most of our consolidated subsidiaries is the U.S. dollar. Accordingly, we have balance
sheet exposure deriving from the gap between assets and liabilities in each currency other
than the dollar. This exposure is limited, mainly for balances in European currencies and
New Israeli Shekels, or NIS. Until the sale of Scailex Visions business, we used to
hedge certain assets or liabilities denominated in currencies other than the dollar by
balancing debt with receivables in the same currency.

We do not actively hedge interest
rate exposure or engage in other transactions intended to manage risks relating to
interest rate fluctuations. The interest income on our cash equivalents and short-term
investments is sensitive to changes in the general level of market interest rates. We
mitigate the impact of fluctuations in interest rates primarily through diversification
and by limiting the average duration of our interest-bearing investment portfolio. The
interest rate for the credit lines we use varies according to changes in the dollar LIBOR
rate as well as the Euro LIBOR rate.

PRESENTATION OF EXCHANGE
RATE AND INTEREST RATE RISK

The table below details the balance
sheet exposure, by currency, as of the periods indicated below (at fair value). All data
in the table has been translated for convenience into the dollar equivalent (in millions).
Explanatory notes are provided below the table.

|Balance sheet exposure by currency (from continuing operations)
|---------------------------------------------------------------
|
|as of December 31, 2005                                        
|as of December 31, 2004                                        

| |  | The
amounts shown in the table represent monetary assets less liabilities.
| | - | --------------------------------------------------------------------------

| |  | The
table does not include data with respect to balance sheet exposure for certain equity
investments in which the functional currency was the local currency, since those balances
do not create any such exposure.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | European
Currenciesinclude all European currency exposure.
| | - | ------------------------------------------------------------

73

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(See Item 5. Operating And
Financial Review And Prospects  Impact of Inflation and Exchange Rates and
Note 11 to our consolidated financial statements included in this Annual Report.)

For information about
forward-exchange contracts please see Note 11a to our Consolidated Financial Statement
included in this Annual Report.

|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not applicable.

# PART II

|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- |  | -----------------------------------------------

Not applicable.

|ITEM 14. |  | MATERIAL MODIFICATIONS IN THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- |  | ----------------------------------------------------------------------------

Not applicable.

|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

Disclosure controls and
procedures: Our chief executive officer, or CEO, and chief financial
officer, or CFO, are responsible for establishing and maintaining our disclosure controls
and procedures. These controls and procedures were designed to ensure that information
required to be disclosed in the reports that we file under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. We evaluated these disclosure controls and
procedures under the supervision of our CEO and CFO as of December 31, 2005. Based on this
evaluation, our CEO and CFO concluded that our disclosure controls and procedures are
effective in timely alerting them to information required to be disclosed in our periodic
reports to the SEC.

Managements annual report
on internal control over financial reporting:Not applicable.

Attestation report of the
registered public accounting firm:Not applicable.

Changes in internal control
over financial reporting: There were no changes in the Companys
internal control over financial reporting that occurred during the year ended December 31,
2005 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our board of directors has determined
that two of the four members of the audit committee are audit committee financial
experts as defined in Item 16A of Form 20-F. Our audit committee financial
experts are Mr. Asheri and Mr. Dogon, both of whom are independent as
this term is defined in the NASDAQ rules.

74

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|ITEM 16B. |  | CODE OF ETHICS
|--------- |  | --------------

We have adopted a Code of Ethics and
Business Conduct, which applies to all of our directors, executive officers and employees.
A copy of our Code of Ethics and Business Conduct has been posted on our Internet website,
http://www.scailex.com.

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEESAND SERVICES
|--------- |  | -------------------------------------

In the annual general meeting held in
December 2005, our shareholders re-appointed Kesselman & Kesselman, a member of
PricewaterhouseCoopers International Ltd. (PwC), to serve as our independent auditors
until the next annual meeting.

PwC, including Kesselman &
Kesselman, billed the following fees to us for professional services in each of the last
two fiscal years:

|                       | Year ended December 31,
|---------------------- | -----------------------
|
|
|
|
|Audit Fees (1)         |                        
|Audit-Related Fees (2) |                        
|Tax Fees (3)           |                        
|All Other Fees (4)     |                        
|Total Fees             |                        
|                       |                        

| | * | Includes
fees related to services rendered in respect of discontinued operations.
| | - | ---------------------------------------------------------------------------------

| | (1) | Audit
Fees are the aggregate fees billed for the audit of our annual
               financial statements, reviews of interim financial statements and
attestation                services that are normally provided in connection with
statutory and regulatory                filings or engagements.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Audit-Related
Fees are the aggregate fees billed for assurance and                related
services that are reasonably related to the performance of the audit or
               review of our financial statements and are not reported under Audit Fees.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tax
Fees are the aggregate fees billed for professional services
               rendered for tax compliance, tax advice on actual or contemplated
transactions                and tax planning. Kesselman & Kesselman provided us with
tax services such                as PFIC evaluation and tax planning.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | All
Other Fees are the aggregate fees billed for professional                services
that are not reported under the captions Audit Fees,               Audit-Related
Fees or Tax Fees.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
Audit Committee oversees our independent auditors. See also the description under the
heading Board Practices in Item 6. Directors, Senior Management and
Employees.

Our
Audit Committee approves each audit and non-audit service to be performed by our
independent accountant before the accountant is engaged.

|ITEM 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FORAUDIT COMMITTEES.
|--------- |  | ----------------------------------------------------------

Not applicable.

75

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|ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER ANDAFFILIATED PURCHASERS.
|--------- |  | ----------------------------------------------------------------------

On
March 29,  2006,  Clal and  Discount  purchased  on the open market 42,765 shares and
42,235 shares, respectively, at an average price per share of NIS 27.75 ($5.90 based on
an exchange rate of NIS 4.703 per dollar as of March 29, 2006). On March 30, 2006, Clal
and Discount purchased on the open market 6,541 shares and 6,451 shares, respectively, at
an average price per share of NIS 27.70 ($5.93 based on an exchange rate of NIS 4.673 per
dollar as of March 30, 2006). These purchases were made in open market transactions on
the TASE.

Nothing
herein shall be deemed as an admission by Discount or Clal that they are affiliated
purchasers within the meaning of Rule 10b-18 promulgated under the Exchange Act.

# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

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

|ITEM 18. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

Scailex is filing as part of this
Annual Report:

| |  | consolidated
audited financial statements of Scailex for the year ended December 31, 2005; and
| | - | ----------------------------------------------------------------------------------------------

| |  | consolidated
audited financial statements of Objet for the year ended December 31, 2004 (includes
audited financial statements for the year ended December 31, 2003).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                     |       
| | --------------------------------------------------------------------------------------------------- | ------
|
|
|
|
| | Index to the Financial Statements of the Registrant:                                                | Page  
| |                                                                                                    
| | Report of Independent Registered Public Accounting Firm relating to Scailex                         | F2    
| | Consolidated Balance Sheets at December 31, 2005 and 2004                                           | F3-F4 
| | Consolidated Statements of Operations                                                              
| | for the Three Years ended December 31, 2005                                                         | F5    
| | Consolidated Statements of Changes in Shareholders' Equity                                         
| | for the Three Years ended December 31, 2005                                                         | F6    
| | Consolidated Statements of Cash Flows                                                              
| | for the Three Years ended December 31, 2005                                                         | F7-F8 
| | Notes to Consolidated Financial Statements                                                          | F9-F35
| |                                                                                                    
| | Associated Companies                                                                               
| |                                                                                                    
| | Report of Independent Registered Public Accounting Firm relating to Jemtex for the year ended      
| | December 31, 2005                                                                                   | J1    
| | Report of Independent Registered Public Accounting Firm relating to and consolidated financial     
| | statements of Objet for the year ended December 31, 2004                                           
| | (including with respect to the year ended December 31, 2003)                                        | O1-O20
| | Report of Independent Registered Public Accounting Firm relating to Scitex Vision America, Inc. for
| | the year ended December 31, 2004                                                                    | S-1   

76

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|ITEM 19. |  | EXHIBITS
|-------- |  | --------

|1.1 |  | Memorandum
of Association of the Registrant.
|--- |  | --------------------------------------------

|1.2 |  | Amended
and Restated Articles of Association of the Registrant.
|--- |  | ---------------------------------------------------------------

|3 |  | Voting
Agreement, dated December 1, 1980, by and among Discount Investment Corporation Ltd.,
             PEC Israel Economic Corporation and Clal Electronics Industries Ltd. (1)
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(2) |  | Asset
Purchase Agreement, dated November 24, 2003, between Eastman Kodak Company, the
             Registrant, Scitex Digital Printing, Inc. and Scitex Development Corp. (2)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(5) |  | Asset
Purchase Agreement, dated August 11, 2005, between Hewlett-Packard Company and Scitex
             Vision Ltd. and the First Amendment thereto, dated November 1, 2005.
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(c)(1) |  | The
Israel Key Employee Share Incentive Plan 1991. (3)
|------- |  | ------------------------------------------------------

|4(c)(2) |  | The
International Key Employee Stock Option Plan 1991 (as amended, 1995). (3)
|------- |  | -----------------------------------------------------------------------------

|4(c)(3) |  | Form
of the Letter of Indemnification provided to office holders. (4)
|------- |  | ---------------------------------------------------------------------

|4(c)(4) |  | The
2001 Stock Option Plan (as amended, 2003). (5)
|------- |  | --------------------------------------------------

|4(c)(5) |  | The
2003 Share Option Plan. (6)
|------- |  | -------------------------------

|4(d)(1) |  | Services
Agreement dated November 1, 2001, between Clal and the Registrant (as amended,
             2004). (7)
|------- |  | ---------------------------------------------------------------------------------------------------------------

|4(d)(2) |  | Share
Exchange Agreement, dated December 22, 2002, by and among the Registrant, Scitex
             Vision Ltd. and Aprion Digital Ltd. (8)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|4(d)(3) |  | Services
Agreement, dated March 1, 2004, between Discount Investment Corporation Ltd. and
             the Registrant. (9)
|------- |  | --------------------------------------------------------------------------------------------------------------------------

|8 |  | List
of Subsidiaries of the Registrant.
|- |  | ---------------------------------------

|12.1 |  | Certification
of CEO of the Registrant pursuant to Rule 13a-14(a) as adopted pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of CFO of the Registrant pursuant to Rule 13a-14(a) as adopted pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of CEO of the Registrant pursuant to Rule 13a-14(b), as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of CFO of the Registrant pursuant to Rule 13a-14(b), as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|14(a)(1) |  | Consent
of Independent Registered Public Accounting Firm relating to Registrant.
|-------- |  | --------------------------------------------------------------------------------

|14(a)(2) |  | Consent
of Independent Registered Public Accounting Firm relating to Jemtex.
|-------- |  | ----------------------------------------------------------------------------

|14(a)(3) |  | Consent
of Independent Registered Public Accounting Firm relating to Objet.
|-------- |  | ---------------------------------------------------------------------------

|14(a)(4) |  | Consent
of Independent Registered Public Accounting Firm relating to Scitex Vision America,
             Inc.
|-------- |  | -------------------------------------------------------------------------------------------------------------

---

|(1) | Incorporated
by reference to Exhibit 10.h to our Registration Statement on Form                F-1
filed May 26, 1983 (File No. 2-82743).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference to Exhibit 4(a)(2) to our Annual Report on Form 20-F                for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
by reference to Exhibit 1.1 to our Annual Report on Form 20-F for                the
fiscal year ended December 31, 2000, filed June 29, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
by reference to Appendix B to our Proxy Statement filed under the                cover of
a Current Report on Form 6-K filed December 1, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
by reference to Exhibit (d)(4) to our Tender Offer Statement on                Schedule
TO filed May 14, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------

77

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|(6) | Incorporated
by reference to Appendix B to our Proxy Statement filed under the                cover of
a Current Report on Form 6-K filed December 3, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
by reference to Exhibit 4(d)(1) to our Annual Report on Form 20-F                for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
by reference to Exhibit 4(d)(2) to our Annual Report on Form 20-F                for the
fiscal year ended December 31, 2002, filed June 19, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
by reference to Exhibit 4(d)(3) to our Annual Report on Form 20-F                for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

78

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SCAILEX CORPORATION LTD.(Formerly SCITEX CORPORATION LTD.)2005 CONSOLIDATED FINANCIAL STATEMENTS



---

---



SCAILEX CORPORATION LTD.2005 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                          |           
|--------------------------------------------------------- | ----------
|                                                          | Page      
|                                                          |           
|                                                          |           
|REPORT OF INDEPENDENT
  REGISTERED PUBLIC ACCOUNTING FIRM | F-2       
|CONSOLIDATED FINANCIAL STATEMENTS:                        |           
|Balance sheets                                            | F-3 - F-4 
|Statements of
operations                                  | F-5       
|Statements of shareholders
equity                        | F-6       
|Statements of cash
flows                                  | F-7 - F-8 
|Notes to financial
statements                             | F-9 - F-35

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

---

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
shareholders of SCAILEX CORPORATION LTD.

We have
audited the consolidated balance sheets of Scailex Corporation Ltd. (the
Company) and its subsidiaries as of December 31, 2005 and 2004 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,
2005. These financial statements are the responsibility of the Companys Board
of Directors and 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 $954,132 and $18,550,000 at December 31, 2005 and 2004,
respectively, and net income (losses) of ($3,497,222) and $1,739,810 for the
years then ended, respectively. We did not audit the financial statements of
certain associated companies, the Companys investment in which, as reflected
in the balance sheets as of December 31, 2004 is $124,000, and the Companys
share in losses of which is $1,418,000 and $5,637,000 in 2004 and 2003,
respectively. Those financial statements were audited by other independent registered
public accounting firms whose reports thereon have been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
these companies, is based solely on the reports of the other independent
registered public accounting firms.

We conducted
our audits in accordance with 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 the Companys Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other independent registered public
accounting firms provide a reasonable basis for our opinion.

In our
opinion, based on our audits and the reports of the other independent
registered public accounting firms, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of December 31, 2005
and 2004 and the consolidated results of operations and cash flows for each of
the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.

|Tel-Aviv, Israel 
March 19,   2006 |  | BY: /S/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
|---------------------------------- |  | -------------------------------------------------------------------------------

F - 2

---

---



SCAILEX CORPORATION LTD.CONSOLIDATED BALANCE SHEETS

|                                                                                   |  |                           |         |      |  |         | 
|---------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------- | 
|                                                                                   |  | December 31               |        
|                                                                                   |  |                           |        
|                                                                                   |  | 2005                      |         | 2004 | 
|                                                                                   |  |                           |         |      | 
|                                                                                   |  | U.S. dollars in thousands |        
|                                                                                   |  |                           |        
|                                                                                   |  |                           |         |      |  |         | 
|A s s e t s                                                                        |  |                           |         |      |  |         | 
|CURRENT ASSETS:                                                                    |  |                           |         |      |  |         | 
|Cash and cash equivalents                                                          |  |                           | 200,350 |      |  | 85,892  | 
|Short-term investments                                                             |  |                           | 30,405  |      |  | 56,693  | 
|Restricted deposit                                                                 |  |                           | 5,165   |      |  | 5,000   | 
|Other receivables                                                                  |  |                           | 583     |      |  | 962     | 
|Deferred income taxes                                                              |  |                           | 1,260   |      |  | 709     | 
|Current assets of discontinued operations                                          |  |                           | 80,754  |      |  | 89,767  | 
|                                                                                   |  |                           |         |      |  |         | 
|T o t a l  current assets                                                          |  |                           | 318,517 |      |  | 239,023 | 
|                                                                                   |  |                           |         |      |  |         | 
|                                                                                  
|INVESTMENTS AND OTHER NON-CURRENT ASSETS:                                          |  |                           |         |      |  |         | 
|Restricted deposit                                                                 |  |                           |         |      |  | 5,000   | 
|Securities held-to-maturity                                                        |  |                           | 29,707  |      |  |         | 
|Other investments and prepaid expenses                                             |  |                           | 1,540   |      |  | 1,574   | 
|Funds in respect of employee rights upon
  retirement                              |  |                           | 613     |      |  | 596     | 
|                                                                                   |  |                           |         |      |  |         | 
|                                                                                   |  |                           | 31,860  |      |  | 7,170   | 
|                                                                                   |  |                           |         |      |  |         | 
|PROPERTY AND EQUIPMENT,
  net ofaccumulated depreciation and amortization (note 5) |  |                           | 82      |      |  | 101     | 
|                                                                                  
|INTANGIBLE ASSETS,
  net of accumulated amortization (note 6)                      |  |                           | 559     |      |  | 1,774   | 
|                                                                                  
|NON-CURRENT ASSETS OF DISCONTINUED
  OPERATIONS                                    |  |                           |         |      |  | 26,085  | 
|                                                                                   |  |                           |         |      |  |         | 
|                                                                                   |  |                           | 351,018 |      |  | 274,153 | 
|                                                                                   |  |                           |         |      |  |         | 

| |  | BY: /S/ Ami Erel
Ami ErelChairman of the Board of Directors
| |  | -------------------------------------------------------------------------

| |  | BY: /S/ Raanan Cohen 
Raanan Cohen Interim President & Chief Executive Officer
| |  | --------------------------------------------------------------------------------------------

F - 3

---

---



|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | ---- |  | ------- | -
|                                                                                                                                                                                                 |  | December 31               |        
|                                                                                                                                                                                                 |  |                           |        
|                                                                                                                                                                                                 |  | 2005                      |         | 2004 | 
|                                                                                                                                                                                                 |  |                           |         |      | 
|                                                                                                                                                                                                 |  | U.S. dollars in thousands |        
|                                                                                                                                                                                                 |  |                           |        
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|Liabilities and shareholders equity                                                                                                                                                             |  |                           |         |      |  |         |  
|CURRENT LIABILITIES:                                                                                                                                                                             |  |                           |         |      |  |         |  
|Trade payables                                                                                                                                                                                   |  |                           | 329     |      |  | 312     |  
|Income taxes payable                                                                                                                                                                             |  |                           | 13,660  |      |  | 13,872  |  
|Accrued and other liabilities                                                                                                                                                                    |  |                           | 1,507   |      |  | 1,046   |  
|Current liabilities related to discontinued
  operations                                                                                                                                         |  |                           | 30,822  |      |  | 83,352  |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|T o t a l  current liabilities                                                                                                                                                                   |  |                           | 46,318  |      |  | 98,582  |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                           |  |                           |         |      |  |         |  
|Liability for employee rights upon
  retirement (note 7)                                                                                                                                         |  |                           | 715     |      |  | 648     |  
|Long-term liabilities related to
  discontinued operations                                                                                                                                       |  |                           | 1,192   |      |  | 16,423  |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|T o t a l  long-term liabilities                                                                                                                                                                 |  |                           | 1,907   |      |  | 17,071  |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|COMMITMENTS AND CONTINGENT LIABILITIES
  (note 8)                                                                                                                                                |  |                           |         |      |  |         |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|T o t a l  liabilities                                                                                                                                                                           |  |                           | 48,225  |      |  | 115,653 |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|MINORITY INTEREST OF DISCONTINUED OPERATION                                                                                                                                                      |  |                           | 41,190  |      |  | 4,226   |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|SHAREHOLDERS EQUITY
  (note 9):                                                                                                                                                                 |  |                           |         |      |  |         |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|Share capital - ordinary shares of NIS 0.12
  par value (authorized: December 31, 2005 and 2004 - 48,000,000 shares; issued
  and outstanding: December 31, 2005 and 2004 - 43,467,388
  shares) |  |                           | 6,205   |      |  | 6,205   |  
|Capital surplus                                                                                                                                                                                  |  |                           | 280,314 |      |  | 278,812 |  
|Accumulated other comprehensive loss                                                                                                                                                             |  |                           | (1,110  | )    |  | (327    | )
|Deferred stock compensation                                                                                                                                                                      |  |                           | (45     | )    |  | (517    | )
|Retained earnings (accumulated deficit)                                                                                                                                                          |  |                           | 8,539   |      |  | (97,599 | )
|Treasury shares, at cost (December 31, 2005
  and 2004 - 5,401,025 shares)                                                                                                                       |  |                           | (32,300 | )    |  | (32,300 | )
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|T o t a l   shareholders equity                                                                                                                                                                 |  |                           | 261,603 |      |  | 154,274 |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  
|                                                                                                                                                                                                 |  |                           | 351,018 |      |  | 274,153 |  
|                                                                                                                                                                                                 |  |                           |         |      |  |         |  

