----

----

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| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|--------------------------------|---------------------|-------------------------|

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|      |   |                                                                         | Page No. |
|-----------|--------|------------------------------------------------------------------------------|----------|
|      |   |                                                                         |     |
| PART I    |   |                                                                         |     |
|      |   |                                                                         |     |
| Item 1.   |   | Identity of Directors, Senior Management and Advisers                        | 6        |
|      |   |                                                                         |     |
| Item 2.   |   | Offer Statistics and Expected Timetable                                      | 6        |
|      |   |                                                                         |     |
| Item 3.   |   | Key Information                                                              | 6        |
|      |   |                                                                         |     |
| Item 4.   |   | Information on the Company                                                   | 35       |
|      |   |                                                                         |     |
| Item 4A.  |   | Unresolved Staff Comments                                                    | 73       |
|      |   |                                                                         |     |
| Item 5.   |   | Operating and Financial Review and Prospects                                 | 73       |
|      |   |                                                                         |     |
| Item 6.   |   | Directors, Senior Management and Employees                                   | 110      |
|      |   |                                                                         |     |
| Item 7.   |   | Major Shareholders and Related Party Transactions                            | 139      |
|      |   |                                                                         |     |
| Item 8.   |   | Financial Information                                                        | 145      |
|      |   |                                                                         |     |
| Item 9.   |   | The Offer and Listing                                                        | 148      |
|      |   |                                                                         |     |
| Item 10.  |   | Additional Information                                                       | 149      |
|      |   |                                                                         |     |
| Item 11.  |   | Quantitative and Qualitative Disclosures About Market Risk                   | 172      |
|      |   |                                                                         |     |
| Item 12.  |   | Description of Securities Other than Equity Securities                       | 172      |
|      |   |                                                                         |     |
| PART II   |   |                                                                         |     |
|      |   |                                                                         |     |
| Item 13.  |   | Defaults, Dividend Arrearages and Delinquencies                              | 172      |
|      |   |                                                                         |     |
|      |   |                                                                         |     |
| Item 14.  |   | Material Modifications to the Rights of Security Holders and Use of Proceeds | 172      |
|      |   |                                                                         |     |
| Item 15.  |   | Controls and Procedures                                                      | 172      |
|      |   |                                                                         |     |
| Item 16.  |   | [Reserved]                                                                   | 173      |
|      |   |                                                                         |     |
| Item 16A. |   | Audit Committee Financial Expert                                             | 173      |
|      |   |                                                                         |     |
| Item 16B. |   | Code of Ethics                                                               | 173      |
|      |   |                                                                         |     |
| Item 16C. |   | Principal Accountant Fees and Services                                       | 174      |
|      |   |                                                                         |     |
| Item 16D. |   | Exemptions from the Listing Standards for Audit Committees                   | 174      |
|      |   |                                                                         |     |
| Item 16E. |   | Purchases of Equity Securities by the Issuer and Associate Purchasers        | 174      |
|      |   |                                                                         |     |
| Item 16 F |   | Change in Registrant's Certifying Accountant                                 | 175      |
|      |   |                                                                         |     |
| Item 16 G |   | Corporate Governance                                                         | 175      |
|      |   |                                                                         |     |
| PART III  |   |                                                                         |     |
|      |   |                                                                         |     |
| Item 17.  |   | Financial Statements                                                         | 175      |
|      |   |                                                                         |     |
| Item 18.  |   | Financial Statements                                                         | 175      |
|      |   |                                                                         |     |
| Item 19.  |   | Exhibits                                                                     | 176      |

----

----

----

  

| Item 1. | Identity of Directors, Senior Management and Advisers |
|---------|-------------------------------------------------------|

  

| Item 2. | Offer Statistics and Expected Timetable |
|---------|-----------------------------------------|