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

F - 4

---

---



SCAILEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---- |  | ------ | - |  | ------ | -
|                                                                                                                     |  | Year ended December 31                              |        
|                                                                                                                     |  |                                                     |        
|                                                                                                                     |  | 2005                                                |         | 2004 |  | 2003   |  
|                                                                                                                     |  |                                                     |         |      |  |        |  
|                                                                                                                     |  | U.S. dollars in thousands
  (except per share data) |        
|                                                                                                                     |  |                                                     |        
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|RESEARCH AND DEVELOPMENT COSTS, net                                                                                  |  |                                                     | 2,549   |      |  | 2,168  |   |  |        |  
|MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES                                                                       |  |                                                     | 3,679   |      |  | 4,859  |   |  | 2,890  |  
|AMORTIZATION OF INTANGIBLE ASSETS                                                                                    |  |                                                     | 1,215   |      |  | 1,215  |   |  |        |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|OPERATING LOSS                                                                                                       |  |                                                     | (7,443  | )    |  | (8,242 | ) |  | (2,890 | )
|FINANCIAL INCOME, net                                                                                                |  |                                                     | 4,293   |      |  | 2,723  |   |  | 48     |  
|OTHER INCOME, net                                                                                                    |  |                                                     | 917     |      |  | 648    |   |  | 498    |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|LOSS BEFORE TAXES ON INCOME                                                                                          |  |                                                     | (2,233  | )    |  | (4,871 | ) |  | (2,344 | )
|INCOME TAX BENEFITS
  (note 12)                                                                                      |  |                                                     | 94      |      |  | 1,121  |   |  |        |  
|SHARE IN RESULTS OF ASSOCIATED COMPANY (including gain gain
from sale of the
  associated company in 2005 of $2,981) |  |                                                     | 2,876   |      |  | (1,418 | ) |  | (5,637 | )
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|NET INCOME (LOSS) FROM CONTINUING OPERATIONS                                                                         |  |                                                     | 737     |      |  | (5,168 | ) |  | (7,981 | )
|NET INCOME FROM DISCONTINUED OPERATIONS, net of taxes and
minority interests                                         |  |                                                     | 105,401 |      |  | 52,421 |   |  | 9,368  |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|NET INCOME                                                                                                           |  |                                                     | 106,138 |      |  | 47,253 |   |  | 1,387  |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|EARNING (LOSS) PER SHARE (EPS) - BASIC:                                                                            |  |                                                     |         |      |  |        |   |  |        |  
|Continuing operations                                                                                                |  |                                                     | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
|Discontinued operations                                                                                              |  |                                                     | 2.77    |      |  | 1.30   |   |  | 0.22   |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|                                                                                                                     |  |                                                     | 2.79    |      |  | 1.17   |   |  | 0.03   |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|EARNING (LOSS) PER SHARE (EPS) -
DILUTED:                                                                          |  |                                                     |         |      |  |        |   |  |        |  
|Continuing operations                                                                                                |  |                                                     | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
|Discontinued operations                                                                                              |  |                                                     | 2.67    |      |  | 1.30   |   |  | 0.22   |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|                                                                                                                     |  |                                                     | 2.69    |      |  | 1.17   |   |  | 0.03   |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN
  COMPUTATION OF EPS
  (in thousands):                                     |  |                                                     |         |      |  |        |   |  |        |  
|Basic                                                                                                                |  |                                                     | 38,066  |      |  | 40,336 |   |  | 43,018 |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  
|Diluted                                                                                                              |  |                                                     | 38,134  |      |  | 40,336 |   |  | 43,018 |  
|                                                                                                                     |  |                                                     |         |      |  |        |   |  |        |  

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

F - 5

---

---



SCAILEX CORPORATION LTD.CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----- | ----------------- |  | --------------------------------------------------- | - | --------------------- | ------ | ----------------------------- |  | ----------------- | - | ------------------------------ | ------ | - |  | ------- | - |  | ------- | -
|                                                                                                                          |  | Share
  capital           |       | Capital
  surplus |  | Accumulated
  other
  comprehensive
  Income (loss) |   | Accumulated
  deficit |        | Deferred Stock
  Compensation |  | Treasury
  shares |   | Total
  shareholders
  equity |       
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |       
|                                                                                                                          |  | U.S. dollars in thousands |      
|                                                                                                                          |  |                           |      
|                                                                                                                         
|BALANCE AT JANUARY 1, 2003                                                                                                |  |                           | 6,205 |                   |  | 364,619                                             |   |                       | 801    |                               |  | (146,239          | ) |                                | ,    |   |  | (4,207  | ) |  | 221,179 |  
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2003:                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Net Income                                                                                                                |  |                           |       |                   |  |                                                     |   |                       |        |                               |  | 1,387             |   |                                |        |   |  |         |   |  | 1,387   |  
|Other comprehensive loss, in respect of currency
translation
  adjustments                                                |  |                           |       |                   |  |                                                     |   |                       | (1,353 | )                             |  |                   |   |                                |        |   |  |         |   |  | (1,353  | )
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|T o t a l  comprehensive income                                                                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  | 34      |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Share in beneficial conversion feature relating to
convertible
  preferred shares issued by Scailex Vision (see note 14b) |  |                           |       |                   |  | 3,485                                               |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  | 3,485   |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|BALANCE AT DECEMBER 31, 2003                                                                                              |  |                           | 6,205 |                   |  | 368,104                                             |   |                       | (552   | )                             |  | (144,852          | ) |                                | ,    |   |  | (4,207  | ) |  | 224,698 |  
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2004:                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Net income                                                                                                                |  |                           |       |                   |  |                                                     |   |                       |        |                               |  | 47,253            |   |                                |        |   |  |         |   |  | 47,253  |  
|Other comprehensive income (loss), in respect
of:                                                                         |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Available-for-sale securities, net                                                                                        |  |                           |       |                   |  |                                                     |   |                       | (327   | )                             |  |                   |   |                                |        |   |  |         |   |  | (327    | )
|Realization of currency translation
adjustments                                                                           |  |                           |       |                   |  |                                                     |   |                       | 552    |                               |  |                   |   |                                |        |   |  |         |   |  | 552     |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|T o t a l  comprehensive income                                                                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  | 47,478  |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Cash distribution                                                                                                         |  |                           |       |                   |  | (89,837                                             | ) |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  | (89,837 | )
|Deferred stock compensation related to options
granted to employees                                                       |  |                           |       |                   |  | 545                                                 |   |                       |        |                               |  |                   |   |                                | (545   | ) |  |         |   |  |         |  
|Amortization of deferred stock compensation from
options granted to
  employees                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                | 28     |   |  |         |   |  | 28      |  
|Treasury shares                                                                                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  | (28,093 | ) |  | (28,093 | )
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|BALANCE AT DECEMBER 31, 2004                                                                                              |  |                           | 6,205 |                   |  | 278,812                                             |   |                       | (327   | )                             |  | (97,599           | ) |                                | (517   | ) |  | (32,300 | ) |  | 154,274 |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|CHANGES DURING THE YEAR ENDED DECEMBER 31, 2005:                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Net income                                                                                                                |  |                           |       |                   |  |                                                     |   |                       |        |                               |  | 106,138           |   |                                |        |   |  |         |   |  | 106,138 |  
|Other comprehensive loss, in respect of:                                                                                  |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Available-for-sale securities                                                                                             |  |                           |       |                   |  |                                                     |   |                       | (865   | )                             |  |                   |   |                                |        |   |  |         |   |  | (865    | )
|Realized losses included in net income                                                                                    |  |                           |       |                   |  |                                                     |   |                       | 82     |                               |  |                   |   |                                |        |   |  |         |   |  | 82      |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|T o t a l  comprehensive income                                                                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  | 105,355 |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|Deferred stock compensation related to options
granted to employees                                                       |  |                           |       |                   |  | 1,502                                               |   |                       |        |                               |  |                   |   |                                | (1,502 | ) |  |         |   |  |         |  
|Amortization of deferred stock compensation from
options granted to
  employees                                           |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                | 1,974  |   |  |         |   |  | 1,974   |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  
|BALANCE AT DECEMBER 31, 2005                                                                                              |  |                           | 6,205 |                   |  | 280,314                                             |   |                       | (1,110 | )                             |  | 8,539             |   |                                | (45    | ) |  | (32,300 | ) |  | 261,603 |  
|                                                                                                                          |  |                           |       |                   |  |                                                     |   |                       |        |                               |  |                   |   |                                |        |   |  |         |   |  |         |  

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

F - 6

---

---



(Continued - 1)

SCAILEX CORPORATION LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                      |  |                           |          |      |  |         |   |  |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | ---- |  | ------- | - |  | ------- | -
|                                                                                                                      |  | Year ended December 31    |         
|                                                                                                                      |  |                           |         
|                                                                                                                      |  | 2005                      |          | 2004 |  | 2003    |  
|                                                                                                                      |  |                           |          |      |  |         |  
|                                                                                                                      |  | U.S. dollars in thousands |         
|                                                                                                                      |  |                           |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                 |  |                           |          |      |  |         |   |  |         |  
|Net income                                                                                                            |  |                           | 106,138  |      |  | 47,253  |   |  | 1,387   |  
|Adjustments to reconcile net income from
  operations to net cash provided by (used in) operating activities:         |  |                           |          |      |  |         |   |  |         |  
|Income and expenses not involving cash
  flows:                                                                       |  |                           |          |      |  |         |   |  |         |  
|Gain from sale/Share in results of
  associated companies (including funds received from cost method investee),
  net |  |                           | (3,668   | )    |  | 1,418   |   |  | 5,637   |  
|Depreciation and amortization                                                                                         |  |                           | 1,252    |      |  | 1,273   |   |  | 23      |  
|Amortization of deferred stock
compensation                                                                           |  |                           | 20       |      |  | 20      |   |  |         |  
|Gain from issuance of shares by an
  associated company                                                               |  |                           |          |      |  | (137    | ) |  |         |  
|Long-term prepaid expenses                                                                                            |  |                           | 21       |      |  | (16     | ) |  |         |  
|Write-down of investment in investee
  companies                                                                      |  |                           |          |      |  | 137     |   |  | 2,493   |  
|Gain from waiver of loan                                                                                              |  |                           |          |      |  | (581    | ) |  |         |  
|Accrued severance pay, net                                                                                            |  |                           | 50       |      |  | 42      |   |  |         |  
|Deferred income taxes, net                                                                                            |  |                           | (551     | )    |  | (709    | ) |  |         |  
|Loss (gain) from sale of available-for-sale
  and bonds interests Income                                              |  |                           | 59       |      |  | 70      |   |  | (11,058 | )
|Changes in operating asset and liability
  items:                                                                     |  |                           |          |      |  |         |   |  |         |  
|Decrease (Increase) in other receivables                                                                              |  |                           | 359      |      |  | 257     |   |  | (3      | )
|Increase (decrease) in accounts payable and
  accruals                                                                |  |                           | 542      |      |  | (275    | ) |  | 142     |  
|Other items, net                                                                                                      |  |                           |          |      |  | (339    | ) |  | (8      | )
|Net cash used in discontinued operation,
  net                                                                        |  |                           | (131,209 | )    |  | (58,717 | ) |  | (4,777  | )
|                                                                                                                      |  |                           |          |      |  |         |   |  |         |  
|Net cash used in operating activities                                                                                 |  |                           | (26,987  | )    |  | (10,304 | ) |  | (6,164  | )
|                                                                                                                      |  |                           |          |      |  |         |   |  |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                 |  |                           |          |      |  |         |   |  |         |  
|Acquisition of assets and operations
  consolidated for the first time*                                               |  |                           |          |      |  | 294     |   |  |         |  
|Acquisition of available for sale
  marketable securities                                                             |  |                           | (13,233  | )    |  | (98,198 | ) |  |         |  
|Proceeds from sale of marketable
securities                                                                           |  |                           | 8,972    |      |  | 49,034  |   |  |         |  
|Purchase of fixed assets                                                                                              |  |                           | (18      | )    |  | (10     | ) |  |         |  
|Proceeds from sale of investment in
  discontinued operations                                                         |  |                           | 199,164  |      |  | 230,418 |   |  |         |  
|Proceeds from sale of other investment                                                                                |  |                           |          |      |  |         |   |  | 53,886  |  
|Proceeds from disposal of associated
  company                                                                        |  |                           | 3,000    |      |  |         |   |  |         |  
|Distribution of funds from cost method
  investment                                                                   |  |                           | 1,006    |      |  |         |   |  |         |  
|Restricted deposits                                                                                                   |  |                           | 4,835    |      |  | (10,000 | ) |  |         |  
|Investment in associated companies and
  other investments                                                            |  |                           | (325     | )    |  | (594    | ) |  | (3,061  | )
|Net cash provided by (used in) discontinued
  operations, net                                                         |  |                           | (18,802  | )    |  | 2,219   |   |  | 72      |  
|                                                                                                                      |  |                           |          |      |  |         |   |  |         |  
|Net cash provided by investing activities                                                                             |  |                           | 184,599  |      |  | 173,163 |   |  | 50,897  |  
|                                                                                                                      |  |                           |          |      |  |         |   |  |         |  

F - 7

---

---



(Concluded - 2)

SCAILEX CORPORATION LTD.CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                                            |  |                           |         |      |  |          |   |  |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | -------- | - |  | ------- | -
|                                                                            |  | Year ended December 31    |        
|                                                                            |  |                           |        
|                                                                            |  | 2005                      |         | 2004 |  | 2003     |  
|                                                                            |  |                           |         |      |  |          |  
|                                                                            |  | U.S. dollars in thousands |        
|                                                                            |  |                           |        
|Subtotal - brought forward                                                  |  |                           | 157,612 |      |  | 162,859  |   |  | 44,733  |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                           |         |      |  |          |   |  |         |  
|Purchase of treasury shares                                                 |  |                           |         |      |  | (28,093  | ) |  |         |  
|Cash distribution                                                           |  |                           |         |      |  | (89,837  | ) |  |         |  
|Repayment of long-term loans and other
  liabilities                        |  |                           |         |      |  |          |   |  | (18,759 | )
|Net cash provided by (used in) discontinued
  operations, net               |  |                           | (43,154 | )    |  | (15,798  | ) |  | 9,073   |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|Net cash used in financing activities                                       |  |                           | (43,154 | )    |  | (133,728 | ) |  | (9,686  | )
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                   |  |                           | 114,458 |      |  | 29,131   |   |  | 35,047  |  
|                                                                           
|CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR                            |  |                           | 85,892  |      |  | 56,761   |   |  | 21,714  |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                    |  |                           | 200,350 |      |  | 85,892   |   |  | 56,761  |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|*   Acquisition
  of assets and operations consolidated for the first time: |  |                           |         |      |  |          |   |  |         |  
|Assets and liabilities at the date of
  acquisition:                        |  |                           |         |      |  |          |   |  |         |  
|Deficiency in working capital (excluding
  cash and cash equivalents)       |  |                           |         |      |  | 574      |   |  |         |  
|Property and equipment, net                                                 |  |                           |         |      |  | (140     | ) |  |         |  
|Investment in associated company                                            |  |                           |         |      |  | 2,266    |   |  |         |  
|Intangible assets arising from
acquisition                                  |  |                           |         |      |  | (2,987   | ) |  |         |  
|Long-term loans and other liabilities                                       |  |                           |         |      |  | 581      |   |  |         |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|Cash received                                                               |  |                           |         |      |  | 294      |   |  |         |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                           |  |                           |         |      |  |          |   |  |         |  
|Income taxes paid                                                           |  |                           | 123     |      |  | 6,137    |   |  | 1,225   |  
|                                                                            |  |                           |         |      |  |          |   |  |         |  

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

F - 8

---

---



SCAILEX CORPORATION LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |         
|---------- | --------
|NOTE 1    | GENERAL:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                       
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Nature of operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Continuing operation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Scailex
  Corporation Ltd. (formerly Scitex Corporation Ltd., hereafter the Company)
  is an Israeli company. As of December 31, 2005 the Company operates through
  two segments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Corporate - management of assets and
  pursuing investments and opportunities.                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                       
| |    | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Continuous inkjet industrial digital printing
  - develop, manufacture and market of continuous inkjet based digital
  printers, through the Companys subsidiary Jemtex Ink Jet Printing Ltd. (hereafter - Jemtex).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                       
| |    | On December
  2005, the shareholders of the Company agreed to change the name of the
  Company from Scitex Corporation Ltd. to Scailex Corporation Ltd. Amounts
  provided in these notes to the consolidated financial statements pertain to
  continuing operations - unless otherwise indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | Discontinued operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                       
| |    | The Company
  used to operate in two other segments through its subsidiaries. Both segments
  were disposed over the last two years: Consequently operating results of both
  segments have been reported in these financial statements as discontinued
  operations in accordance with SFAS 144 Accounting for the Impairment or Disposal
  of Long-Lived Assets (FAS 144) and the Company has reclassified its results
  of operations, and the related assets and liabilities for the prior periods
  in accordance with provisions of FAS 144 as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1) Sale of the High-Speed Digital Printing segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | On January
  5, 2004, the Company completed the sell of substantially all of the assets,
  liabilities and operations of its indirect wholly-owned subsidiary Scailex
  Digital Printing Inc. (SDP) related to its High-Speed Digital Printing
  Business, including most of the distribution channels that served SDP, to
  Eastman Kodak Company (Kodak), for $ 250 million in cash (in addition $12
  million were retained at SDP following the transaction). Pursuant to the
  agreement, a $25 million was held in escrow, of which (1) $15 million were
  released in February 2004 to SDPs parent company (SDC, a wholly owned
  subsidiary of the Company) account, (2) $5 million were released in January
  2005 to SDPs account and (3) the remaining $5 million were released in
  January 2006, in accordance with the applicable terms of the agreement. The
  last $5 million are presented as restricted deposit (short-term, in equal
  shares) in the Companys balance sheet as of December 31, 2005. The closing
  of the transaction took place on January 5, 2004. As a result of the
  transaction, the Company recorded a net gain of approximately $60 million, of
  which approximately $52 million were included in the statement of operations
  in 2004, and approximately $8 million of which was recognized in the fourth
  quarter of 2003 as a tax benefit related to expected utilization of
  carryforward tax losses including capital losses and is recorded under
  income from discontinued operation.

F - 9

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                                                                                                            
|---------- | ---------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | GENERAL (continued):                                                                                                       
|           |                                                                                                                            
|           | The current
  liabilities of SDP classified as discontinued operation in the Consolidated
  Balance Sheets, are as follows:

| |                                                                                  |  |                           |       |      |  |       | 
| | -------------------------------------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- | 
| |                                                                                  |  | Year ended
  December 31  |      
| |                                                                                  |  |                           |      
| |                                                                                  |  | 2005                      |       | 2004 | 
| |                                                                                  |  |                           |       |      | 
| |                                                                                  |  | U.S. dollars in thousands |      
| |                                                                                  |  |                           |      
| |                                                                                  |  |                           |       |      |  |       | 
| | Assets                                                                           |  |                           |       |      |  |       | 
| | Federal Income tax
  receivable (see not 10g(2))                                 |  |                           | 7,800 |      |  |       | 
| |                                                                                  |  |                           |       |      |  |       | 
| | T o t a l 
  assets                                                              |  |                           | 7,800 |      |  | -,-   | 
| |                                                                                  |  |                           |       |      |  |       | 
| |                                                                                  |  |                           |       |      |  |       | 
| | Liabilities                                                                      |  |                           |       |      |  |       | 
| | Current liabilities                                                              |  |                           | 250   |      |  | 2,193 | 
| |                                                                                  |  |                           |       |      |  |       | 
| | T o t a l 
  liabilities                                                         |  |                           | 250   |      |  | 2,193 | 
| |                                                                                  |  |                           |       |      |  |       | 
| |                                                                                  |  |                           |       |      |  |       | 
| | Revenues and
  net income from the discontinued operations of SDP are as follow:

| |                                    |  |                           |       |      |  |        |  |  |         |  
| | ---------------------------------- |  | ------------------------- | ----- | ---- |  | ------ |  |  | ------- | -
| |                                    |  | Year ended
  December 31  |      
| |                                    |  |                           |      
| |                                    |  | 2005                      |       | 2004 |  | 2003   | 
| |                                    |  |                           |       |      |  |        | 
| |                                    |  | U.S. dollars in thousands |      
| |                                    |  |                           |      
| | Revenues                           |  |                           |       |      |  |        |  |  | 170,113 |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Cost of revenues                   |  |                           |       |      |  |        |  |  | 101,721 |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Gross profit                       |  |                           |       |      |  |        |  |  | 68,392  |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Other operation expenses           |  |                           |       |      |  |        |  |  | 56,300  |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Operating income                   |  |                           |       |      |  |        |  |  | 12,092  |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Financial income, net              |  |                           |       |      |  |        |  |  | 3,970   |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Other (income) expenses,
  net     |  |                           | 966   |      |  | 51,646 |  |  | (390    | )
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Income before taxes on income      |  |                           | 966   |      |  | 51,646 |  |  | 15,672  |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Income tax benefit (note
  10g(2)) |  |                           | 7,800 |      |  |        |  |  | 4,371   |  
| |                                    |  |                           |       |      |  |        |  |  |         |  
| | Net income for the year            |  |                           | 8,766 |      |  | 51,646 |  |  | 20,043  |  
| |                                    |  |                           |       |      |  |        |  |  |         |  

| |                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * In 2004 the
  Company recognized a gain of $51.6 million on the said sale of SDP presented
  as part of other income above.
| |                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                               | 2) Sale of the Wide Format Digital Printing Segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                               | On November
  1, 2005, the Company completed the sale of the substantially all of the
  assets and the liabilities of the business of Scailex Vision (Tel-Aviv) Ltd.
  (Formerly Scitex Vision Ltd.), a majority-owned subsidiary of the Company, to
  Hewlett-Packard Company (HP). Under the terms of the agreement, HP paid
  approximately $230 million in cash to Scailex Vision (subject to certain
  adjustments under the agreement), of which $23 million are retained in escrow
  for 24 months to cover possible indemnification claims and $1 million will be
  retained for 12 months to cover possible tax payments related to 2005. In
  addition, the Company has agreed to license its rights to the Scitex trade
  name to HP, and has agreed to change its corporate name (accordingly the
  Company changes its name to Scailex Corporation Ltd. At December 31, 2005,
  the remaining cash and assets classified as discontinued operations are
  estimated to be used for future payment of the related liabilities of the
  discontinued operations. At December 31, 2005, the remaining liabilities
  classified as discontinued operation represent liabilities for payments of
  deal expenses and related taxes.

F - 10

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                                                                                                                                                                         
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | GENERAL (continued):                                                                                                                                                                    
|           |                                                                                                                                                                                         
|           | The assets
  and liabilities of Scailex Vision (Tel-Aviv) Ltd. (hereafter - Scailex
  Vision) classified as discontinued operation in the Consolidated Balance
  Sheets, are as follows:

| |                                                                       |  |                             |        |      |  |         | 
| | --------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------- | 
| |                                                                       |  | December 31                 |       
| |                                                                       |  |                             |       
| |                                                                       |  | 2005                        |        | 2004 | 
| |                                                                       |  |                             |        |      | 
| |                                                                       |  | U.S.
  dollars in thousands |       
| |                                                                       |  |                             |       
| | A s s e t s                                                           |  |                             |        |      |  |         | 
| | Current assets:                                                       |  |                             |        |      |  |         | 
| | Cash                                                                  |  |                             | 53,905 |      |  |         | 
| | Restricted Deposits                                                   |  |                             |        |      |  | 13,000  | 
| | Trade and other receivables                                           |  |                             | 19,049 |      |  | 40,226  | 
| | Inventories                                                           |  |                             |        |      |  | 36,541  | 
| |                                                                       |  |                             |        |      |  |         | 
| | T o t a l  current assets                                             |  |                             | 72,954 |      |  | 89,767  | 
| |                                                                       |  |                             |        |      |  |         | 
| | Funds in respect of
  employee rights Upon retirement                 |  |                             |        |      |  | 2,815   | 
| | Property, plant and
  equipment, net of depreciation and amortization |  |                             |        |      |  | 9,046   | 
| | Goodwill                                                              |  |                             |        |      |  | 6,717   | 
| | Other intangible assets,
  net of accumulated amortization            |  |                             |        |      |  | 7,507   | 
| |                                                                       |  |                             |        |      |  |         | 
| | T o t a l  non-current assets                                         |  |                             |        |      |  | 26,085  | 
| |                                                                       |  |                             |        |      |  |         | 
| | T o t a l 
  assets                                                   |  |                             | 72,954 |      |  | 115,852 | 
| |                                                                       |  |                             |        |      |  |         | 
| |                                                                       |  |                             |        |      |  |         | 
| | Liabilities                                                           |  |                             |        |      |  |         | 
| | Current liabilities                                                   |  |                             | 30,572 |      |  | 81,159  | 
| | Long-term liabilities:                                                |  |                             |        |      |  |         | 
| | Liability for employee rights upon
retirement                         |  |                             |        |      |  | 3,530   | 
| | Loans, net of current maturities                                      |  |                             | 1,192  |      |  | 12,893  | 
| |                                                                       |  |                             |        |      |  |         | 
| | T o t a l  long-term liabilities                                      |  |                             | 1,192  |      |  | 16,423  | 
| | Minority interest in
  discontinued operation                         |  |                             | 41,190 |      |  | 4,226   | 
| |                                                                       |  |                             |        |      |  |         | 
| | T o t a l 
  liabilities                                              |  |                             | 72,954 |      |  | 101,808 | 
| |                                                                       |  |                             |        |      |  |         | 

F - 11

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                                                                                     
|---------- | ----------------------------------------------------------------------------------------------------
|NOTE 1    | GENERAL(continued):                                                                                 
|           |                                                                                                     
|           | Revenues and
  net income (loss) from the discontinued operations of Scailex Vision are as
  follow:

| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | --------------------------------------------------------------- |  | --------------------------- | ------- | ---- |  | ------- | - |  | ------- | -
| |                                                                 |  | Year ended
  December 31    |        
| |                                                                 |  |                             |        
| |                                                                 |  | 2005                        |         | 2004 |  | 2003    |  
| |                                                                 |  |                             |         |      |  |         |  
| |                                                                 |  | U.S.
  dollars in thousands |        
| |                                                                 |  |                             |        
| | Revenues                                                        |  |                             | 126,964 |      |  | 128,186 |   |  | 102,880 |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Cost of revenues                                                |  |                             | 73,778  |      |  | 69,165  |   |  | 63,212  |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Gross profit                                                    |  |                             | 53,186  |      |  | 59,021  |   |  | 39,668  |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Other operation expenses                                        |  |                             | 40,797  |      |  | 50,037  |   |  | 47,943  |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Operating income (loss)                                         |  |                             | 12,389  |      |  | 8,984   |   |  | (8,275  | )
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Financial expense, net                                          |  |                             | (506    | )    |  | (3,449  | ) |  | (2,907  | )
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Other income, net                                               |  |                             | 123,049 |      |  | 212     |   |  | 12      |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Income (loss) before taxes
  on income                          |  |                             | 134,932 |      |  | 5,747   |   |  | (11,170 | )
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Taxes on income                                                 |  |                             | 963     |      |  | 1,054   |   |  | 2,402   |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Net income (loss)                                               |  |                             | 133,969 |      |  | 4,693   |   |  | (13,572 | )
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Minority interests in
  income (loss) of discontinued operation |  |                             | (37,334 | )    |  | (3,918  | ) |  | 2,897   |  
| |                                                                 |  |                             |         |      |  |         |   |  |         |  
| | Net income (loss)                                               |  |                             | 96,635  |      |  | 775     |   |  | (10,675 | )
| |                                                                 |  |                             |         |      |  |         |   |  |         |  

|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|---------- | -------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|           |                                  | In 2005 the
  Company recognized a gain of $92.3 million on the said sale (net of minority
  interest and related taxes), presented as part of other income above.
|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|NOTE 2    | SIGNIFICANT ACCOUNTING POLICIES:
|           |                                 
|           | a.                               | General:                                                                                                                                                          
|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|           |                                  | 1)                                                                                                                                                                 | Risk factors
  and concentration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|           |                                  |                                                                                                                                                                    | As of December
  31, 2005, the Company and its subsidiaries are subject to various risks,
  including but not limited to: (i) business and industry risks like
  diversification of the business and uncertainty as to a prospective business
  model of the Company; changes in domestic and foreign economic and market
  conditions and classification as investment company under US securities laws;
  (ii) financial risks such as currency fluctuations, credit risks, obtaining
  future financing for affiliated companies, decreases in the value of its
  financial investments and classification as a passive foreign investment
  company for US tax law purpose; and (iii) risks related to operations in
  Israel like political, economic and military instability in Israel or the
  Middle East; and terms and conditions of tax benefits and governmental
  grants.
  See also note 11 for financial instruments and other risks.
|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|           |                                  | 2)                                                                                                                                                                 | Functional
  currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  |                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|           |                                  |                                                                                                                                                                    | The U.S.
  dollar is the functional currency for the Company and its subsidiaries. Since
  the U.S. dollar is the primary currency in the economic environment in which
  the foreign subsidiaries operate, monetary accounts maintained in currencies
  other than the U.S. dollar (principally cash and liabilities) are remeasured
  using the representative foreign exchange rate at the balance sheet date.
  Operational accounts and non monetary balance sheet accounts are measured and
  recorded at the rate in effect at the date of the transaction. The effects of
  foreign currency remeasurement are reported in current operations and have
  not been material to date.                                                                                                                                                                                                                                                          

F - 12

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | -------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | 3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Use of
  estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting years.
  Actual results could differ from those estimates.
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | 4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Accounting
  principles                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The
  consolidated financial statements have been prepared in accordance with
  accounting principles generally accepted in the United States of America.                                                                                                                                                                                                                                                                                                    
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | b.                                           | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries. Intercompany balances and transactions have been eliminated in
  consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | c.                                           | Cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | The Company
  and its subsidiaries consider all highly liquid investments, with an original
  maturity of three months or less at time of investment, that are not
  restricted as to withdrawal or use, to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | d.                                           | Investments in marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | Pursuant to
  SFAS No. 115, Accounting for Certain Investments in Debt and Equity
  Securities, part of the Companys investments in marketable securities has
  been designated as held to maturity and part of it has been classified as
  available-for-sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | Investments
  classified as available-for-sale are reported at fair value with unrealized
  gains and losses, net of related tax, recorded as a separate component of
  comprehensive income in shareholders equity until realized. Interest and
  amortization of premiums and discounts for debt securities and gains and
  losses on securities sold are included in financial income. For all
  investment securities, unrealized losses that are other than temporary are
  recognized in net income.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | For debt
  securities are held-to-maturity - in the fourth quarter of 2005, the Company
  decided to hold some securities to maturity and changed some of the
  classifications to held-to-maturity in accordance with the policy of the
  Company, the unrealized holding gain or loss at the date of the change in
  classification continues to be reported as a separate component of
  comprehensive income in shareholders equity, but is being amortized over the
  remaining life of the security as an adjustment of yield.Investment in marketable securities -
  which are to be held to maturity - are stated at amortized cost with the
  addition of computed interest accrued as of the balance sheet date (such
  interest represents the computed yield on cost from acquisition to maturity).
  Interest and amortization of premium or discount for those debt securities
  are carried to financial income or expenses.

F - 13

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- | -------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | e.                                           | Other non-current investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                              | These
  investments are carried at cost, net of write-down for decrease in value,
  which is not of a temporary nature.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | f.                                           | Investments in associated companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                              | Associated
  companies are companies over which significant influence is exercised, but
  which are not consolidated subsidiaries, and are accounted for by the equity
  method, net of write-down for decrease in value, which is not of a temporary
  nature.  The excess of cost of
  investment in associated companies over the Companys share in their net
  assets at date of acquisition (excess of cost of investment) represents
  amounts attributed to know-how and technology.  The excess of cost of investment is amortized over a period of
  5 years, commencing in the year of acquisition.
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | g.                                           | Property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                              | Property and
  equipment are carried at cost and are depreciated by the straight-line method
  over their estimated useful life.Annual rates of depreciation are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |           |  |   |       | 
| | --------- |  | - | ----- | 
| |           |  | % |      
| |           |  |   |      
| | Equipment |  |   | 7-20  | 
| | Computers |  |   | 20-33 | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Leasehold
  improvements are amortized over the shorter of the lease term or the estimated
  useful life of the related asset using the straight-line method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | h. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Intangible
  assets which consist of technology are presented at cost and are amortized by
  the straight-line method over the estimated useful life of 5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | i. | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | FAS 144 Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144), requires
that long-lived assets including certain intangible assets, to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. Under FAS 144, if the
sum of the expected future cash flows (undiscounted and without interest charges) of the
long-lived assets is less than the carrying amount of such assets, an impairment loss
would be recognized, and the assets would be written down to their estimated fair values.                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | j. | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Deferred
  taxes are determined utilizing the asset and liability method based on the
  estimated future tax effects of differences between the financial accounting
  and tax bases of assets and liabilities under the applicable tax laws.
  Deferred income tax provisions and benefits are based on the changes in the
  deferred tax asset or tax liability from period to period. Valuation
  allowances are provided for deferred tax assets when it is more likely than
  not that all or a portion of the deferred tax assets will not be realized.
  The Company may incur an additional tax liability in the event of an
  intercompany dividend distribution by non-Israeli subsidiaries.

F - 14

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | -------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | k.                                           | Comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | In addition
  to net income (loss), comprehensive income (loss) includes unrealized gains
  and losses on available-for-sale securities and currency translation
  adjustments of non-dollar currency financial statements of a subsidiary.                                                                                                                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | l.                                           | Treasury shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | Companys
  shares held by the Company, are presented as a reduction of shareholders
  equity, at their cost to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | m.                                           | Research and development costs, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | Research and
  development costs are charged to income as incurred. Royalty-bearing grants
  received from governments for approved projects are recognized as a reduction
  of expenses as the related costs are incurred.                                                                                                                                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | n.                                           | Stock based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | The Company
  and its subsidiaries account for employee stock based compensation in
  accordance with Accounting Principles Board Opinion No. 25 Accounting for
  Stock Issued to Employees (APB 25) and related interpretations. Under APB
  25 compensation cost for employee stock option plans is measured using the
  intrinsic value based method of accounting, and is amortized by the
  straight-line method against income, over the expected service period.                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | FAS 123
  Accounting for Stock-Based Compensation, establishes a fair value based
  method accounting for employee stock options or similar equity instruments,
  and encouraged adoption of such method for stock compensation plans. However,
  it also allows companies to continue to account for those plans the
  accounting treatment prescribed by APB 25.                                                                                                                                                                                                         
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                              | Proforma
  information regarding net income (loss), required under FAS 123, has been
  determined as if the Company and its subsidiaries had accounted for its stock
  options under the fair value method of FAS 123. The fair value for their
  stock options was estimated at the date of each option grant using the
  Black-Scholes option pricing model with the following assumptions: in 2004
  risk-free interest rate of 3.1%; dividend yields of zero; expected life of
  the options of approximately 3 years; and expected volatility of and 52%
  respectively.