  

| Item 3. | Key Information |
|---------|-----------------|

|   | Selected Financial Data |
|--------|-------------------------|

|                                                                                      |   | Years endedDecember 31 |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | 2008                   |   |   | 2009 |   |   | 2010 |   |
| Income:                                                                                   |   |                   |   |   |   |   |   |   |   |
| Sales of goods                                                                       |   | $                      | 6,237  |   |   | $ | 9,904 |   |   | $ | 9,608 |   |
| Gain from disposal of businesses and associates and changes in holding in associates, net |   |                   | 783    |   |   |   | 31,802 |   |   | $ | 160,010 |   |
| Financial income                                                                          |   |                   | 6,259  |   |   |   | 1,413 |   |   | $ | 2,739 |   |
|                                                                                      |   |                   | 13,279 |   |   |   | 43,119 |   |   | $ | 172,357 |   |

----

| Item 3. | Key Information (Cont.) |
|---------|-------------------------|

|                                                                                                     |   | Years endedDecember 31 |    |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                     |   | 2008                   |    |   | 2009 |   |   | 2010 |   |
| Cost and Expenses:                                                                                       |   |                   |    |   |   |   |   |   |   |
| Cost of sales                                                                                            |   |                   | 3,200   |   |   |   | 4,824 |   |   |   | 3,948 |   |
| Research and development expenses, net                                                                   |   |                   | 29,911  |   |   |   | 25,699 |   |   |   | 18,209 |   |
| Selling and marketing expenses                                                                           |   |                   | 7,525   |   |   |   | 8,985 |   |   |   | 6,551 |   |
| General and administrative expenses                                                                      |   |                   | 19,065  |   |   |   | 15,865 |   |   |   | 13,577 |   |
| Equity in losses of associates, net                                                                      |   |                   | 40,146  |   |   |   | 10,514 |   |   |   | 10,863 |   |
| Amortization of intangible assets                                                                        |   |                   | 1,061   |   |   |   | 1,416 |   |   |   | 1,484 |   |
| Other expenses, net                                                                                      |   |                   | 257     |   |   |   | 2,230 |   |   |   | 3,136 |   |
| Financial expenses                                                                                       |   |                   | 4,800   |   |   |   | 5,434 |   |   |   | 3,031 |   |
|                                                                                                     |   |                   | 105,965 |   |   |   | 74,967 |   |   |   | 60,799 |   |
|                                                                                                     |   |                   |    |   |   |   |   |   |   |   |   |   |
| Income (loss) before taxes on income                                                                     |   |                   | (92,686 | ) |   |   | (31,848 | ) |   |   | 111,558 |   |
|  Taxes on income (tax benefit)                                                                      |   |                   | (32     | ) |   |   | (2,453 | ) |   |   | 6,112 |   |
| Net income (loss)                                                                                        |   |                   | (92,654 | ) |   |   | (29,395 | ) |   |   | 105,446 |   |
| Net income (loss) attributable to Elron's shareholders                                                   |   |                   | (71,834 | ) |   |   | (14,304 | ) |   |   | 60,678 |   |
| Net income (loss) attributable to non-controlling interest                                               |   |                   | (20,820 | ) |   |   | (15,091 | ) |   |   | 44,768 |   |
| Net income (loss)                                                                                        |   | $                      | (92,654 | ) |   | $ | (29,395 | ) |   | $ | 105,446 |   |
| Net income (loss) per share attributable to shareholders:                                                |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic gain (loss) per share                                                                              |   |                   | (2.43   | ) |   |   | (0.48 | ) |   |   | 1.98 |   |
| Weighted average number of ordinaryshares used in computing basic gain (loss) per share (in thousands)   |   |                   | 29,650  |   |   |   | 29,650 |   |   |   |   29,655 |   |
| Diluted gain (loss) per share                                                                            |   |                   | (2.44   | ) |   |   | (0.49 | ) |   |   | 1.98 |   |
| Weighted average number of ordinaryshares used in computing diluted gain (loss) per share (in thousands) |   |                   | 29,650  |   |   |   | 29,650 |   |   |   |   29,666 |   |

----

| Item 3. | Key Information (Cont.) |
|---------|-------------------------|

|                                                                                                                      |   | Years endedDecember 31 |    |
|---------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                                                      |   | 2006                   |    |   | 2007 |   |
|                                                                                                                      |   |                   |    |   |   |   |
| Income:                                                                                                                   |   |                   |    |   |   |   |
| Net revenues                                                                                                         |   | $                      | 12,863  |   |   | $ | 4,371 |   |
| Equity in losses of affiliated companies                                                                                  |   |                   | (17,740 | ) |   |   | (20,416 | ) |
| Gain (loss) from disposal of businesses and affiliatedcompanies and changes in holdings inaffiliated companies, net  |   |                   | 2,547   |   |   |   | 14,854 |   |
| Other income (expenses), net                                                                                              |   |                   | 29,310  |   |   |   | (3,214 | ) |
| Financial income, net                                                                                                     |   |                   | 4,051   |   |   |   | 3,945 |   |
|                                                                                                                      |   |                   | 31,031  |   |   |   | (460 | ) |
| Costs and expenses:                                                                                                       |   |                   |    |   |   |   |   |   |
| Cost of revenues                                                                                                          |   |                   | 6,625   |   |   |   | 2,233 |   |
| Research and development costs, net                                                                                       |   |                   | 11,758  |   |   |   | 13,284 |   |
| Marketing and selling expenses, net                                                                                       |   |                   | 4,717   |   |   |   | 2,802 |   |
| General and administrative expenses                                                                                       |   |                   | 12,995  |   |   |   | 13,716 |   |
|                                                                                                                      |   |                   |    |   |   |   |   |   |
| Amortization of intangible assets and acquired in- process- research and development write-off                            |   |                   | 18      |   |   |   | 2,306 |   |
|                                                                                                                      |   |                   | 36,113  |   |   |   | 34,341 |   |

----

| Item 3. | Key Information (Cont.) |
|---------|-------------------------|

|                                                                                                         |   | Years endedDecember 31 |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                         |   | 2006                   |   |   | 2007 |   |
|                                                                                                         |   |                   |   |   |   |   |
| Income (loss) before taxes on income from continuing operations                                              |   |                   | (5,082 | ) |   |   | (34,801 | ) |
|  Taxes on income                                                                                        |   |                   | (1,110 | ) |   |   | (7,544 | ) |
| Net income (loss) from continuing operations                                                                 |   |                   | (6,192 | ) |   |   | (42,345 | ) |
| Net income (loss)*                                                                                           |   | $                      | (6,192 | ) |   | $ | (42,345 | ) |
| Net income (loss) per share:                                                                                 |   |                   |   |   |   |   |   |   |
|                                                                                                         |   |                   |   |   |   |   |   |   |
| Basic -                                                                                                      |   |                   |   |   |   |   |   |   |
| Net income (loss) attributable to Elron's shareholders                                                       |   | $                      | 0.10   |   |   | $ | (1.25 | ) |
| Weighted average number of ordinaryshares used in computing basic netincome (loss) per share (in thousands)  |   |                   | 29,532 |   |   |   | 29,619 |   |
|                                                                                                         |   |                   |   |   |   |   |   |   |
| Diluted -                                                                                                    |   |                   |   |   |   |   |   |   |
| Net income (loss) attributable to Elron's shareholders                                                       |   | $                      | 0.07   |   |   | $ | (1.27 | ) |
| Weighted average number of ordinaryshares used in computing diluted netincome (loss) per share in thousands) |   |                   | 29,624 |   |   |   | 29,619 |   |
|                                                                                                         |   |                   |   |   |   |   |   |   |

| * Reclassified according to ASC 810, "Consolidation" (originally issued as FAS 160). |   |   |   |   |   |   |   |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|