F - 15

---

---



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                               |                                                                                                                                                                                                                                                      
|---------- | --------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2    | SIGNIFICANT
ACCOUNTING POLICIES  (continued):
|           |                                              
|           |                                               | The
  following table illustrates the effect on net income (loss) and earning
  (loss) per share assuming the Company and its subsidiaries had applied the
  fair value recognition provisions of FAS 123 to its stock-based employee
  compensation:

| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------- | ------- | ---- |  | ------ | - |  | ------ | -
| |                                                                                                                                                                |  | Year ended
  December 31                                |        
| |                                                                                                                                                                |  |                                                         |        
| |                                                                                                                                                                |  | 2005                                                    |         | 2004 |  | 2003   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |  
| |                                                                                                                                                                |  | U.S.
  dollars in thousands (except for per share data) |        
| |                                                                                                                                                                |  |                                                         |        
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income (loss) from continuing
  operations - as reported                                                                                                   |  |                                                         | 737     |      |  | (5,168 | ) |  | (7,981 | )
| | Add: stock based employee compensation
  expenses, included in reported net loss from continuing operations                                                    |  |                                                         | 20      |      |  | 20     |   |  | -,-    |  
| | Deduct: stock based employee compensation
  expenses determined under fair value method                                                                        |  |                                                         | (95     | )    |  | (156   | ) |  | (371   | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Pro-forma net income (loss) from continuing
  operations                                                                                                       |  |                                                         | 662     |      |  | (5,304 | ) |  | (8,352 | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income from discontinued operations -
  as reported                                                                                                        |  |                                                         | 105,401 |      |  | 52,421 |   |  | 9,368  |  
| | Add: stock based employee compensation
  expenses, included in reported net income from discontinued operations (net
  of minority interest and related taxes) |  |                                                         | 1,954   |      |  | 8      |   |  | -,-    |  
| | Deduct: stock based employee compensation
  expenses determined under fair value method (net of minority interest and
  related taxes)                         |  |                                                         | (3,434  | )    |  | (437   | ) |  | (1,952 | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Pro-forma net income from discontinued
  operations                                                                                                            |  |                                                         | 103,921 |      |  | 51,992 |   |  | 7,416  |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Pro-forma net income (loss)                                                                                                                                    |  |                                                         | 104,583 |      |  | 46,688 |   |  | (936   | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Basic earning (loss) per share - as
  reported:                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Continuing operations                                                                                                                                          |  |                                                         | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
| | Discontinued operations                                                                                                                                        |  |                                                         | 2.77    |      |  | 1.30   |   |  | 0.22   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income                                                                                                                                                     |  |                                                         | 2.79    |      |  | 1.17   |   |  | 0.03   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Basic Pro-forma earning (loss) per share:                                                                                                                      |  |                                                         |         |      |  |        |   |  |        |  
| | Continuing operations                                                                                                                                          |  |                                                         | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
| | Discontinued operations                                                                                                                                        |  |                                                         | 2.70    |      |  | 1.29   |   |  | 0.17   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income (loss)                                                                                                                                              |  |                                                         | 2.72    |      |  | 1.16   |   |  | (0.02  | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Diluted earning (loss) per share - as
  reported:                                                                                                              |  |                                                         |         |      |  |        |   |  |        |  
| | Continuing operations                                                                                                                                          |  |                                                         | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
| | Discontinued operations                                                                                                                                        |  |                                                         | 2.67    |      |  | 1.30   |   |  | 0.22   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income                                                                                                                                                     |  |                                                         | 2.69    |      |  | 1.17   |   |  | 0.03   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Diluted Pro-forma earning (loss) per share:                                                                                                                    |  |                                                         |         |      |  |        |   |  |        |  
| | Continuing operations                                                                                                                                          |  |                                                         | 0.02    |      |  | (0.13  | ) |  | (0.19  | )
| | Discontinued operations                                                                                                                                        |  |                                                         | 2.60    |      |  | 1.29   |   |  | 0.17   |  
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  
| | Net income (loss)                                                                                                                                              |  |                                                         | 2.62    |      |  | 1.16   |   |  | (0.02  | )
| |                                                                                                                                                                |  |                                                         |         |      |  |        |   |  |        |  

F - 16

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- | --------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE
2    | SIGNIFICANT
ACCOUNTING POLICIES  (continued):
|           |                                              
|           | o.                                            | Earning
(loss) per share (EPS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                               | Basic EPS
  are computed based on the weighted average number of shares outstanding
  during each year excluding the treasury shares held by the Company. Diluted
  EPS reflects the increase in the weighted average number of shares
  outstanding that would result from the assumed exercise of options,
  calculated using the treasury-stock-method (in 2004, 2003 such effect was not
  included since it would have been anti-dilutive). In addition, diluted EPS
  does not reflect options exercisable to the Companys ordinary shares not
  included in the EPS calculation since their effect is anti-dilutive include
  options granted to employees only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | p.                                            | Revision of
prior years statements of cash flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                               | We have
  revised our 2004 and 2003 statements of cash flows to separately disclose the
  operating, investing, and financing portions of the cash flows attributable
  to our discontinued operations. We had previously reported these amounts on a
  combined basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | q.                                            | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                               | Certain
  comparative figures have been reclassified to conform to the current year
  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | r.                                            | Recently
issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                               | In December
  2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment
  (SFAS No. 123(R)). SFAS No. 123(R) addresses all forms of share-based payment
  (SBP) awards, including shares issued under employee stock purchase plans,
  stock options, restricted stock and stock appreciation rights. SFAS No.
  123(R) supersedes our current accounting for SBP awards under APB No. 25 and
  requires us to recognize compensation expense for all SBP awards based on
  fair value. In March 2005, the SEC released Staff Accounting Bulletin No.
  107, Share-Based Payment (SAB No. 107) relating to the adoption of SFAS
  No. 123(R). Beginning in the first quarter of 2006, the Company will adopt
  the provisions of SFAS No. 123(R) under the modified prospective transition
  method. Under the new standard, our estimate of compensation expense will
  require a number of complex and subjective assumptions including our stock
  price volatility, employee exercise patterns (expected life of the options),
  future forfeitures and related tax effects. The Company recognize SBP
  compensation expense based on FASB Interpretation 28 Accounting for Stock
  Appreciation Rights and Other Variable Stock Option or Award Plans an
  interpretation of APB Opinions No. 15 and 25, which provides for accelerated
  expensing and will continue to do so after the adoption of SFAS No. 123(R).
  SFAS 123R requires the Company to estimate the number of forfeitures expected
  to occur and record expense based upon the number of awards expected to vest.
  Currently, the Company accounts for forfeitures as they accrue as permitted
  under previous accounting standard.
  The Company does not expect the statement to have a material effect on
  its consolidated financial position, results of operations or cash flows. In
  addition, the Company estimates that the cumulative effect of adopting SFAS
  No. 123R as of its adoption date (January 1, 2006), based on the awards
  outstanding as of December 31, 2005, will not be material. This estimate does
  not include the impact of additional awards, which may be granted, or
  forfeitures, which may occur after December 31, 2005 and prior to the
  Companys adoption of SFAS No. 123R.

F - 17

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE
2     | SIGNIFICANT
ACCOUNTING POLICIES(continued):                                                            
|            |                                                                                                        
|            |                                                                                                         | In June
  2005, the FASB issued SFAS No. 154, Accounting Changes and Error
  Corrections (SFAS No. 154). SFAS No. 154 supercedes of Accounting
  Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides
  guidance on the accounting for and reporting of accounting changes and error
  corrections. It establishes retrospective application as the required method
  for reporting a change in accounting principle. SFAS No. 154 provides
  guidance for determining whether retrospective application of a change in
  accounting principle is impracticable and for reporting a change when
  retrospective application is impracticable. SFAS No. 154 also addresses the
  reporting of a correction of an error by restating previously issued
  financial statements. SFAS No. 154 is effective for accounting changes and
  corrections of errors made in fiscal years beginning after December 15, 2005.
  SFAS No. 154 applies to accounting changes and error corrections that are
  made in fiscal years beginning after December 15, 2005. The Company will be
  adopting this pronouncement beginning in the fiscal year 2006 and does not
  currently believe that it will have a material impact on its consolidated
  financial position, results of operations or cash flows.
|            |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                         | In February
  2006, the FASB issued FAS 155, accounting for certain Hybrid Financial
  Instruments, an amendment of FASB statements No. 133 and 140. This statement
  permits fair value measurement for any hybrid financial instrument that
  contains an embedded derivative that otherwise would require bifurcation.
  This statement is effective for all financial instruments acquired or issued
  after the beginning of an entitys first fiscal year that begins after
  September 15, 2006. Earlier adoption is permitted as of the beginning of an
  entitys fiscal year, provided that no interim period financial statements
  have bee issued for the financial year. Management is currently evaluating
  the impact of this statement, if any, on the Companys financial statements
  or its results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                         | In November
  2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
  Other-Than-Temporary Impairment and Its Application to Certain Investments
  (FSP 115-1 and 124-1), which clarifies when an investment is considered
  impaired, whether the impairment is other than temporary, and the measurement
  of an impairment loss. It also includes accounting considerations subsequent
  to the recognition of an other-than-temporary impairment and requires certain
  disclosures about unrealized losses that have not been recognized as
  other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all
  reporting periods beginning after December 15, 2005. The Company does not
  believe adoption of FSP FAS 115-1 and FAS 124-1 will have a material effect
  on its consolidated financial position, results of operations or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 3
    | INVESTMENTS
IN ASSOCIATED COMPANIES (including associated Company consolidated for first
time in 2004):
|            |                                                                                                        
|            | a.                                                                                                      | Jemtex
  Ink Jet Printing Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                         | In December
  2002, the Company signed a share purchase agreement with Jemtex Ink Jet
  Printing Ltd (Jemtex), according to which, the Company invested additional
  $2,400,000 in three equal quarterly installments of $800,000 each. The first
  installment and an advance of $250,000 on the last payment were made in
  December 2002. The additional $1,350,000 was transferred in February and May
  2003. The excess of cost of investment over the Companys share in Jemtex
  net assets at the date of transaction in the amount of $1,371,000 was
  attributed to technology to be amortized over five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F - 18

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | -------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3     | INVESTMENTS IN ASSOCIATED COMPANIES (including associated Company
  consolidated for first time in 2004)(continued):
|            |                                                                                                                     
|            |                                                                                                                      | In addition,
  Jemtex granted to the Company for no additional consideration, warrants to
  purchase (1) 3,181 preferred shares of Jemtex at an exercise price of
  $ 251.467 per share, exercisable until January 2, 2004, and (2) 3,181
  preferred shares of Jemtex at an exercise price of $ 251.467 per share
  exercisable until March 31, 2005. An amount of $51,000 was allocated to the
  said warrants out of the total above-mentioned investment of $2,400,000.  In August 2003, the Company invested in
  Jemtex an amount of $799,917 by way of convertible loan, bearing interest at
  the rate of LIBOR+0.75%. The loan is due on August 31, 2007, and is
  convertible at the option of the holder, at any time during the term of the
  note and the accrued interest, into preferred shares. According to the
  investment agreement and upon its execution, the second warrant to purchase
  3,181 preferred shares of Jemtex was cancelled.
|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                      | In the
  beginning of 2004, the Company concluded a $1.5 million investment in Jemtex
  in consideration for convertible loans, out of which $0.45 million were
  provided to Jemtex in late 2003 and $1.05 million were provided to Jemtex in
  early 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                      | In addition, during September 2004,
the Company signed an investment agreement and invested an additional amount of $1 million
by way of convertible loans and in November 2004 signed a further investment agreement
under which it invested between the date of such agreement and January 2005 an additional
amount of $1 million by way of convertible loans. The convertible loans and accrued
interest thereon may be converted by the Company into preferred shares of Jemtex at any
time during a 5-year period at an exercise price of approximately $0.68 subject to
adjustment as set forth in the notes. The loans bear interest of between LIBOR plus
0.75%-1%.                                                                                                                                                                                                                                                                                    
|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                      | During February 2005, the Company
signed on an investment agreement (that was subsequently amended to increase the invested
amount), under which the Company invested a total of $2,825,000 by way of convertible
loans in 2005. The convertible loans bear interest at LIBOR plus 1% and mature 5 years
from the date of issuance. The convertible loans are convertible at the option of the
Company to preferred shares, nominal value CityplaceNIS 0.01 per share at any time after
the issue date of the particular note and ending at the maturity date at a
PersonNameProductIDprice perprice per share of approximately $0.68, subject to adjustment
as set forth in the notes.                                                                                                                                                                                                                                                                         
|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                      | As of December 31, 2005, the Company
effectively holds approximately 85% of Jemtexs issued share capital on an
as-converted basis. Jemtex has a capital deficit and as the Company is
currently the sole financier of Jemtex, it has taken full share (100%) in Jemtex
losses, commencing on the third quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                                                                                                      | Since January 2004, Jemtex financial
statements are consolidated with those of the Company, since the Company effectively has
the right to appoint 4 out of 6 directors and holds majority of the shareholders voting
rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F - 19

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- | ------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3    | INVESTMENTS
IN ASSOCIATED COMPANIES (continued):
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | b.                                               | Objet Geometries Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  | On June 28, 2005, the Company sold
all of its holdings in Objet Geometries Ltd. (hereafter  Objet) to
several shareholders of Objet for $3 million in cash. Additional contingent consideration
will be paid to the Company if Objet undergoes specified exit events prior to
the end of 2007. The Company recognized a gain on sale of approximately $3 million from
this sale, presented under Share in results of associated company in the
Companys 2005 Statements of operations.
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  | Summarized data from Objets
financial statements for the periods ended December 31, 2004:                                                                                                                                                                                                                                                                                                                                                                                                    

| |                         |  |                   | 
| | ----------------------- |  | ----------------- | 
| |                         |  | December
  31,    | 
| |                         |  | 2004              | 
| |                         |  |                   | 
| |                         |  | U.S.
  dollars in | 
| |                         |  | thousands         | 
| |                         |  |                   | 
|
| | Current assets          |  | 8,515             | 
| |                         |  |                   | 
| | Non-current assets      |  | 1,415             | 
| |                         |  |                   | 
| | Current liabilities     |  | 11,938            | 
| |                         |  |                   | 
| | Non-current liabilities |  | 732               | 
| |                         |  |                   | 

| |                |  |                   |  
| | -------------- |  | ----------------- | -
| |                |  | Year ended        |  
| |                |  | December  31,     |  
| |                |  | 2004              |  
| |                |  |                   |  
| |                |  | U.S.
  dollars in |  
| |                |  | thousands         |  
| |                |  |                   |  
| | Revenues       |  | 16,951            |  
| |                |  |                   |  
| | Gross profit   |  | 6,520             |  
| |                |  |                   |  
| | Operating loss |  | (678              | )
| |                |  |                   |  
| | Net loss       |  | (845              | )
| |                |  |                   |  

F - 20

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4     | OTHER INVESTMENTS:                                                     
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | a.                                                                      | During 2005,
  the Company invested an amount of $0.3 million in Dor Venture Capital
  (hereafter - Dor), following a capital call made by Dor. In May 2005, the
  Company received $1 million as a return on investment. As a result, the
  Company recognized a gain of $0.8 million presented in other income. As of
  December 31, 2005, the Company is committed to invest an additional $1.8
  million in Dor.
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | b.                                                                      | See also
  note 14c.                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 5     | PROPERTY AND EQUIPMENT                                                 
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | Grouped by
  major classifications, the assets are composed as follows:

| |                                                    |  |                             |      |      |  |      |  
| | -------------------------------------------------- |  | --------------------------- | ---- | ---- |  | ---- | -
| |                                                    |  | December
  31               |     
| |                                                    |  |                             |     
| |                                                    |  | 2005                        |      | 2004 | 
| |                                                    |  |                             |      |      | 
| |                                                    |  | U.S.
  dollars in thousands |     
| |                                                    |  |                             |     
| | Equipment                                          |  |                             | 133  |      |  | 132  |  
| | Leasehold
  improvements                           |  |                             | 64   |      |  | 64   |  
| | Computers                                          |  |                             | 302  |      |  | 285  |  
| |                                                    |  |                             |      |      |  |      |  
| |                                                    |  |                             | 499  |      |  | 481  |  
| | Less -
  accumulated depreciation and amortization |  |                             | (417 | )    |  | (380 | )
| |                                                    |  |                             |      |      |  |      |  
| |                                                    |  |                             | 82   |      |  | 101  |  
| |                                                    |  |                             |      |      |  |      |  

|            |                                                                                                                                                  | 
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | 
|            | Depreciation
  of property and equipment from continuing operations totaled $37,000, $58,000
  and $23,000 in 2005, 2004 and 2003, respectively.
|            |                                                                                                                                                  | 
|NOTE 6     | INTANGIBLE ASSETS:                                                                                                                              
|            |                                                                                                                                                  | 
|            | Intangible
  assets are comprised of acquired technology, as follows:                                                                           

| |                                                              |  |                           |        |      |  |        |  
| | ------------------------------------------------------------ |  | ------------------------- | ------ | ---- |  | ------ | -
| |                                                              |  | December 31               |       
| |                                                              |  |                           |       
| |                                                              |  | 2005                      |        | 2004 | 
| |                                                              |  |                           |        |      | 
| |                                                              |  | U.S. dollars in thousands |       
| |                                                              |  |                           |       
| | Gross
  carrying amount                                      |  |                           | 6,072  |      |  | 6,072  |  
| | L e s s  -
  accumulated amortization and impairment charges |  |                           | (5,513 | )    |  | (4,298 | )
| |                                                              |  |                           |        |      |  |        |  
| |                                                              |  |                           | 559    |      |  | 1,774  |  
| |                                                              |  |                           |        |      |  |        |  

| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization
  expenses totaled $1,215,000 and $1,215,000 in 2005 and 2004 respectively.
  Estimated amortization expense for the following years, subsequent to
  December 31, 2005:

| |                            |  |                               |     | 
| | -------------------------- |  | ----------------------------- | --- | 
| |                            |  | U.S.
  dollars
  in thousands |    
| |                            |  |                               |    
| | Year ending
  December 31: |  |                               |     | 
| | 2006                       |  |                               | 284 | 
| | 2007                       |  |                               | 275 | 
| |                            |  |                               |     | 
| |                            |  |                               | 559 | 
| |                            |  |                               |     | 

F - 21

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7     | EMPLOYEE RIGHTS UPON RETIREMENT:       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | a.                                      | Israeli
  labor laws and agreements require the payment of severance pay upon dismissal
  of an employee or upon termination of employment in certain circumstances.
  The liability is based upon the length of service and the latest monthly
  salary (one months salary for each year worked), and is mainly funded
  through monthly payments by the Company and its Israeli subsidiaries to
  severance pay and pension funds as well as insurance companies (principally,
  an insurer which is an affiliate of the two major shareholders of the
  Company).
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         | The Company
  records the long-term obligation as if it was payable at each balance sheet
  date on an undiscounted basis.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | b.                                      | Severance
  pay and defined contribution plan expenses totaled $145,000, $191,000 and
  $9,000, in 2005, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 8     | COMMITMENTS AND CONTINGENT LIABILITIES:
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | a.                                      | Commitments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Operating
  leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | The Company
  leases its facilities and automobiles under cancelable and non-cancelable
  operating lease agreements. The commitment of the Company and its subsidiary
  since the end of year 2005 is for additional six months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Commencing
  November 1, 2001 and until January 2004, the Companys headquarters were
  located on the premises of one of its major shareholders. The Company
  obtained the services of certain executives and other staff as well as
  certain services from the major shareholder, for which the Company paid
  amounts based on formulas determined in the agreement between the Company and
  the shareholder. During the first two quarters of 2004, the Companys
  headquarters were relocated to the premises of another major shareholder. The
  Company obtains the services of an executive as well as certain ancillary
  services from the shareholder, for which the Company pays amounts based on
  formulas determined in the agreement between the Company and the shareholder.
  Expenses due to the said agreements totaled $302,000, $227,000 and $518,000
  in 2005, 2004 and 2003, respectively. Beginning with the third quarter of
  2004 the Company has a lease agreement with an unrelated third party.