----

| Item 3. | Key Information (Cont.) |
|---------|-------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | As of January 1,                       |   |   |   | As of December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------|--------|--------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 2008                                   |   |   |   | 2008               |   |   |   | 2009 |   |   |   | 2010 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |  ( in thousands of $)   |   |
| Cash, cash equivalents and short-term and long term investments                                                                                                                                                                                                                                                                                                                                               |   | $      | 74,362                                 |   |   | $      | 17,507             |   |   | $ | 64,807 |   |   |   | 56,904 |   |
| Assets held for sale                                                                                                                                                                                                                                                                                                                                                                                          |   |   | -                                      |   |   |   | -                  |   |   |   | - |   |   |   | 17,211 |   |
| Investments in associate companies and in other companies and long term receivables                                                                                                                                                                                                                                                                                                                           |   |   | 158,059                                |   |   |   | 175,877            |   |   |   | 128,704 |   |   |   | 157,808 |   |
| Total assets                                                                  |   |   | 243,426                                |   |   |   | 219,579            |   |   |   | 213,080 |   |   |   | 250,338 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                     |   |   | 22,056                                 |   |   |   | 20,095             |   |   |   | 25,937 |   |   |   | 14,782 |   |
| Long term loans from banks and others                                                                                                                                                                                                                                                                                                                                                                         |   |   | 2,244                                  |   |   |   | 35,141             |   |   |   | 36,981 |   |   |   | 535 |   |
| Long term loans from shareholders                                                                                                                                                                                                                                                                                                                                                                             |   |   | -                                      |   |   |   | 6,176              |   |   |   | 16,737 |   |   |   | - |   |
| Employee benefits                                                                                                                                                                                                                                                                                                                                                                                             |   |   | 561                                    |   |   |   | 991                |   |   |   | 194 |   |   |   | 134 |   |
| Total equity                                                                  |   |   | 212,656                                |   |   |   | 146,051            |   |   |   | 122,093 |   |   |   | 219,493 |   |
| Equity attributable to Elron's shareholders                                                                                                                                                                                                                                                                                                                                                                   |   |   | 209,613                                |   |   |   | 139,506            |   |   |   | 126,469 |   |   |   | 195,921 |   |
| Capital stock                                                                 |   |   | 208,338                                |   |   |   | 209,558            |   |   |   | 209,968 |   |   |   | 214,806 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                         | As of December 31,   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |                 | 2006 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         | ( in thousands of $) |
| Cash, cash equivalents and short-term and long term investments                                                                                                                                                                                                                                                                                                                                              |                 | $ | 128,733 |   |
| Investments in affiliated companies and in other companies and long term receivables                                                                                                                                                                                                                                                                                                                         |                 |   | 168,607 |   |
| Total assets                                                                 |                 |   | 326,249 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                    |                 |   | 20,535 |   |
| Long term loans from banks and others                                                                                                                                                                                                                                                                                                                                                                        |                 |   | 2,113 |   |
| Accrued severance pay and retirement obligations                                                                                                                                                                                                                                                                                                                                                             |                 |   | 2,089 |   |
| Total equity*                                                                                                                                                                                                                                                                                                                                                                                                |                 |   | 299,984 |   |
| Equity attributable to Elron's shareholders*                                                                                                                                                                                                                                                                                                                                                                 |                 |   | 297,504 |   |
| Capital stock                                                                                                                                                                                                                                                                                                                                                                                                |                 |   | 283,801 |   |

|   | * Reclassified according to ASC 810, "Consolidation" (originally issued as FAS 160). |
|--------|-------------------------------------------------------------------------------------------|

----

| B.  | Capitalization and Indebtedness |
|----------|---------------------------------|

| C.  | Reasons for the Offer and Use of Proceeds |
|----------|-------------------------------------------|

| D.  | Risk Factors |
|----------|--------------|

----

----

----

----

----

|   | · | any worsening of the global economic condition; |
|--------|--------|-------------------------------------------------|

|   | · | the market price of our group companies that are publicly traded, in particular, Given Imaging; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | · | low trading volume of our ordinary shares, which has decreased and  may further decrease following our delisting from Nasdaq; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our group companies, their competitors or other third parties announcing technological innovations, new products, regulatory developments, new clinical data regarding current or future products or earnings or losses; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | delays or failures in the development of products of our group companies; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | periodic variations in results of operations of our group companies; |
|--------|--------|----------------------------------------------------------------------|

|   | · | factors that generally affect the market for stocks of medical device and other companies; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | political, economic or other developments affecting Israel and its region; and |
|--------|--------|--------------------------------------------------------------------------------|

|   | · | quarter-to-quarter fluctuations in our financial results. |
|--------|--------|-----------------------------------------------------------|