F - 22

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ----------------------------------------------------- | ---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8     | COMMITMENTS AND CONTINGENT LIABILITIES
  (continued):
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       | 3)                     | In
  connection with its research and development, a subsidiary of the Company
  received and accrued participation payments from the Office of the Chief
  Scientist of the Ministry of Industry and Trade in Israel in the total amount
  of approximately $3,249,000. In return for the Government of Israels
  participation, the subsidiary is committed to pay royalties at a rate of 3% -
  5% of sales of the developed products, up to 100% of the amount of grants
  received (for grants received under programs approved subsequent to January
  1, 2000 - 100% plus interest at LIBOR). The subsidiarys total commitment for
  royalties payable with respect to future sales, based on Government
  participations received or accrued, net of royalties paid or accrued, totaled
  approximately $3,200,000, as of December 31, 2005.                                                                                                                                                                                                                                               
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       | 4)                     | In connection with a
  commitment to invest in investee company, see note 4a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | b.                                                    | Contingentliabilities:
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       | 1)                     | A
  shareholder of the Scailex Vision (hereafter CDI), filed against Scailex
  Vision (and others) three claims in 2003 and 2004: the first, a monetary
  claim in the amount of NIS 14 million, asserting, inter alia, that SV had
  allowed its controlling shareholders and directors to execute the share
  exchange agreement with the company and Scailex Vision International, dated
  December 2002, to CDIs alleged detriment. The second, an originating motion,
  requiring that Scailex Vision submit to CDI various documents and information
  pertaining to the conversion of all preferred shares of Scailex Vision into
  ordinary share capital, that took place in May 2003. The third, also an
  originating motion, was directed against the resolutions adopted by Scailex
  Visions audit committee, board of directors and general meeting of
  shareholders, that approved the internal financing round of May 2004.                                                                                                                                                    
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |                        | On April 6,
  2005, the Company and the Companys two largest shareholders, Clal and
  Discount (the Purchasers) signed an agreement with the minority
  shareholder, whereby they agreed to purchase all of the minority
  shareholders shares in Scailex Vision, constituting then 1.89% of Scailex
  Visions issued share capital (1.35% on a fully diluted basis) in
  consideration for $1.6 million, plus additional contingent consideration to
  be paid if Scailex Vision undergoes an exit event within the next 2 years
  at a higher valuation as detailed in the agreement. In the framework of the
  agreement, the minority shareholder dismissed all suits and other legal
  proceedings it had initiated or had threatened to initiate against the
  Company, the Purchasers and other various parties. In addition, the minority
  shareholder, on one hand, and the Company, the Purchasers and other various
  parties on the other hand waived all other claims and disputes in connection
  with Scailex Vision they may have vis-à-vis the other party to the agreement.
|            |                                                       |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |                        | As a result
  of the sale of the business of Scailex Vision on November 1, 2005 (that is
  being considered as an exit event) the company and the other two
  shareholders compensated the minority shareholders according to the
  agreement. The company accrued $0.34 million for that purpose and paid it to
  the minority in the beginning of 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F - 23

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8     | COMMITMENTS AND CONTINGENT LIABILITIES
  (continued):
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 2)                                                                                                                                                                          | In December
  2003, three minority shareholders of Objet, a company in which the Company
  had a 22.91% interest, filed an approximate 7.8 million New Israeli Shekels
  (NIS) (approximately $1.75 million) lawsuit against Objet, certain of its
  shareholders, including the Company, and certain of Objets directors. The
  lawsuit alleges that the defendants acted in a manner that prejudiced the
  rights of the minority shareholders, and breached Objets obligations to such
  shareholders. Among the remedies being sought by the said minority
  shareholders are compensation, restitution (with linkage and interest) of the
  investment amount, or repurchase of the plaintiffs shares in Objet, and a
  demand for changes to the terms of certain convertible loans made to Objet by
  certain of the defendants including the Company. Objet has asked for a
  dismissal of the case relating to one of the parties suing.
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |                                                                                                                                                                             | In September
  2005 the court recommended to the parties to try and settle the dispute in
  mediation (the parties have not reached any settlement yet regarding the
  mediator to be appointed).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |                                                                                                                                                                             | At this time neither Objet nor the Company is able
  to assess the likelihood of success of the suit, therefore no provision was
  recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 3)                                                                                                                                                                          | Claims have
  been filed against the Company and its subsidiaries in the ordinary course of
  business. The Company and its subsidiaries intend to defend themselves
  vigorously against those claims. Management does not expect that the Company
  will incur substantial expenses in respect thereof; therefore, no provision
  has been made for the claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|NOTE 9     | SHAREHOLDERS EQUITY:                                
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | a.                                                    | Share capital:                                                                                                                                                             
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 1)                                                                                                                                                                          | The Companys shares are traded
on NASDAQ, under the symbol SCIX, and on The Tel Aviv Stock Exchange (TASE).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       |                                                                                                                                                                             | On December
  31, 2005, the Companys share closed on NASDAQ and TASE at $6.00 and
  approximately $5.97 (in NIS), respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 2)                                                                                                                                                                          | The number of shares stated as issued
and outstanding  43,467,388 shares at December 31, 2005 and 2004 
includes, at December 31, 2004, 5,401,025 shares repurchased by the Company and held
by the Company or by a trustee. These shares bear no voting rights or rights to cash
dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            | b.                                                    | Cash distribution and treasury stock                                                                                                                                       
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | In 2004,
  approximately $118 million were transferred by the Company to its
  shareholders through a repurchase of shares from the shareholders and a cash
  distribution:
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 1)                                                                                                                                                                          | In June
  2004, the Company completed a self tender offer and purchased 4,952,050
  shares for an aggregate amount of approximately $28.1 million that represent
  $5.67 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                                       |                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                                       | 2)                                                                                                                                                                          | In July
  2004, the Company distributed in cash $2.36 per ordinary share, or
  approximately $89.8 million in the aggregate, to its shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 24

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|----------- | -------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 9     | SHAREHOLDERS EQUITY(continued):
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|            | c.                               | Share incentive and stock option plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|            |                                  | 2001 and 2003 Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|            |                                  | In December
  2001, the Companys shareholders approved the adoption of the Companys 2001
  Stock Option Plan (2001 Plan), designed primarily for employees and
  directors of the Company and its subsidiaries. In December 2003, the
  Companys shareholders approved the adoption of the companys 2003 Share
  Option Plan (2003 Plan), designed for employees, directors and consultants
  of the Company who are Israeli residents, and also approved an increase in
  the aggregate number of shares reserved for issuance under the 2001 Plan from
  an initial 750,000 shares to 1,900,000 shares, with all such reserved shares
  being available for issuance under either the 2001 Plan or the 2003 Plan.
  Option awards may be granted under the 2001 Plan until November 5, 2011 and
  under the 2003 Plan until November 23, 2013. Terms of the options granted
  under the plans, such as length of term, exercise price, vesting and exercisability,
  are determined by the board of directors. The maximum term of an option may
  not exceed ten years. Each option can be exercised to purchase one share
  having the same rights as other ordinary shares of the Company.
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                  | The 2003
  Plan is designed to be governed by the terms stipulated by Section 102 of the
  Israeli Income Tax Ordinance. Inter alia, these terms provide that the
  Company will be allowed to claim, as an expense for tax purposes, the amounts
  credited to the employees as a benefit in respect of shares or options
  granted under the plan. The amount allowed as an expense for tax purposes, at
  the time the employee utilizes such benefit, is limited to the amount of the
  benefit that is liable to tax as labor income, in the hands of the employee;
  all being subject to the restrictions specified in Section 102 of the Income
  Tax Ordinance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                  | On September
  20, 2004, the board of directors resolved to grant two senior employees of
  the Company options under the 2003 Plan to purchase an aggregate of 168,000
  shares of the Company at an exercised price of $3.70 per share. The fair
  value of one share at the day of grant was $4.11. The options vest ratably
  over three years and are exercisable for ten years until September 20, 2014.
  Any options not exercised by then will expire. In the year 2004, the Company
  recorded $69,000 of deferred stock compensation for the excess of the fair
  value of shares over the exercise price at the date of grant related to these
  options. The deferred stock compensation is amortized over the vesting period
  using the straight-line method. The compensation costs of $20,000 and $7000
  is presented under general and administrative expenses in 2005 and 2004
  respectively.                                                                                                                                                                                                                                                                                   
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                  | In the years
  ended December 31, 2005 and December 31, 2003, no options were granted under
  either the 2001 plan or 2003 plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                  | The options
  granted under the Companys plans are exercisable for the purchase of shares
  as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                     |  |                     |         |      |  |         | 
| | ----------------------------------- |  | ------------------- | ------- | ---- |  | ------- | 
| |                                     |  | December
  31       |        
| |                                     |  |                     |        
| |                                     |  | 2005                |         | 2004 | 
| |                                     |  |                     |         |      | 
| |                                     |  | Number of
  options |        
| |                                     |  |                     |        
| | At balance
  sheet date             |  |                     | 234,754 |      |  | 351,922 | 
| | During the
  first year thereafter  |  |                     | 56,000  |      |  | 56,000  | 
| | During the
  second year thereafter |  |                     | 56,000  |      |  | 112,000 | 
| |                                     |  |                     |         |      |  |         | 
| |                                     |  |                     | 346,754 |      |  | 519,922 | 
| |                                     |  |                     |         |      |  |         | 

F - 25

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|           |                                 
|---------- | --------------------------------
|NOTE 9    | SHAREHOLDERS EQUITY(continued):

| |  |                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  the status of the Companys plans at December 31, 2005, 2004 and 2003, and
  changes during the years ended on those dates, is presented below:

|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 
|---------------------------------------- |  | ---------------------- | --------- | ------------------------------------- |  | ------ |  | ------------------------------------- | --------- | ------ |  | ------------------------------------- |  |  | --------- | - |  | ----- | 
|                                         |  | Year ended December 31 |          
|                                         |  |                        |          
|                                         |  | 2005                   |           | 2004                                  |  | 2003   | 
|                                         |  |                        |           |                                       |  |        | 
|                                         |  | Number                 |           | Weighted
  average
  exercise
  price |  | Number |  | Weighted
  average
  exercise
  price |           | Number |  | Weighted
  average
  exercise
  price | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       | 
|                                         |  |                        |           | $                                     |  |        |  | $                                     |           |        |  | $                                     | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       | 
|Options outstanding at beginning of year |  |                        | 519,922   |                                       |  | 8.09   |  |                                       | 987,066   |        |  | 10.48                                 |  |  | 1,252,492 |   |  | 10.34 | 
|Changes during the year:                 |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 
|Granted                                  |  |                        |           |                                       |  |        |  |                                       | 168,000   |        |  | 3.70                                  |  |  |           |   |  |       | 
|Forfeited and canceled                   |  |                        | (173,168  | )                                     |  | 10.46  |  |                                       | (635,144  | )      |  | 10.64                                 |  |  | (265,426  | ) |  | 9.82  | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 
|Options outstanding at end of year       |  |                        | 346,754   |                                       |  | 6.91   |  |                                       | 519,922   |        |  | 8.09                                  |  |  | 987,066   |   |  | 10.48 | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 
|Options exercisable at end of year       |  |                        | 234,754   |                                       |  | 8.44   |  |                                       | 351,922   |        |  | 10.19                                 |  |  | 978,732   |   |  | 10.50 | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 
|Options available for future awards      |  |                        | 1,732,000 |                                       |  |        |  |                                       | 1,732,000 |        |  |                                       |  |  | 1,900,000 |   |  |       | 
|                                         |  |                        |           |                                       |  |        |  |                                       |           |        |  |                                       |  |  |           |   |  |       | 

| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted
  average fair value of options granted during 2004 is $1.69.                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                    
| | The weighted
  average fair value of each option grant is estimated on the date of grant
  using the Black-Scholes option-pricing model with the following weighted
  average assumptions: risk-free interest rate of 3.1%; dividend yields of zero;
  expected life of the options of approximately three years; and expected
  volatility of 52%.
| |                                                                                                                                                                                                                                                                                                                                                    
| | The
  following table summarizes information about options under the Companys
  plans outstanding at December 31, 2005:                                                                                                                                                                                                                           

| |                            |  |                                               |         |                                                   |  |                                       |  |                                               |       |                                       |  |         |  |  |       | 
| | -------------------------- |  | --------------------------------------------- | ------- | ------------------------------------------------- |  | ------------------------------------- |  | --------------------------------------------- | ----- | ------------------------------------- |  | ------- |  |  | ----- | 
| | Options outstanding        |  | Options exercisable                           |        
| |                            |  |                                               |        
| | Range of
  exercise prices |  | Number
  outstanding at
  December 31,
  2005 |         | Weighted
  average
  remaining
  contractual life |  | Weighted
  average
  exercise
  price |  | Number
  exercisable at
  December 31,
  2005 |       | Weighted
  average
  exercise
  price | 
| |                            |  |                                               |         |                                                   |  |                                       |  |                                               |       |                                       | 
| | $                          |  |                                               |         | Years                                             |  | $                                     |  |                                               |       | $                                     | 
| |                            |  |                                               |         |                                                   |  |                                       |  |                                               |       |                                       | 
| | 3.70                       |  |                                               | 168,000 |                                                   |  | 8.7                                   |  |                                               | 3.70  |                                       |  | 56,000  |  |  | 3.70  | 
| | 9.06                       |  |                                               | 102,754 |                                                   |  | 0.6                                   |  |                                               | 9.06  |                                       |  | 102,754 |  |  | 9.06  | 
| | 10.00                      |  |                                               | 9,000   |                                                   |  | 3.0                                   |  |                                               | 10.00 |                                       |  | 9,000   |  |  | 10.00 | 
| | 11.00
  to 11.99           |  |                                               | 61,000  |                                                   |  | 0.6                                   |  |                                               | 11.11 |                                       |  | 61,000  |  |  | 11.11 | 
| | 12.00
  to 12.99           |  |                                               | 6,000   |                                                   |  | 1.8                                   |  |                                               | 12.57 |                                       |  | 6,000   |  |  | 12.57 | 
| |                            |  |                                               |         |                                                   |  |                                       |  |                                               |       |                                       |  |         |  |  |       | 
| |                            |  |                                               | 346,754 |                                                   |  | 4.6                                   |  |                                               | 6.91  |                                       |  | 234,754 |  |  | 8.44  | 
| |                            |  |                                               |         |                                                   |  |                                       |  |                                               |       |                                       |  |         |  |  |       | 

F - 26

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | -------------------------------- | --------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 9    | SHAREHOLDERS EQUITY(continued):
|           |                                 
|           |                                  | Option plan in subsidiaries
|           |                                  |                            
|           |                                  | 1)                          | The
  Companys Israeli subsidiary, Scailex Vision (whos operations are classified
  as discontinued in these financial statements), has an employee stock option
  plan (the subsidiary plan), whereunder options to purchase up to 18,054,200
  ordinary shares of the subsidiary can be granted to employees, directors and
  consultants of the subsidiary without consideration. Each option can be
  exercised to purchase one ordinary share of NIS 0.01 par value of the
  subsidiary.                                                                                                                    
|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  |                             | During 2005,
  14,626, options were exercised of the above grants (During 2004 and 2003 no
  options were exercised).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  |                             | As of
  December 31, 2005, 15,673,184 options are granted, vested and outstanding at
  an exercise price of $0.405223.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  |                             | In
  connection with the sale of the business of Scailex Vision, the board of
  directors of Scailex Vision decided to accelerate part of the unvested
  options prior to the transaction, according to specific criteria such as
  seniority at work and grant dates. 4,693,683 options were accelerated. In
  connection with this acceleration, Scailex Vision recorded a compensation
  expense of approximately $2.4 million (this amount was classified as net
  income from discontinued operation in the statement of operation). The
  options that were not accelerated were forfeited. See also note 14.
|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  | 2)                          | In 2003,
  Jemtex adopted an Option Plan which grants options to purchase up to an
  aggregate of 426,100 Ordinary shares to officers, directors, key employees,
  etc. The plan will expire eight years after its adoption unless terminated
  earlier by the Board of Directors.                                                                                                                                                                                                                                                                                                                                   
|           |                                  |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  |                             | In 2003,
  Jemtex granted certain employees 176,200 options (No options were granted in
  previous years). The options may be exercised over a period of eight years
  from the date of grant, at an exercise price of $ 2.26. The vesting period of
  the options is up to four years. No compensation expense was recognized, as
  the exercise price on the date of grant was greater than the estimated fair
  value of the underlying shares.                                                                                                                                                                   

|            |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- | ---------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME:
|            |                 
|            | a.               | The Company and its Israeli subsidiary:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                  | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                  | The
  Companys subsidiary has received the approval of the Investment Center for
  an investment program for the Lod facility, qualifying for alternative
  benefits under the Law for the Encouragement of Capital Investments, 1959
  (the Law).                                                                                                                                                                                                                                                                                                             
|            |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                  | These benefits provide the subsidiary with an exemption from
  income taxes on income from its Approved Enterprise, for a period of two
  years followed by reduced tax rates of 25% for an additional period of five
  years from the first year in which there is taxable income, up to the earlier
  of twelve years from the time the facility was first made operational, or
  fourteen years from the issuance of the letter of approval. The investment
  program was completed and a final implementation report was submitted to the
  Investment Center.

F - 27

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME(continued):
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985
  (hereafter - the Inflationary Adjustments Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | Under this
  law, results for tax purposes are measured in real terms, in accordance with
  the changes in the Israeli CPI, or in the exchange rate of the dollar for a
  foreign investors company. The Company and its Israeli subsidiaries
  elected to measure their results on the basis of the changes in the Israeli
  CPI.                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | Tax rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | The income
  of the company and its Israeli subsidiaries is taxed at the regular rate.
  Through December 31, 2003, the corporate tax was 36%. In July 2004, Amendment
  No. 140 to the Income Tax Ordinance was enacted. One of the provisions of
  this amendment is that the corporate tax rate is to be gradually reduced from
  36% to 30%. In August 2005, a further amendment (No. 147) was published,
  which makes a further revision to the corporate tax rates prescribed by
  Amendment No. 140. As a result of the aforementioned amendments, the
  corporate tax rates for 2004 and thereafter are as follows: 2004 - 35%, 2005
  - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010 and
  thereafter - 25%.
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | b.                          | Non-Israeli subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | The
  non-Israeli subsidiaries are taxed under the laws of their countries of
  residence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | c.                          | Carryforward tax losses and deductions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                             | Carryforward
  tax losses and deductions of the Company and its subsidiaries, including
  capital losses and losses from realization of marketable securities
  approximated $391 million at December 31, 2005. Most of the carryforward
  amounts are available indefinitely with no expiration date.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | d.                          | Deferred income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                                                                             |  |                             |          |      |  |          |   |  |          |  
| | ----------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | ---- |  | -------- | - |  | -------- | -
| |                                                                                                             |  | December
  31               |         
| |                                                                                                             |  |                             |         
| |                                                                                                             |  | 2005                        |          | 2004 |  | 2003     |  
| |                                                                                                             |  |                             |          |      |  |          |  
| |                                                                                                             |  | U.S.
  dollars in thousands |         
| |                                                                                                             |  |                             |         
| | Computed in respect of the following:                                                                       |  |                             |          |      |  |          |   |  |          |  
| | Carryforward tax losses and credits                                                                         |  |                             | 136,946  |      |  | 141,028  |   |  | 133,000  |  
| | Investments                                                                                                 |  |                             | 4,191    |      |  | 5,447    |   |  | 4,374    |  
| |                                                                                                             |  |                             |          |      |  |          |   |  |          |  
| |                                                                                                             |  |                             | 141,137  |      |  | 146,475  |   |  | 137,374  |  
| | Less - valuation allowance (attributed
  mainly to loss carryforwards and expenses deductible upon payment) |  |                             | (139,877 | )    |  | (145,766 | ) |  | (137,374 | )
| |                                                                                                             |  |                             |          |      |  |          |   |  |          |  
| |                                                                                                             |  |                             | 1,260    |      |  | 709      |   |  | -,-      |  
| |                                                                                                             |  |                             |          |      |  |          |   |  |          |  
| | Deferred income taxes are included in the
  balance sheets as current assets                                |  |                             | 1,260    |      |  | 709      |   |  | -,-      |  
| |                                                                                                             |  |                             |          |      |  |          |   |  |          |  

F - 28

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                             |                                                                
|----------- | --------------------------- | ---------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME(continued):
|            |                            
|            | e.                          | Income (loss) before taxes on income from continuing operation:

| |                                          |  |                             |        |      |  |        |   |  |        |  
| | ---------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | - |  | ------ | -
| |                                          |  | Year ended
  December 31    |       
| |                                          |  |                             |       
| |                                          |  | 2005                        |        | 2004 |  | 2003   |  
| |                                          |  |                             |        |      |  |        |  
| |                                          |  | U.S.
  dollars in thousands |       
| |                                          |  |                             |       
| | The Company and its Israeli subsidiaries |  |                             | (4,916 | )    |  | (5,591 | ) |  | (1,840 | )
| | Non-Israeli subsidiaries                 |  |                             | 2,683  |      |  | 720    |   |  | (504   | )
| |                                          |  |                             |        |      |  |        |   |  |        |  
| |                                          |  |                             | (2,233 | )    |  | (4,871 | ) |  | (2,344 | )
| |                                          |  |                             |        |      |  |        |   |  |        |  

| |    |                                                                                      
| | -- | -------------------------------------------------------------------------------------
| | f. | Taxes on income included in the statements of operations - from continuing operation:

| |  |    |            
| |  | -- | -----------
| |  | 1) | As follows:

| |                          |  |                           |      |      |  |       |  
| | ------------------------ |  | ------------------------- | ---- | ---- |  | ----- | -
| |                          |  | Year ended December 31    |     
| |                          |  |                           |     
| |                          |  | 2005                      |      | 2004 | 
| |                          |  |                           |      |      | 
| |                          |  | U.S. dollars in thousands |     
| |                          |  |                           |     
| | Current:                 |  |                           |      |      |  |       |  
| | Israeli                  |  |                           | (185 | )    |  | (103  | )
| | Non-Israeli              |  |                           | (272 | )    |  | 515   |  
| |                          |  |                           |      |      |  |       |  
| |                          |  |                           | (457 | )    |  | 412   |  
| |                          |  |                           |      |      |  |       |  
| | Deferred, see e. above - |  |                           |      |      |  |       |  
| | Non-Israeli              |  |                           | 551  |      |  | 709   |  
| |                          |  |                           |      |      |  |       |  
| |                          |  |                           | 551  |      |  | 709   |  
| |                          |  |                           |      |      |  |       |  
| |                          |  |                           | 94   |      |  | 1,121 |  
| |                          |  |                           |      |      |  |       |  

| |  |    |                                                                                                                                                                                                       
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2) | Following is
  a reconciliation of the theoretical tax expense, assuming all income is taxed
  at the regular tax rate applicable to Israeli corporations (see a. above) and
  the actual tax expense:

| |                                                                                                                                 |  |                             |        |      |  |        |   |  |         |  
| | ------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | ------ | - |  | ------- | -
| |                                                                                                                                 |  | Year ended
  December 31    |       
| |                                                                                                                                 |  |                             |       
| |                                                                                                                                 |  | 2005                        |        | 2004 |  | 2003   |  
| |                                                                                                                                 |  |                             |        |      |  |        |  
| |                                                                                                                                 |  | U.S.
  dollars in thousands |       
| |                                                                                                                                 |  |                             |       
| | Loss before taxes on income                                                                                                     |  |                             | (2,233 | )    |  | (4,871 | ) |  | (2,344  | )
| |                                                                                                                                 |  |                             |        |      |  |        |   |  |         |  
| | Theoretical tax expense (tax benefit) on the above amount                                                                       |  |                             | (759   | )    |  | (1,705 | ) |  | (844    | )
| | Decrease in taxes resulting from different tax rates 
net                                                                      |  |                             | (175   | )    |  | (75    | ) |  |         |  
| | Change in valuation allowance                                                                                                   |  |                             | (5,889 | )    |  | 8,392  |   |  | (16,601 | )
| | Changes in deferred taxes resulting from carryforward tax
losses                                                                |  |                             | 4,082  |      |  | (8,028 | ) |  | 17,445  |  
| | Increase in taxes resulting from prior years                                                                                    |  |                             |        |      |  | (515   | ) |  |         |  
| | Increase (decrease) in taxes arising from differences between
  non-dollar currencies income and dollar income, net, and other* |  |                             | 2,835  |      |  | 3,052  |   |  | -,-     |  
| |                                                                                                                                 |  |                             |        |      |  |        |   |  |         |  
| | Taxes on income in the consolidated statements of
operations                                                                    |  |                             | 94     |      |  | 1,121  |   |  | -,-     |  
| |                                                                                                                                 |  |                             |        |      |  |        |   |  |         |  

F - 29

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                             |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                             
|----------- | --------------------------- | ---------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | TAXES ON INCOME(continued):
|            |                            
|            |                             |                  | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Resulting
  mainly from the difference between the changes in the Israeli CPI (the basis
  for computation of taxable income of the Company and its Israeli
  subsidiaries, see a. above) and the changes in the exchange rate of Israeli
  currency relative to the dollar.
|            |                             |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                             
|            | g.                          | Tax assessments:
|            |                             |                 
|            |                             | 1)               | The Company
  has received, or is considered to have received, final tax assessments
  through the 2000 tax year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                             |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                             
|            |                             | 2)               | Following
  the filing of tax returns of the Companys U.S. subsidiaries (reported under
  discontinued operations of SDP) for the years 1992 through 1996 (and receive
  certain refunds in respect thereof), the Internal Revenue Service (IRS)
  commenced an audit on those years. By the end of 2001, the Company had
  already made advance payments of $21.5 million on account of this audit. In
  partial settlement of said audit the Company consented to a partial
  assessment by the IRS for approximately $10.6 million of federal taxes on
  certain agreed upon issues in June 2002. In the same month, the Company
  received a notice from the IRS proposing to assess $29.6 million of
  additional federal income taxes for the years 1992 through 1996. In August
  2002, the Company appealed the proposed additional assessment. In February
  2004, following negotiations with the IRS, the Company finalized the
  settlement with the IRS, and the during the remainder of 2004, the Company
  concluded paying according to the settlement the IRS in an amount of $5.9 million
  to the IRS, and also paid $5.7 million as state taxes derived from that IRS
  audit.
|            |                             |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                             
|            |                             |                  | As a result
  of the conclusion of the 1992-1996 IRS audits, the Company filed federal tax
  amendments for the years 1994, 1995 and 1997, claiming a refund of $7.8
  million of federal taxes. During 2005, the IRS reviewed the refund claim and
  forwarded the refund request on to the Joint Committee of Taxation for their
  approval. Management estimates that the likelihood of receiving this refund
  is high; therefore the Company recorded a Federal income tax receivable of
  $7.8 million as part of discontinued operations on 2005. When the cash is
  received it will be allocated to continued operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                             |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                             
|            |                             |                  | During 2005
  the IRS has begun an audit of the US subsidiary for year 2003 and for the
  requested refund.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|            |                                            |                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | ------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11    | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
|            |                                           
|            | a.                                         | Foreign exchange risk management                                                                                                                                                                                                                                                                                                                                                             
|            |                                            |                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                            | The Company
  and its subsidiaries operate internationally, which gives rise to significant
  exposure to market risks, mainly from changes in foreign exchange rates.                                                                                                                                                                                                                       
|            |                                            |                                                                                                                                                                                                                                                                                                                                                                                              
|            | b.                                         | Concentrations of credit risks                                                                                                                                                                                                                                                                                                                                                               
|            |                                            |                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                            | At December
  31, 2005 and 2004, the Company and its subsidiaries held cash and cash
  equivalents, most of which were deposited with major Israeli, European and
  U.S. banks. Substantially, all of the marketable securities held by the
  Company are debt securities of the U.S. Treasury and highly rated
  corporations. The Company considers the inherent credit risks to be remote.

F - 30

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                                                       |                                                                                                                                                                  |                                                                                                                                                                        
|----------- | ----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11    | FINANCIAL INSTRUMENTS AND
RISK MANAGEMENT(continued):
|            |                                                      
|            | c.                                                    | Cash Management and Fair value of
financial instruments                                                                                                         
|            |                                                       |                                                                                                                                                                 
|            |                                                       | The
  financial instruments of the Company and its subsidiaries consist mainly of
  cash and cash equivalents, marketable securities and short-term investments.
|            |                                                       |                                                                                                                                                                 
|            |                                                       | In view of
  their nature, the fair value of the financial instruments included in working
  capital is usually identical or close to their carrying amount.    
|            |                                                       |                                                                                                                                                                 
|NOTE 12    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:       
|            |                                                       |                                                                                                                                                                 
|            | Balance sheets:                                      
|            |                                                       |                                                                                                                                                                 
|            | a.                                                    | Information on investments in securities available for sale and
  held-to-maturity:                                                                             
|            |                                                       |                                                                                                                                                                 
|            |                                                       | 1)                                                                                                                                                               | The fair
  value and the amortized cost of available-for-sale securities, cash
  equivalents and short term maturities of securities held-to-maturity are as
  follows:

| |                                                   |  |                           |        |                                   |  |                                                                               |     |  |        | 
| | ------------------------------------------------- |  | ------------------------- | ------ | --------------------------------- |  | ----------------------------------------------------------------------------- | --- |  | ------ | 
| |                                                   |  | December 31, 2005         |       
| |                                                   |  |                           |       
| |                                                   |  | Cost                      |        | Unrealized
  holding
  losses (*) |  | Estimated fair
  market value
  (except for
  securities held-
  to-maturity) |    
| |                                                   |  |                           |        |                                   |  |                                                                               |    
| |                                                   |  | U.S. dollars in thousands |       
| |                                                   |  |                           |       
| | Corporate debt securities                         |  |                           | 19,517 |                                   |  | (428                                                                          | )** |  | 19,089 | 
| |                                                   |  |                           |        |                                   |  |                                                                               |     |  |        | 
| | Accrued interest to the end of the year           |  |                           |        |                                   |  |                                                                               |     |  | 367    | 
| | Current maturities of securities held-to-maturity |  |                           |        |                                   |  |                                                                               |     |  | 10,949 | 
| |                                                   |  |                           |        |                                   |  |                                                                               |     |  |        | 
| | Total - securities presented as short-term        |  |                           |        |                                   |  |                                                                               |     |  | 30,405 | 
| |                                                   |  |                           |        |                                   |  |                                                                               |     |  |        | 

| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*)  | Such
  unrealized holding losses are the result of an increase in market interest
  rates during 2004 and 2005 and are not the result of credit or principal
  risk. Based on the nature of the investments, management concluded that such
  unrealized losses were not other than temporary as of December 31, 2005.
  Securities in continuance amounts reclassified out of accumulated
  comprehensive income into earning are determined by specific identification.
  As of December 31, 2005, the Company held investments in available for sale
  with unrealized holding losses totaling $428,000. Realized losses in 2005
  were approximately $84,000 compared to 2004 that were approximately $70,000.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (**) | Of which
  $306,000 has been in continuous unrealized loss position for over 12 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 31

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                                                           |    |                                                                                                 
|----------- | --------------------------------------------------------- | -- | ------------------------------------------------------------------------------------------------
|NOTE 12    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):
|            |                                                           |    |                                                                                                 
|            |                                                           | 2) | Maturities
  of the available-for-sale and held-to-maturities above securities are as
  follows:

| |                        |  |                                |        |                                                                    |  |        | 
| | ---------------------- |  | ------------------------------ | ------ | ------------------------------------------------------------------ |  | ------ | 
| |                        |  | Securities held-
  to-maturity |        | Estimated fair
  market value
  of available for
  sale securities | 
| |                        |  |                                |        |                                                                    | 
| |                        |  | U.S. dollars in thousands      |       
| |                        |  |                                |       
| | 2006                   |  |                                | 11,127 |                                                                    |  | 5,399  | 
| | 2007                   |  |                                | 16,643 |                                                                    |  | 9,050  | 
| | 2008                   |  |                                | 2,967  |                                                                    |  | 3,010  | 
| | 2009 and
  there after |  |                                | 9,914  |                                                                    |  | 2,002  | 
| |                        |  |                                |        |                                                                    |  |        | 
| |                        |  |                                | 40,651 |                                                                    |  | 19,461 | 
| |                        |  |                                |        |                                                                    |  |        | 

| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                | In addition,
  as a result of the Companys decision in the forth quarter of 2005, to hold
  certain securities, then classified as available-for-sale, to maturity an
  other comprehensive income of unrealized losses of $682 thousands continues
  to be reported as a separate component of comprehensive income in shareholders
  equity, but is being amortized over the remaining life of the security as an
  adjustment of yield.                                                                   
| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | 3)                                                                                                                                                                                                                             | In June and
  August 2003, the Company sold all of its remaining holdings in Creo Inc.
  (hereafter - Creo) shares for a net total consideration of $54,000,000 and
  recorded a gain of approximately $3,000,000. Prior to the said sale, the
  investment in Creo shares was accounted for as shares available for sale, and
  following the sale of the shares, the Company recorded approximately $750,000
  gain in its shareholders equity. This gain was realized and released to
  earnings in 2003.
| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | b. | Long-term loans:                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In July
  2004, Jemtex received a waiver of all rights regarding a long-term loan from
  a third party at the amount of $581,000. The waiver of the loan is presented
  in the financial statements under Other income, net.

F - 32

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                                                          
|----------- | ---------------------------------------------------------
|NOTE 12    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):
|            |                                                          
|            | Statements of operations:                                

| |    |                                                                           |  |                           |       |      |  |       |   |  |  | 
| | -- | ------------------------------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- | - |  |  | 
| |    |                                                                           |  | Year ended December 31    |       |      |  |      
| |    |                                                                           |  |                           |       |      |  |      
| |    |                                                                           |  | 2005                      |       | 2004 |  |       |   | 
| |    |                                                                           |  |                           |       |      |  |       |   | 
| |    |                                                                           |  | U.S. dollars in thousands |       |      |  |      
| |    |                                                                           |  |                           |       |      |  |      
| | c. | Research and development costs, net:                                      |  |                           |       |      |  |       |   |  |  | 
| |    | Expenses incurred                                                         |  |                           | 2,555 |      |  | 2,346 |   |  |  | 
| |    | L e s s  - royalty-bearing participations
  from the Government of Israel |  |                           | (6    | )    |  | (178  | ) |  |  | 
| |    |                                                                           |  |                           |       |      |  |       |   |  |  | 
| |    |                                                                           |  |                           | 2,549 |      |  | 2,168 |   |  |  | 
| |    |                                                                           |  |                           |       |      |  |       |   |  |  | 

| |    |                                                   |  |                           |       |      |  |       |  |  |       | 
| | -- | ------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |    |                                                   |  | Year ended December 31    |      
| |    |                                                   |  |                           |      
| |    |                                                   |  | 2005                      |       | 2004 |  | 2003  | 
| |    |                                                   |  |                           |       |      |  |       | 
| |    |                                                   |  | U.S. dollars in thousands |      
| |    |                                                   |  |                           |      
| | d. | Marketing, general and administrative
  expenses: |  |                           |       |      |  |       |  |  |       | 
| |    | Marketing                                         |  |                           | 55    |      |  | 51    |  |  |       | 
| |    | General and administrative                        |  |                           | 3,624 |      |  | 4,808 |  |  | 2,890 | 
| |    |                                                   |  |                           |       |      |  |       |  |  |       | 
| |    |                                                   |  |                           | 3,679 |      |  | 4,859 |  |  | 2,890 | 
| |    |                                                   |  |                           |       |      |  |       |  |  |       | 

| |    |                                                              |  |  |       |   |  |       |   |  |      |  
| | -- | ------------------------------------------------------------ |  |  | ----- | - |  | ----- | - |  | ---- | -
| | e. | Financial income, net:                                       |  |  |       |   |  |       |   |  |      |  
| |    | Interest income                                              |  |  | 4,470 |   |  | 2,874 |   |  | 255  |  
| |    | Gain (loss) on trading marketable
  securities, net          |  |  | (84   | ) |  | (70   | ) |  | 3    |  
| |    | Interest on loan from associated company                     |  |  |       |   |  |       |   |  | (237 | )
| |    | Bank charges                                                 |  |  | (48   | ) |  | (67   | ) |  | (10  | )
| |    | Other (including foreign exchange
  transaction losses, net) |  |  | (45   | ) |  | (14   | ) |  | 37   |  
| |    |                                                              |  |  |       |   |  |       |   |  |      |  
| |    |                                                              |  |  | 4,293 |   |  | 2,723 |   |  | 48   |  
| |    |                                                              |  |  |       |   |  |       |   |  |      |  

| |    |                                                     |  |  |     |  |  |     |  |  |        |  
| | -- | --------------------------------------------------- |  |  | --- |  |  | --- |  |  | ------ | -
| | f. | Other income, net:                                  |  |  |     |  |  |     |  |  |        |  
| |    | Gain from sale of a portion in a
subsidiary         |  |  |     |  |  |     |  |  | 2,822  |  
| |    | Impairment of investment in cost                    |  |  |     |  |  |     |  |  | (2,492 | )
| |    | Distribution of funds from cost method
  investment |  |  | 793 |  |  |     |  |  |        |  
| |    | Gain from waiver of a loan                          |  |  |     |  |  | 585 |  |  |        |  
| |    | Other                                               |  |  | 124 |  |  | 63  |  |  | 168    |  
| |    |                                                     |  |  |     |  |  |     |  |  |        |  
| |    |                                                     |  |  | 917 |  |  | 648 |  |  | 498    |  
| |    |                                                     |  |  |     |  |  |     |  |  |        |  

F - 33

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                      
|----------- | ---------------------
|NOTE 13    | SEGMENTS INFORMATION:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | General:                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| |    | Following
  the sale of the wide format digital printing segment the Company is operating
  in two segments: 1) The corporate segment that its main activity is
  management of the funds of the company. 2) The continuous inkjet industrial
  digital printing segment (develop, manufacture and market of continuous
  inkjet based digital printers for the industrial printing ceramic tiles and
  textile markets).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| | b. | Information
on segment loss and assets of the reportable operating segments:                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| |    | 1)                                                                                                                                                                                                                                                                                                                                                                                                                        | Measurement of segment loss and assets:                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           | The measurement of losses and assets of the reportable segments is
  based on the same accounting principles applied in these consolidated financial
  statements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                   
| |    | 2)                                                                                                                                                                                                                                                                                                                                                                                                                        | Financial data relating to the reportable
operating segments:                                                                                                     

| |                                                                |  |                           |        |      |  |        |  
| | -------------------------------------------------------------- |  | ------------------------- | ------ | ---- |  | ------ | -
| |                                                                |  | Year ended December 31,   |       
| |                                                                |  |                           |       
| |                                                                |  | 2005                      |        | 2004 | 
| |                                                                |  |                           |        |      | 
| |                                                                |  | U.S. dollars in thousands |       
| |                                                                |  |                           |       
|
| | Operating
  loss from continuing operations:                   |  |                           |        |      |  |        |  
| | Corporate                                                      |  |                           | (2,862 | )    |  | (4,252 | )
| | Continuous inkjet industrial digital
  printing                |  |                           | (4,581 | )    |  | (3,990 | )
| |                                                                |  |                           |        |      |  |        |  
| | Total
  consolidated operating loss from continuing operations |  |                           | (7,443 | )    |  | (8,242 | )
| |                                                                |  |                           |        |      |  |        |  
| | Financial
  income, net:                                       |  |                           |        |      |  |        |  
| | Corporate                                                      |  |                           | 4,283  |      |  | 2,757  |  
| | Continuous inkjet industrial digital
  printing                |  |                           | 10     |      |  | (34    | )
| |                                                                |  |                           |        |      |  |        |  
| | Total
  consolidation financial income, net                    |  |                           | 4,293  |      |  | 2,723  |  
| |                                                                |  |                           |        |      |  |        |  
| | Other
  income, net:                                           |  |                           |        |      |  |        |  
| | Corporate                                                      |  |                           | 917    |      |  | 62     |  
| | Continuous inkjet industrial digital
  printing                |  |                           |        |      |  | 586    |  
| |                                                                |  |                           |        |      |  |        |  
| | Total
  consolidation other income, net                        |  |                           | 917    |      |  | 648    |  
| |                                                                |  |                           |        |      |  |        |  
| | Income
  (loss) before taxes on income:                        |  |                           |        |      |  |        |  
| | Corporate                                                      |  |                           | 2,338  |      |  | (2,648 | )
| | Continuous inkjet industrial digital
  printing                |  |                           | (4,571 | )    |  | (2,223 | )
| |                                                                |  |                           |        |      |  |        |  
| | Total
  consolidation loss before taxes on income              |  |                           | (2,233 | )    |  | (4,871 | )
| |                                                                |  |                           |        |      |  |        |  