----

|   | · | Rafael does not cooperate with RDC in the realization of RDC's rights under the agreement; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | Rafael or RDC does not identify existing technology, or Rafael does not develop new technology, that is identified  suitable for being commercially exploited in non-military markets; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | RDC does not reach agreement with Rafael on the terms of any commercial exploitation; or |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | RDC is unable to obtain continued financing from its shareholders or otherwise, if and when required; or |
|--------|--------|----------------------------------------------------------------------------------------------------------|

|   | · | RDC faces difficulties in securing financial resources to support new and existing innovations. |
|--------|--------|-------------------------------------------------------------------------------------------------|

----

|   | · | Some foreign countries may not protect their proprietary rights as fully as do the laws of the United States; |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

|   | · | Competitors of our group companies may be issued patents that will prevent our group companies from using technologies, designs or methods that our group companies would like to integrate into their products; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Enforcing their rights may be time consuming and costly, thereby diverting management’s attention and company resources; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

|   | · | Measures such as entering into non-disclosure agreements afford us and our group companies only limited protection; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | · | Unauthorized parties may attempt to copy aspects of our group companies' products and develop similar products or to obtain and use information that they regard as proprietary; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Competitors may independently develop products that are substantially equivalent or superior to our group companies' products or that circumvent their intellectual property rights. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | Local Manufacturing Obligation: Products developed as a result of OCS funded R&D must, as a general matter subject to exclusions, be manufactured in Israel. The transfer of manufacturing capacity outside of Israel is subject to the OCS's prior written approval (except for the transfer of less than 10% of the manufacturing) and the payment of royalties at an increased rate (between 120% and 300% of the amount of the grant, less royalties already paid to the OCS). In January 2011 the R&D Law was amended to clarify that an increased royalties rate will be due even in those cases where the OCS approval for transfer of manufacturing capacity is not required |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Know-How transfer limitation: The R&D Law restricts the ability to transfer out of Israel know-how funded by OCS. Transfer of such know-how out of Israel requires prior OCS approval and is subject to certain payment to the OCS calculated according to formulae provided under the R&D Law. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | · | fluctuation of the New Israeli Shekel / U.S. Dollar representative rate of exchange; |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | inability of our group companies and their  subcontractors to obtain export licenses; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | · | imposition of tariffs and other barriers and restrictions; |
|--------|--------|------------------------------------------------------------|

|   | · | burdens of complying with a variety of foreign laws; |
|--------|--------|------------------------------------------------------|

|   | · | political and economic instability; |
|--------|--------|-------------------------------------|

|   | · | changes in diplomatic and trade relationships; and |
|--------|--------|----------------------------------------------------|

|   | · | acts of terror. |
|--------|--------|-----------------|

|   | · | any major hostilities involving Israel; |
|--------|--------|-----------------------------------------|

|   | · | a full or partial mobilization of the reserve forces of the Israeli army; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | the interruption or curtailment of trade between Israel and its present trading partners; |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | · | a significant downturn in the economic or financial condition of Israel; |
|--------|--------|--------------------------------------------------------------------------|

|   | · | a significant downgrading of Israel's international credit rating; |
|--------|--------|--------------------------------------------------------------------|

|   | · | labor disputes and strike actions; and |
|--------|--------|----------------------------------------|

|   | · | political instability. |
|--------|--------|------------------------|

----

----

----

----

----

|   | · | Given Imaging's ability to develop and introduce new technologies that will improve the clinical effectiveness of the PillCam COLON capsule; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Receipt of FDA marketing clearance in the United States or regulatory approvals in other countries such as Japan, Given Imaging cannot be sure that FDA clearance or other regulatory approvals will be granted. In order to obtain FDA clearance and other regulatory approvals, Given Imaging will be required to demonstrate that the PillCam COLON is safe and effective for its intended purpose; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | The existence of clinical data sufficient to support the use of the PillCam COLON for visualization or screening of the colon as compared with other colon visualization or screening methods. If clinical trials indicate that PillCam COLON is not as clinically-effective as other current methods, or if the PillCam COLON procedure causes unexpected complications or other unforeseen negative effects, Given Imaging may not obtain regulatory clearance to market and sell this capsule or physicians may be reluctant to use it; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The availability of sufficient clinical and cost-effectiveness data for the American Medical Association, or AMA, to provide a favorable permanent "current procedural terminology", or CPT, code and for private third-party payors to make an adequate reimbursement decision to provide coverage for the PillCam COLON procedure; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The availability of a reliable colon cleansing and preparation procedure for the PillCam COLON capsule, which is accepted by physicians and patients; and/or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The absence of other safe and effective colon cancer screening products, which, if brought to market by third parties, may make the PillCam COLON capsule obsolete. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

|                                                                                                                             | Risk Factor Influence on the Company |
|----------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|
|                                                                                                                             | Major  Influence                | Medium Influence | Minor Influence |
| Specific Risks Affecting Elron                                                                                                   |                                      |   |   |
|  If our cash resources are insufficient to finance our operations, we may have to seek alternative sources of financing.    |                                      | ü |   |
| Our controlling shareholder, Discount Investment Corporation, or DIC, has the ability to control our business and affairs.       | ü                                    |   |   |
| We have voluntarily delisted from the Nasdaq Global Select Market and intend to seek to terminate our Exchange Act registration. |                                      |   | ü |

----

| We may be deemed to be an investment company under the U.S. Investment Company Act of 1940.                                                                                                                                                                                                                        |   |   | ü |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.                                                                                                                                                   |   |   | ü |
| It may be difficult to serve process or to enforce a U.S. judgment against us, our directors and our officers.                                                                                                                                                                                                     |   |   | ü |
| Risks Affecting Us and the Companies in Our Group                                                                                                                                                                                                                                                                  |   |   |   |
| Ongoing uncertainty regarding the duration and extent of the recovery from the recent economic downturn and in global economic conditions generally has adversely affected and may continue to adversely affect our and our group companies' results and financial condition and could lead to impairment charges. |   | ü |   |
| Our financial results and financial condition are principally impacted by the results of operation of, and the value of our holdings in, our group companies, which are primarily concentrated in Given Imaging.                                                                                                   | ü |   |   |
| Our financial results significantly depend on the results of operations of our group companies, which continue to invest heavily in their development and have generated losses.                                                                                                                                   | ü |   |   |
| Our financial results and our cash reserves are directly impacted by our ability to conclude "exit" transactions at significant values, which has been made more difficult by the global economic downturn.                                                                                                        | ü |   |   |
|  We compete with other entities for acquisition and investment opportunities.                                                                                                                                                                                                                                 | ü |   |   |
| We may face difficulties in our ability to dispose of our shares in companies in our group.                                                                                                                                                                                                                        | ü |   |   |
| Our ability to invest in companies or conclude exit transactions may be adversely affected and/or prevented by anti-trust regulations both in Israel and abroad.                                                                                                                                                   |   |   | ü |
| We may not receive the entire proceeds due to us from exit transactions of our group companies.                                                                                                                                                                                                                    |   | ü |   |
| Our market value significantly depends on the market values of publicly traded companies in our group.                                                                                                                                                                                                             | ü |   |   |
| The market price of our ordinary shares is subject to fluctuations.                                                                                                                                                                                                                                                | ü |   |   |
| Many of our group companies may face difficulties in obtaining future financing on favorable terms or at all.                                                                                                                                                                                                      | ü |   |   |
| Bank of Israel regulations limit our and our group companies' ability to borrow from Israeli banks.                                                                                                                                                                                                                |   |   | ü |