F - 34

---

---



SCAILEX CORPORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

|            |                                 
|----------- | --------------------------------
|NOTE 13    | SEGMENTS INFORMATION(continued):

| |                                                               |  |                           |         |      |  |         | 
| | ------------------------------------------------------------- |  | ------------------------- | ------- | ---- |  | ------- | 
| |                                                               |  | December 31,              |        
| |                                                               |  |                           |        
| |                                                               |  | 2005                      |         | 2004 | 
| |                                                               |  |                           |         |      | 
| |                                                               |  | U.S. dollars in thousands |        
| |                                                               |  |                           |        
|
| | Assets:                                                       |  |                           |         |      |  |         | 
| | Corporate:                                                    |  |                           |         |      |  |         | 
| | Cash*                                                         |  |                           | 235,920 |      |  | 147,239 | 
| | Other assets                                                  |  |                           | 330     |      |  | 627     | 
| | Securities held-to-maturities                                 |  |                           | 29,707  |      |  |         | 
| | Other long-lived assets                                       |  |                           | 2,158   |      |  | 8,395   | 
| | Continuous inkjet industrial digital
  printing               |  |                           | 2,149   |      |  | 2,040   | 
| |                                                               |  |                           |         |      |  |         | 
| |                                                               |  |                           | 270,264 |      |  | 158,301 | 
| |                                                               |  |                           |         |      |  |         | 
| | Discontinued operations                                       |  |                           | 80,754  |      |  | 115,852 | 
| |                                                               |  |                           |         |      |  |         | 
| |                                                               |  |                           | 351,018 |      |  | 274,153 | 
| |                                                               |  |                           |         |      |  |         | 
| |                                                               |  |                           |         |      |  |         | 
| | Depreciation
  and amortization expenses:                     |  |                           |         |      |  |         | 
| | Corporate                                                     |  |                           | 4       |      |  | 7       | 
| | Continuous inkjet industrial digital
  printing, other assets |  |                           | 1,248   |      |  | 1,266   | 
| |                                                               |  |                           |         |      |  |         | 
| |                                                               |  |                           | 1,252   |      |  | 1,273   | 
| |                                                               |  |                           |         |      |  |         | 

| |                                                                     
| | --------------------------------------------------------------------
| | * including
  short term investments and short term restricted cash.
| | ** The
  majority of long-lived assets are located in Israel.       

|            |                   
|----------- | ------------------
|NOTE 14    | SUBSEQUENT EVENTS:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | In January 2006, Scailex Visions shareholders approved the
  distribution of a cash dividend in the amount of approximately $135 million,
  which reflected the amount available for distribution, (of which $101 million
  received by the Company) following the conclusion of the asset sale agreement
  with HP (after taking into consideration funds required for loan repayments,
  taxes and other liabilities and expenses). The distribution resulted in the
  payment of approximately $0.80 per share to each shareholder and
  approximately $0.39 per option to each option holder.                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | b) | In July 2003 and May 2004, two of the Companys shareholders granted
  Scailex Vision convertible loans in the total amount of $933,000 and
  $805,000, respectively (the balance of this convertible loan is presented in
  discontinued operations). Prior to the distribution said in note 14a, the
  lenders converted the entire principal of their loans and all interest
  accrued thereon into a total of 4,559,650 ordinary shares, based on a
  conversion price $0.405223 per share. Additionally, such lenders exercised
  the right granted to them and exercised a total of 1,058,578 warrants (which
  had been issued to them in association with the loans they provided) by means
  of setting off the exercise price ($0.405223 per share) against the dividend
  payable on the ordinary shares issuable upon exercise of such warrants (i.e.
  cashless exercise).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | c) | In January
  2006, RealTimeImage, Ltd., (hereafter - RTI) in which the Company holds approximately
  14.9% of the issued share capital (RTI was recorded on the Companys balance
  sheet at $1.2 million as of December 31, 2005, and accounted under the cost
  method) paid dividend to its shareholders. The Company received approximately
  $2.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 35

---

---



[ZIV HAFT LETTERHEAD]

# REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

# Board of Directors and
StockholdersJEMTEX INK JET
PRINTING LTD.

We have audited the accompanying
balance sheets of Jemtex Ink Jet Printing Ltd. (the Company) as of
December 31, 2005 and 2004 and the related statements of operations, changes in
shareholders deficiency and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit 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 the Companys Board of
Directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2005 and 2004 and the results of its operation
and its cash flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1B, to the financial statements, the Company has suffered recurring
losses from operations and as of December 31, 2005 has a shareholders deficiency of
approximately US $ 7.7 million. These factors described in Note 1B raise substantial doubt
about the Companys ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 1B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

|Tel-Aviv, IsraelFebruary 26, 2006 |  | /s/ ZIV HAFTZIV HAFTCertified Public Accountants (Isr.)BDO member firm
|--------------------------------- |  | ----------------------------------------------------------------------

J - 1

---

---



# Objet Geometries Ltd.

# Consolidated Financial
Statements As of December 31, 2004



---

---



|Objet Geometries Ltd.                              
|---------------------------------------------------
|Consolidated Financial Statements December 31, 2004
|                                                   

|Contents                                      |           
|--------------------------------------------- | ----------
|
|
|
|
|Report of Independent Public Accountants      | O-2       
|Financial Statements:                        
|Consolidated Balance Sheets                   | O-3 - O-4 
|Consolidated Statements of Operations         | O-5       
|Statements of Changes in Shareholders' Equity | O-6       
|Consolidated Statements of Cash Flows         | O-7       
|Notes to the Financial Statements             | O-8 - O-20

O - 1

---

---



|Chaikin, Cohen, Rubin & Gilboa.                                                                                                          
|-----------------------------------------------------------------------------------------------------------------------------------------
|Atidim Technology Park, Bldg. 4,
P.O.B. 58143 Tel-Aviv 61580, IsraelTel: 972-3-6489858 Fax: 972-3-6489946
E-mail: accounting@ccrcpa.co.il
|                                                                                                                                         
|                                                                                                                                         

# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

# To The Shareholders ofObjet Geometries Ltd.

We have audited the accompanying
consolidated balance sheets of Objet Geometries Ltd., (the Company) and its
subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audit.

We conducted our audits in accordance
with auditing standards generally accepted in Israel, including those prescribed under the
Auditors Regulations (Auditors Mode of Performance), 1973 and with the
standards of the Public Company 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 misstatements. 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 statements presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2004 and 2003 and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States.

Without qualifying our opinion, we
wish to draw your attention that the Company is defendant in certain lawsuits as described
in note 8A.

/s/ Chaikin, Cohen, Rubin
& GilboaChaikin, Cohen, Rubin
& Gilboa Certified Public
Accountants (Isr.)

Tel-Aviv, March 2, 2005

O - 2

---

---



|Objet Geometries Ltd.      
|---------------------------
|Consolidated Balance Sheets
|                           
|In thousands of US Dollars 

|                                       |  | December 31,
|-------------------------------------- |  | ------------
|
|
|
|
|ASSETS                                 |  |             
|                                       |  |             
|Current assets                         |  |             
|                                       |  |             
|Cash and cash equivalents              |  |             
|Restricted cash                        |  |             
|Trade receivables                      |  |             
|Other receivables and prepaid expenses |  |             
|Inventories                            |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|Property, plant and equipment          |  |             
|                                       |  |             
|                                       |  |             
|Other assets                           |  |             
|Severance pay funds                    |  |             
|Other                                  |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             
|                                       |  |             

|
Elan Jaglom Chairman of the Board of Directors | 
Adina ShorrChief Executive Officer
|------------------------------------------------------------- | -------------------------------------------------

The
accompanying notes are an integral part of the financial statements

O - 3

---

---



|Objet Geometries Ltd.      
|---------------------------
|Consolidated Balance Sheets
|                           
|In thousands of US Dollars 

|                                                              |  | December 31,
|------------------------------------------------------------- |  | ------------
|
|
|LIABILITIES AND CAPITAL DEFICIENCY                            |  |             
|                                                              |  |             
|Current liabilities                                           |  |             
|                                                              |  |             
|Short term loans                                              |  |             
|Trade payables                                                |  |             
|Deferred revenues                                             |  |             
|Accrued liabilities and other liabilities                     |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|Long-term liabilities                                         |  |             
|                                                              |  |             
|Accrued severance pay                                         |  |             
|                                                              |  |             
|                                                              |  |             
|Contingencies and commitments                                 |  |             
|                                                              |  |             
|Capital deficiency                                            |  |             
|                                                              |  |             
|Ordinary shares of NIS 0.01 par value:                        |  |             
|Authorized: 100,000,000 at December 31, 2004 and 2003; issued |  |             
|and outstanding: 3,669,900 at December 31, 2004 and 2003      |  |             
|Preferred shares of NIS 0.01 par value:                       |  |             
|Authorized: 400,000,000 at December 31, 2004 and 2003; issued |  |             
|and outstanding: 102,110,637 and 93,842,996 at December 31,   |  |             
|2004 and 2003, respectively                                   |  |             
|Additional paid in capital                                    |  |             
|Accumulated deficit                                           |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             
|                                                              |  |             

The accompanying
notes are an integral part of the financial statements

O - 4

---

---



|Objet Geometries Ltd.                
|-------------------------------------
|Consolidated Statements of Operations
|                                     
|In thousands of US Dollars           

|                                     |  | Year ended December 31,
|------------------------------------ |  | -----------------------
|
|
|
|
|Revenues                             |  |                        
|                                     |  |                        
|Cost of revenues                     |  |                        
|                                     |  |                        
|                                     |  |                        
|Gross profit                         |  |                        
|                                     |  |                        
|                                     |  |                        
|Operating expenses:                  |  |                        
|                                     |  |                        
|Research and development, net        |  |                        
|                                     |  |                        
|Marketing and selling                |  |                        
|                                     |  |                        
|General and administrative           |  |                        
|                                     |  |                        
|Special legal expenses and provision |  |                        
|                                     |  |                        
|Amortization of intangible assets    |  |                        
|                                     |  |                        
|                                     |  |                        
|Total operating expenses             |  |                        
|                                     |  |                        
|                                     |  |                        
|Operating loss                       |  |                        
|                                     |  |                        
|Financial expenses, net              |  |                        
|                                     |  |                        
|                                     |  |                        
|Net loss                             |  |                        
|                                     |  |                        

The
accompanying notes are an integral part of the financial statements

O - 5

---

---



|Objet Geometries Ltd.                      
|-------------------------------------------
|Statements of Changes in Capital Deficiency
|                                           
|In thousands of US Dollars                 

|                                | Number of Shares | Share Capital |  |           | Total
|------------------------------- | ---------------- | ------------- |  | --------- | -----
|
|
|
|
|Balance at January 1, 2002      |                  |               |  | 3,669,900 |      
|                                |                  |              
|Net loss for the year           |                  |               |  | -         |      
|                                |                  |               |  |           |      
|                                |                  |              
|Balance at December 31, 2002    |                  |               |  | 3,669,900 |      
|                                |                  |              
|Conversion of convertible loans |                  |               |  | -         |      
|                                |                  |              
|Issuance of preferred shares    |                  |               |  | -         |      
|                                |                  |              
|Net loss for the year           |                  |               |  | -         |      
|                                |                  |               |  |           |      
|                                |                  |              
|Balance at December 31, 2003    |                  |               |  | 3,669,900 |      
|                                |                  |              
|Issuance of preferred shares    |                  |               |  |           |      
|                                |                  |              
|Net loss for the year           |                  |               |  |           |      
|                                |                  |              
|Balance at December 31, 2004    |                  |               |  | 3,669,900 |      
|                                |                  |               |  |           |      

The accompanying
notes are an integral part of the financial statements

O - 6

---

---



|Objet Geometries Ltd.                
|-------------------------------------
|Consolidated Statements of Cash Flows
|                                     
|In thousands of US Dollars           

|                                                            | Year ended December 31,
|----------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities                        |                        
|Net loss for the year                                       |                        
|Adjustments to reconcile net loss to net cash flows used in |                        
|operating activities:                                       |                        
|Depreciation and amortization                               |                        
|Provision for severance pay, net                            |                        
|Other                                                       |                        
|Changes in operating assets and liabilities                 |                        
|Increase in trade receivables                               |                        
|Decrease (increase) in other receivables and prepaid        |                        
|expenses                                                    |                        
|Decrease (increase) in inventories                          |                        
|Increase (decrease) in trade payables                       |                        
|Increase (decrease) in deferred revenues                    |                        
|Increase (decrease) in customer advance                     |                        
|Increase in accruals and other current liabilities          |                        
|                                                            |                        
|                                                            |                        
|Net cash used in operating activities                       |                        
|                                                            |                        
|                                                            |                        
|Cash flows from investing activities                        |                        
|Purchase of fixed assets                                    |                        
|Restricted cash                                             |                        
|                                                            |                        
|                                                            |                        
|Net cash used in investing activities                       |                        
|                                                            |                        
|                                                            |                        
|Cash flows from financing activities                        |                        
|Short term loan received                                    |                        
|Receipts on account of shares                               |                        
|Issuance of shares                                          |                        
|Convertible loans received                                  |                        
|                                                            |                        
|                                                            |                        
|Non cash provided by financing activities                   |                        
|                                                            |                        
|                                                            |                        
|Increase (decrease) of cash and cash equivalents            |                        
|                                                            |                        
|Cash and cash equivalents at beginning of year              |                        
|                                                            |                        
|                                                            |                        
|Cash and cash equivalents at end of year                    |                        
|                                                            |                        

# Supplemental non cash
investing and financing activities:

On December 1, 2003 convertible loan
of $505,000 was converted to 1,990,173 preferred shares.

On March 4, 2003 77,663,122 preferred
shares were issued on account of the conversion of $8,965,436 loans, the receipt of
$2,500,000 on account of shares received in 2002 and shares issued in accordance with anti
dilution protection as stated in the articles.

The
accompanying notes are an integral part of the financial statements

O - 7

---

---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

# NOTE 1  GENERAL

| | A. | Objet
Geometries Ltd. (the Company) was founded and commenced its operations on
                    March 8, 1998. The Company develops, manufactures and markets 3D
printers for                     the rapid prototyping market.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is an Israeli  corporation and it has a fully owned subsidiary:  Objet Geometries
                  Inc. - located in the United States.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
Company faces a number of business risks, including uncertainties regarding
                    demand and market acceptance of the Companys products, the
effects of                     technological changes, uncertainties concerning government
regulation,                     competition, dependence on proprietary technology and the
development of new                     products. Additionally, other risk factors such as
the loss of key personnel                     could affect the future results of the
Company.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 2 
SIGNIFICANT ACCOUNTING POLICIES

| | The
significant accounting policies followed in the preparation of the financial statements,
applied on a consistent basis, are:
| | --------------------------------------------------------------------------------------------------------------------------------

| | A. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Reporting
currency
| | -- | ------------------

| | Most
of the Companys revenues are generated in U.S. dollars (dollar). In
addition, most of the Companys costs and expenses are incurred in dollars. The
Companys management believes that the dollar is the primary currency of the
economic environment in which the Company operates. Thus, the financial and reporting
currency of the Company is the dollar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly
transactions and balances originally denominated in dollars are presented in their
original amounts. Transactions and balances in other currencies are remeasured into
dollars in accordance with the principles set forth in Statement No. 52 of the Financial
Accounting Standards Board of the United States (FASB).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Exchange
gains and losses from the aforementioned remeasurement are reflected in the statement of
operations as financial income or expenses. The representative rate of exchange at
December 31, 2004 was $1 = 4.308 New Israeli Shekels (NIS) (At December 31,
2003 $ 1 = 4.379 NIS).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

O - 8

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2       SIGNIFICANT ACCOUNTING POLICIES(Continued)

| | C. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the accounts of the Company and its fully owned
subsidiary. Significant intercompany transactions and balances have been eliminated upon
consolidation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Cash
equivalents
| | -- | ----------------

| | All
highly liquid investments with an original maturity of three months or less are
considered cash equivalents.
| | ----------------------------------------------------------------------------------------------------------------

| | E. | Restricted
cash
| | -- | ---------------

| | Restricted
cash is primarily invested in highly liquid deposits, which are used as security for the
Companys facilities lease commitment.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Inventories
| | -- | -----------

| | Inventories
are valued of the lower of cost or market. Cost is determined as follows:
| | -------------------------------------------------------------------------------------

| | Raw
materials and consumables  on a moving average basis.
| | ----------------------------------------------------------

| | Finished
products and products in process  on basis of production costs:
| | -------------------------------------------------------------------------

| | Raw
materials  on the moving average basis.
| | --------------------------------------------

| | Labor
and overhead  on the basis of actual manufacturing costs.
| | ----------------------------------------------------------------

| | G. | Property,
plant and equipment
| | -- | -----------------------------

| | These
assets are stated at cost, net of accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

|                               | %    
|------------------------------ | -----
|
|
|
|
|Computers and software         | 33   
|Office furniture and equipment | 6-33 
|Machinery and equipment        | 10-33

| | Equipment
produced by the Company and used for research and development purposes is depreciated on
a straight-line basis over two years. Leasehold improvements are amortized on a straight-
line basis over the shorter of the term of the lease or the estimated useful life of the
improvement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Technology
and other intangible assets
| | -- | --------------------------------------

| | Acquired
technology is amortized by the straight-line method over a period of 2.5 years.
| | ----------------------------------------------------------------------------------------

O - 9

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2       SIGNIFICANT ACCOUNTING POLICIES (Continued)

| | I. | Impairment
of long-lived assets and intangibles
| | -- | -----------------------------------------------

| | The
Companys long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with Statement of Financial Accounting Standard 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, 2004, no impairment
losses have been identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Revenue
recognition
| | -- | -------------------

| | Revenues
from sales of products and consumables are recognized when an arrangement exists (usually
in the form of a purchase order), delivery has occurred and title passed to the customer,
the Companys price to the customer is fixed or determinable, collectability is
reasonably, assured future obligations of the Company are considered insignificant and
the cost of such obligations can be reliably estimated. With respect to products with
installation requirements, revenue is recognized when all of the above criteria are met
and installation is completed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sales
contracts with distributors stipulate fixed prices and current payment terms and are not
subject to the distributors resale or any other contingencies. Accordingly when all
criteria above are met, sales of finished products to distributors are recognized as
revenue upon delivery and after title and risk pass to distributors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Service
revenue is recognized ratably over the contractual period or as services are performed.
| | -----------------------------------------------------------------------------------------------

| | Warranty
costs are provided for at the same time as the revenues are recognized. The annual
provision for warranty costs is calculated based on expected cost of inputs, based on
historical experience.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Emerging
Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with
Multiple Deliverables, addresses the accounting, by a vendor, for contractual
arrangements in which multiple revenue-generating activities will be performed by the
vendor. It is effective prospectively for all arrangements entered into in fiscal periods
beginning after June 15, 2003. EITF Issue 00-21 addresses when and, if so, how an
arrangement involving multiple deliverables should be divided into separate units of
accounting. In accordance with EITF Issue 00-21 the Company separates the different units
of accounting of sales with multiple deliverables (generally consists of machine and
Resin) based on the objective and reliable evidence of fair value of the different
elements, which is estimated based on stand alone sales of the different elements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Customers
deposits and other payments received prior to sales recognition are included in advances
from customers and deferred revenues in the balance sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

O - 10

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2       SIGNIFICANT ACCOUNTING POLICIES (Continued)

| | K. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
taxes are determined utilizing the asset and liability method based on the estimated
future tax effects of differences between the financial accounting and tax bases of
assets and liabilities under the applicable tax laws. Deferred income tax provisions and
benefits are based on the changes in the deferred tax asset or tax liability from period
to period. Valuation allowances are provided for deferred tax assets when it is more
likely than not that all or a portion of the deferred tax assets will not be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Concentration
of credit risk
| | -- | ----------------------------

| | Financial
instruments that are potentially subject to concentrations of credit risk consist
principally of cash and cash equivalents and trade receivables. The majority of the
Companys cash and cash equivalents are invested in dollar and Euro instruments with
major banks in Israel. 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 trade receivables are derived from sales to large and solid organizations
located mainly in the United States, Europe and the Far East. The Company performs
ongoing credit evaluations of its customers and to date has not experiences 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. In certain circumstances,
the Company may require letters of credit, other collateral or additional guarantees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Severance
Pay
| | -- | -------------

| | The
Companys liability for severance pay is calculated pursuant to the 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 is fully provided by monthly deposits with insurance policies,
pension funds and by an accrual.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
value of these policies and pensions funds is recorded as assets 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 the
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, 2002, 2003 and 2004 amounted to approximately
($50,000) $26,000 and ($28,000), respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

O - 11

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2  SIGNIFICANT ACCOUNTING POLICIES(Continued)

| | N. | Research
and development, net
| | -- | -----------------------------

| | The
Company expenses research and development costs, as incurred.
| | -----------------------------------------------------------------

| | Royalty
bearing participation from the Government of Israel via the Office of the Chief Scientist
(OCS) for the development of approved projects is recognized as a reduction of expenses
as the related costs are incurred.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Stock
based compensation
| | -- | ------------------------

| | The
Company grants restricted shares and stock options for a fixed number of shares to
employees, consultants and others. The Company accounts for stock options grants to
employees in accordance with APB Opinion No.25, Accounting for Stock Issued to
Employees and for stock options granted to consultants and others, in accordance
with FAS Statement No. 123 Accounting for Stock-based compensation using the
minimum value method. Under APB 25, compensation cost for employee stock option plans is
measured using the intrinsic value based method of accounting and is amortized by the
straight-line method against income, over the expected service period. FAS 123, Accounting
for Stock-Based Compensation, establishes a fair value based method of accounting
for employee stock options or similar equity instruments, and encourages adoption of such
method for stock compensation plans. However, it also allows companies to continue to
account for those plans using the accounting treatment prescribed by APB 25. The impact
of the measurement requirements of the FAS Statement No. 123 for stock options grants to
employees on the financial statements, using the minimum value method, was immaterial.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Comprehensive
income
| | -- | --------------------

| | The
Company has no comprehensive income (loss) components other than net income (loss).
| | ---------------------------------------------------------------------------------------

| | Q. | Reclassifications
| | -- | -----------------

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

O - 12

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2  SIGNIFICANT ACCOUNTING POLICIES(Continued)

| | R. | Recently
issued accounting pronouncements
| | -- | -----------------------------------------

| | 1. | In
December 2004, the Financial Accounting Standards Board (FASB)
               issued the revised Statement of Financial Accounting Standards (FAS)
               No. 123, Share-Based Payment (FAS 123R),
which                addresses the accounting for share-based payment transactions in
which the                Company obtains employee services in exchange for (a) equity
instruments of the                Company or (b) liabilities that are based on the fair
value of the                Companys equity instruments or that may be settled by
the issuance of such                equity instruments. This statement eliminates the
ability to account for                employee share-based payment transactions using APB
Opinion No. 25 or using the                minimum value method and requires instead that
such transactions be accounted                for using the grant-date fair value based
method. This statement will be                effective as of the beginning of the first
interim or annual reporting period                that begins after June 15, 2005
for public companies and the beginning of                the annual reporting period that
starts after December 15, 2005 for non                public companies. Early
adoption of FAS 123R is encouraged. This Statement                applies to all awards
granted or modified after the statements effective                date. In
addition, compensation cost for the unvested portion of previously                granted
awards that remains outstanding on the statements effective date
               shall be recognized on or after the effective date, as the related
services are                rendered, based on the awards grant-date fair value as
previously                calculated for the pro-forma disclosure under FAS 123.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates that the cumulative effect of adopting FAS 123R as of its adoption date
by the Company , based on the options outstanding as of December 31, 2004 will be
immaterial. This estimate does not include the impact of additional awards, (including
the 2004 Plan) which may be granted, or forfeitures, which may occur subsequent to
December 31, 2004 and prior to the adoption of FAS 123R. The Company expects that
upon the adoption of FAS 123R, the Company will apply the modified prospective
application transition method, as permitted by the statement. Under such transition
method, upon the adoption of FAS 123R, the Companys financial statements for
periods prior to the effective date of the statement will not be restated. The impact of
this statement on the Companys financial statements or its results of operations in
2006 and beyond will depend upon various factors, among them the Companys future
compensation strategy.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

O - 13

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 2  SIGNIFICANT ACCOUNTING POLICIES(Continued)

| | Recently
issued accounting pronouncements(cont.)
| | ------------------------------------------------

| | 2. | In
November 2004, the FASB issued FAS No. 151, Inventory Costs  an
               Amendment of ARB 43, Chapter 4" (FAS 151). This statement
               amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
               clarify the accounting for abnormal amounts of idle facility expense,
freight,                handling costs, and wasted material. This statement requires that
those items be                recognized as current-period charges. In addition, this
Statement requires that                allocation of fixed production overheads to the
costs of conversion be based on                the normal capacity of the production
facilities. This statement will be                effective for inventory costs incurred
during fiscal years beginning after June                15, 2005 (January 1, 2006 for the
Company). Earlier application of FAS 151 is                permitted. The provisions of
this statement shall be applied prospectively. The                Company does not expect
this statement to have a material effect on the                Companys financial
statements or its results of operations.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
December 2004, the FASB issued FAS No. 153, Exchanges of Non-Monetary
               Assets  An Amendment of APB Opinion No. 29 (FAS
               153).  FAS 153 amends APB Opinion No. 29, Accounting
for                Non-Monetary Transactions (Opinion 29). The amendments made by
FAS 153 are                based on the principle that exchanges of non-monetary assets
should be measured                based on the fair value of the assets exchanged.
Further, the amendments                eliminate the exception for non-monetary exchanges
of similar productive assets                and replace it with a general exception for
exchanges of non-monetary assets                that do not have commercial substance.
The provisions in FAS 153 are effective                for non-monetary asset exchanges
occurring in fiscal periods beginning after                June 15, 2005 (July 1, 2005
for the Company).  Early application of the FAS                153 is permitted. The
provisions of this Statement shall be applied                prospectively. The
Company does not expect the adoption of FAS 153 to have                a material effect
on the Companys financial statements or its results of                operations.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 3 
RECEIVABLES AND PREPAID EXPENSES

|                                           | December 31,
|------------------------------------------ | ------------
|
|
|
|
|VAT refunds                                |             
|Prepaid expenses                           |             
|Research and development grant receivables |             
|Other receivables                          |             
|                                           |             
|                                           |             
|                                           |             
|                                           |             

O - 14

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 4       INVENTORIES

|                         | December 31,
|------------------------ | ------------
|
|
|
|
|Components and materials |             
|Consumables              |             
|Work in process          |             
|Finished products        |             
|                         |             
|                         |             
|                         |             
|                         |             

NOTE 5      - PROPERTY, PLANT AND EQUIPMENT

|                               | December 31,
|------------------------------ | ------------
|
|
|
|
|
|Cost                           |             
|Computers and software         |             
|Office furniture and equipment |             
|Leasehold improvement          |             
|Machinery and equipment        |             
|                               |             
|                               |             
|                               |             
|                               |             
|                               |             
|Accumulated depreciation       |             
|Computers and software         |             
|Office furniture and equipment |             
|Leasehold improvement          |             
|Machinery and equipment        |             
|                               |             
|                               |             
|                               |             
|                               |             
|                               |             

| | Depreciation
expenses totaled $300,000, $336,000 and $531,000, in the years ended December 31, 2004,
2003 and 2002, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------

# NOTE 6  SHORT-TERM
LOANS

| | The
balance as of December 31, 2004 represents short-term bank loans denominated in dollars
and bearing interest of 5.37% per annum. The maturity date is within 30-45 days.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 7  ACCRUED
LIABILITIES AND OTHER LIABILITIES

|                               | December 31,
|------------------------------ | ------------
|
|
|
|
|Employees and related expenses |             
|Accrued expenses               |             
|Warranty provision             |             
|Advances from customers        |             
|Other                          |             
|                               |             
|                               |             
|                               |             
|                               |             

O - 15

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---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

# NOTE 8 
CONTINGENCIES AND COMMITMENTS

| | A. | Contingencies
| | -- | -------------

| | 1. | On
December 16, 2003, certain minority shareholders of the company filed a
               lawsuit claiming approximately NIS 7.8 million (approximately $1.75
million)                against the company, certain of its shareholders, and certain of
its directors.                The lawsuit alleges that the defendants acted in a manner,
which prejudiced the                rights of the minority shareholders, and were in
breach of the Companys                obligations to such shareholders. Among the
relief being claimed by the said                minority shareholders are claims for
compensation, claims that the Company will                return to them (with linkage
and interest) the amount of their investment in the                Company, or that the
defendants will purchase their shares in the Company, and a                demand for
changes to the terms of certain convertible loans made to the Company                by
certain of the defendants. The Company has asked for a dismissal of the case
               relating to one of the parties suing. The Company and its attorneys are
not able                to give any realistic assessment as to the outcome of this
matter, therefore no                provision was recorded.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
October 26, 2004, a competitive company filed a lawsuit against the company
               and its North America distributor in which the plaintiff accused the
company and                its distributor of infringing six US patents based on sales in
the US of the                Companys three  dimensional modeling equipment.
The plaintiff has                requested damages in an unspecified amount, as well as
triple damages and                attorneys fees for alleged willful infringement. The
plaintiff also seeks an                injunction to prevent further infringement of its
patents.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 21, 2005 the Company filed a lawsuit against the competitive company claiming
infringement of three of the Companys US patents.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | Because
the case was recently filed the Company and its attorneys are still in the process of
evaluating the case. As such, the Company and its attorneys are not in a position, at
this time, to comment on the likelihood of an unfavorable outcome of the litigation or on
the amount or range of potential loss.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, at this time the Company and its attorneys are not in a position to provide an
estimate on the cost of litigation if the case, were to proceed through trial.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company assesses the litigation costs for the year 2005 to be approximately $500,000,
which together with other expenses incurred in 2004 were recorded in the statement of
operations as special legal expenses and provision.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | A
former employee of the Company is suing the Company and one of its directors
               for a sum of NIS 315,000. The cause of action is an alleged breach of
certain                undertakings made by the Company to the plaintiff, including,
inter alia, an                undertaking to grant the plaintiff an option to purchase
1.75% of the                Companys shares. Additionally the plaintiff is claming
that the Company                allegedly failed to pay his salary and certain social
benefits. A statement of                defense by the Company has been filed.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
does not expect that the Company will incur substantial expenses in respect thereof;
therefore, no provision has been made for this lawsuit.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

O - 16

---

---



|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 8 - CONTINGENCIES AND COMMITMENTS(cont.)

| | B. | Commitments
| | -- | -----------

| | 1. | The
Company is committed to pay royalties of 3%-3.5% to the Government of Israel
               on sales of products in which the government participated in supporting
the                research and development expenses by way of grants, up to the amount
of the                grants received (dollar linked), plus annual interest based on the
LIBOR,                accruing from the date of grant. At the time the funding was
approved,                successful development of the project was not assured. In the
case of failure of                a project that was partly financed by royalty-bearing
Government participations,                the Company is not obligated to pay any
royalties to the Israeli Government.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, the maximum contingent liability in respect of these royalties
amounts to approximately 1.5 million dollars.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Companys facilities in Israel are rented under a lease agreement for 5
               years which end on December 31, 2006. The Company has two options to
extend the                agreement either by three additional years or by two additional
years following                the three for a total of 5 years. The rental payment under
this agreement is                $520,000 per annum. If the company doesnt exercise
the options mentioned                above the lessor will charge the Company for part of
the leasehold improvements                made by him up to maximum amount of about
$400,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
May 2002, the Company                leases part of the premises to third parties. The
annual rental revenue under                those agreements is $120,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company is committed to pay royalties of 6-7% on sales of consumables to one
               of its suppliers as defined in the agreement between the parties.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

O - 17

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|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

# NOTE 9  SHARE
CAPITAL

| | A. | Balance
as of December 31, 2004 and 2003 
| | -- | ------------------------------------------

|                                       | December 31,
|-------------------------------------- | ------------
|
|
|
|
|Authorized :                           |             
|Ordinary shares of NIS 0.01 par value  |             
|Preferred shares of NIS 0.01 par value |             
|Issued and fully paid up               |             
|Ordinary shares of NIS 0.01 par value  |             
|Preferred shares of NIS 0.01 par value |             

| | B. | On
September 20, 2004 the Company completed a capital raising round, under which
          8,267,641 preferred shares were issued in consideration of $2,099,980. In
          addition, the Company granted to the investors 4,133,822 warrants to purchase
          preferred shares in consideration of an exercise price of $0.254 per share.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | On
August 31, 2003, the Company received a convertible loan in the amount of
          $500,000 from one of its shareholders. The loan bore an interest of LIBOR + 4%
          per annum.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2003, the loan was converted into 1,990,173 preferred shares. In addition, on
that date the company issued 4,075,501 preferred shares in consideration of $1,035,000
and granted 3,032,839 warrants to purchase preferred shares in consideration of an
exercise price of $0.254 per share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | On
March 4, 2003 the authorized shares capital was increase by 93,500,000           ordinary
shares and by 386,500,000 preferred shares.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | On
that date, the company issued 77,663,122 preferred shares as follows:
| | ------------------------------------------------------------------------

| |  | 9,842,520
preferred shares in consideration of $2,500,000, which have been received in 2002.
| | - | --------------------------------------------------------------------------------------------

| |  | 22,480,621
 preferred  shares  pursuant to the Article of  Association of the company as anti
dilution                      agreements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | 45,339,981
 preferred  shares  as a  result  of  conversion  of  convertible  loans at the  amount
 of                      $8,965,436.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | E. | The
Company has decided to grant up to 2,500,000 stock options to key employees,
          consultants and directors as an incentive to attract and retain qualified
          personnel. Each option can be converted into one ordinary share at an exercise
          price to be determined. The total number of options granted are:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | Exercise price
|-------------------------------------- | --------------
|
|
|
|
|Balance as of December 31, 2003        |               
|Options forfeited                      |               
|                                       |               
|Balance of options  outstanding  as of |               
|December 31, 2004                      |               
|                                       |               
|Options  exercisable  as  of  December |               
|31, 2004                               |               
|                                       |               

O - 18

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|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

NOTE 9 - SHARE CAPITAL(cont.)

| | F. | In
2004, the Companys board of directors approved an Omnibus Incentive           Stock
Option and Restricted stock Plan (hereafter  the 2004 plan) under           which
up to 14,000,000 shares to be granted to key employees, consultants and
          directors. As of December 31, 2004 no options or shares were granted under the
          2004 plan.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 10  INCOME
TAXES

| | A. | On
October 14, 2001 the Company was granted Approved Enterprise                    status
under the law for the Encouragement of Capital Investment, 1959
                    (hereafter: the law) in the path of Alternative Benefits Program.
                    The program includes an investment of $ 2,050,000 in computers,
equipment, and                     leasehold improvements. Pursuant to the law, the
Company is entitled for                     exemption from taxes on income derived
therefrom for a period of 2 years,                     starting in the year in which the
Company first generated taxable income and                     reduced tax rate of 10-25%
for an additional period of 5-8 years.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of cash divided out of tax-exempt income, the Company will be
liable to corporate tax of 10-25% in respect of the amount distributed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits is subject to limits of the earlier of 12 years from the
commencement of production or 14 years from October 2001 (date of approval).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Company fulfilling the
conditions stipulated by the law, regulations published thereunder and the approval
letter.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
Company is subject to the Income Tax Law (Inflationary Adjustments), 1985,
                    measuring income on the basis of changes in the Israeli Consumer
Price Index.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | 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), which determined, among
other things, that the corporate                     tax rate is to be gradually reduced
to the following tax rates: 2004  35%,                     2005  34%, 2006
 32% and 2007 and thereafter  30%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | The
Company has a carry forward loss of approximately $33 millions for tax
                    purposes as of December 31, 2004. Since it is more likely than not
that the                     differed tax regarding the loss carry forwards will not be
utilized in the                     foreseeable future, no income tax benefits have been
recorded in respect                     thereof.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | The
subsidiary is taxed under the laws of its country of residence.
| | -- | -------------------------------------------------------------------

| | F. | The
Company and its subsidiary have not yet been assessed for income tax
                    purposes since their incorporation.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

O - 19

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|Objet Geometries Ltd.                         
|----------------------------------------------
|Notes to the Consolidated Financial Statements
|                                              
|In thousands of US Dollars                    

# NOTE 11  OTHER
OPERATING INFORMATION

| | A. | Research
and development expenses, net:
| | -- | ---------------------------------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|
|
|Expenses incurred                           |                        
|Less - grants from the government of Israel |                        
|                                            |                        
|                                            |                        
|                                            |                        
|                                            |                        

| | B. | Following
is data regarding major suppliers:
| | -- | --------------------------------------------

| | Certain
components used in our systems are only available from single or limited sources.
| | -----------------------------------------------------------------------------------------

O - 20

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and StockholderScitex Vision America, Inc.

We have audited the accompanying
balance sheet of Scitex Vision America, Inc. (a wholly owned subsidiary of Scitex Vision,
Ltd.) (the Company) as of December 31, 2004 and the related statements of operations,
stockholders deficit, and cash flows for the year then ended (not presented
separately herein). These financial statements are the responsibility of the
Companys board of directors and 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
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for purposes 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.
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 (not presented separately herein) present fairly, in all
material respects, the financial position of Scitex Vision America, Inc. (a wholly owned
subsidiary of Scitex Vision, Ltd.) as of December 31, 2004, and the results of their
operations and their cash flows for the year then ended in conformity with generally
accepted accounting principles in the United States of America.

| |  | /s/ Frazier & Deeter, LLC
Frazier & Deeter, LLC
| |  | -------------------------------------------------------------

Atlanta, Georgia, United
StatesFebruary 7, 2005

| |  | 
| |  | 

S - 1

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# SIGNATURES

The Registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this Annual Report on its behalf.

| |  | SCAILEX CORPORATION LTD.(Registrant)By: /s/ Raanan CohenRaanan CohenPresident of the Company& Chief Executive Officer
| |  | ----------------------------------------------------------------------------------------------------------------------------------

Date: June 28, 2006



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