----

| Our results, and the value of our investments, are affected by volatility in the securities markets.                                                                                                                                                                                                  | ü |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| There is no assurance that our subsidiary, RDC, will be able to continue to develop technologies and/or new companies.                                                                                                                                                                                |   | ü |   |
| Most of our group companies are dependent upon proprietary technology, which may be infringed by, or may infringe upon, the proprietary technology of others.                                                                                                                                         | ü |   |   |
| The technological fields within which our group companies operate involve a high level of risk and uncertainty.                                                                                                                                                                                       | ü |   |   |
| Many of our group companies experience intense competition.                                                                                                                                                                                                                                           |   | ü |   |
| Israeli government programs in which certain of our group companies participate may be terminated or reduced in the future and may be restrictive in their terms.                                                                                                                                     |   |   | ü |
| We and our group companies may have difficulty retaining key employees.                                                                                                                                                                                                                               |   | ü |   |
| Many of our group companies depend on international operations.                                                                                                                                                                                                                                       |   |   | ü |
| Conditions in Israel may affect our operations and the operations of our group companies.                                                                                                                                                                                                             |   |   | ü |
| Our and our group companies' operations could be disrupted as a result of the obligation of personnel in Israel to perform military service.                                                                                                                                                          |   |   | ü |
| The results of operations of our group companies may be harmed by foreign currency exchange rate fluctuations.                                                                                                                                                                                        |   |   | ü |
| The results of operations of our group companies may be harmed by foreign currency exchange rate fluctuations.                                                                                                                                                                                        |   |   | ü |
| Product liability claims could adversely affect the business results of our group companies, especially those operating in the medical device industry.                                                                                                                                               |   |   | ü |
| Product regulation may adversely affect the ability of our medical device group companies to bring new products to market or to continue to supply existing products to the market.                                                                                                                   | ü |   |   |
| Because the medical device industry is litigious, our medical device group companies are susceptible to intellectual property suits that could cause our medical device group companies to incur substantial costs or pay substantial damages or prohibit them from selling their products.           | ü |   |   |
| If our medical device group companies are unable to obtain reimbursement coverage from third-party healthcare payors for procedures using their products, or if reimbursement is insufficient to cover the costs of purchasing their products, demand for their products may be adversely affected.   |   | ü |   |
| Changes in legislation and government regulation of the healthcare industry, as well as third-party payors' efforts to control the costs of healthcare, could materially adversely the business of our medical device group companies.                                                                |   | ü |   |
| The development of products by our group companies in the medical device field is dependent upon the success of clinical trials.                                                                                                                                                                      | ü |   |   |
| Risks Affecting Our Holdings in Given Imaging.                                                                                                                                                                                                                                                        | ü |   |   |
| The price of Given Imaging's shares could fluctuate significantly as a result of a number of factors, including varying quarterly financial performance or its failure to meet its guidance or the expectations of analysts or investors, which may lead to additional volatility in its share price. | ü |   |   |
| Risks Affecting Our Holdings in Starling                                                                                                                                                                                                                                                              |   | ü |   |

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| Item 4. | Information on the Company |
|---------|----------------------------|

| A.  | History and Development of the Company |
|----------|----------------------------------------|

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|   | · | Delisting and Transition to IFRS.  On January 6, 2010, we voluntarily delisted from the Nasdaq Global Select Market. We further intend, at this stage, to terminate the registration of our ordinary shares under the Exchange Act as soon as possible under SEC rules, thereby releasing us from our obligation to file annual and other reports with the SEC. Deregistration will be possible if either (1) the average daily trading volume, or ADTV of our ordinary shares in the United States has been no greater than 5% of the worldwide ADTV of our ordinary shares during a recent consecutive 12-month period or (2) on a date within 120 days before filing the deregistration form, our ordinary shares are held of record by less than 300 persons resident in the U.S. or less than 300 persons on a worldwide basis. We cannot project when and if such deregistration will take place.  Our ordinary shares will continue to be listed and traded on the TASE, our principal trading market. So long as we are listed on TASE we  will continue to make public reports with the Israeli Securities Authority and TASE, filed in Hebrew, in accordance with the Israeli securities laws and regulations including an annual report, filed with the Israeli Securities Authority simultaneously with this Annual Report and available at www.magna.co.il. In addition, our quarterly financial statements and any material event are reported in immediate releases in Hebrew and translated into English and filed with the SEC under Form 6K. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | As a result of the delisting from Nasdaq and transition to reporting according to Israeli securities laws and regulations, commencing from our 2009 financial reports, we were required to change and accordingly changed our financial reporting principles from U.S. GAAP to IFRS. As permitted under the Exchange Act and the regulations promulgated thereunder, our financial statements included herein are prepared in accordance with IFRS (without reconciliation to US GAAP). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Investment in Nulens Ltd. In January 2010, NuLens completed a financing round of approximately $4.6 million, in which we invested $2 million. NuLens operates in the field of intra-ocular lenses, or IOLs, mainly for the treatment of cataracts, presbyopia and low vision. We hold approximately 35% of NuLens' outstanding shares. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Sale of investment in Galil Medical Ltd. In  March 2010, our Audit Committee and Board of Directors approved the transaction in which we, together with RDC and DIC (who together held approximately 42% of Galil) and certain other shareholders of Galil  entered into an agreement to sell all their respective holdings in Galil to certain other Galil shareholders for an immediate payment in the aggregate amount of approximately $1.33 million and for an additional contingent future payment, conditional upon certain future events occurring within 24 months from the consummation of the above transaction. The consideration was allocated among the selling shareholders proportionally to the number of Galil shares sold by each of them, irrespective of their class and liquidation preference. Accordingly, our and RDC's portion in the immediate payment was approximately $0.4 million and approximately $0.5 million, respectively. In April 2010, subsequent to the receipt of all required approvals, the transaction was completed. As a result of the sale, in the second quarter of 2010, we recorded a gain (attributable to the Company's shareholders) in the amount of approximately $0.5 million (a consolidated net gain of approximately $0.8 million). Galil Mediical is engaged in the production of medical devices for the treatment of benign and malignant diseases through cryotherapy. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sale of Medingo Ltd. In April, 2010, a definitive agreement was executed for the sale of all of the shares of Medingo to F. Hoffman-La Roche Ltd. Medingo, which prior to the sale, was held 92% by us, including 84% by RDC, is developing an insulin patch pump aimed at improving the quality of life for people living with diabetes. The principal terms of the sale included, inter alia, the following: (i) upon completion of the transaction, the selling shareholders received consideration in the aggregate amount of $160 million, subject to certain adjustments, of which an amount of $29 million is held in escrow for a period of up to 24 months to cover mainly potential indemnification payments which may be due from the selling shareholders in connection with breaches, if any, of the sale agreement and certain potential future claims relating to Medingo, if any, (ii) the selling shareholders will receive gradual payments of additional contingent consideration of up to $40 million conditional upon Medingo achieving, gradually, over a certain period, certain operational milestones. Our and RDC's maximum potential indemnification obligations under the sale agreement are limited to approximately 110% of our respective parts of the total consideration amount except – with respect to each of us and RDC separately – in case of fraud or willful misconduct by us or RDC, respectively. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | i. | In accordance with Medingo's capital structure and the shareholders' rights to Medingo's capital, we and RDC received approximately $13.7 million and approximately $93.5 million, respectively, upon completion of the transaction. During the third quarter of 2010,  we and RDC additionally received approximately $0.2 million and approximately $1.5 million, respectively for certain adjustments to the initial consideration, and may receive in the future additional amounts of up to approximately $2.7 million and up to approximately $20 million, respectively, from the amount held in escrow in connection with the transaction for a period of up to 24 months, and up to approximately $3 million and up to approximately $29.2 million, respectively, out of the contingent consideration. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ii. | We recorded a net gain (attributable to the Company's shareholders) in the second quarter of 2010 in the amount of approximately $70.8 million (a consolidated net gain in the amount of approximately $124.7 million). An additional net gain (attributable to the Company's shareholders), currently estimated at an aggregate amount of up to approximately $13.9 million (a consolidated net gain of up to approximately $24.9 million) may be recorded at later stages, taking into consideration certain future events affecting the amounts we and RDC may receive from the contingent consideration. Our net gain amounts include our share of the net gain of RDC in respect of the aforementioned sale. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sale of Teledata Networks Ltd. In April 2010, a definitive merger agreement was executed between Teledata, its principal shareholders, including us and Enablence, a foreign company, publicly traded on the TSXV which designs, manufactures and sells optical components and systems to a global customer base,  (for the sale, by way of merger, of all of the outstanding shares of Teledata to Enablence . Teledata, 21% held by us prior to the merger, provides innovative access products and solutions for both traditional and Next Generation Networks, or NGN, to telecom operators and service providers. The principal terms of the merger agreement include, inter alia, the following: (i) upon completion of the transaction, consideration was received in the aggregate amount of $50 million, including $10 million payable in cash, $10 million paid in non-tradable bonds of Enablence and $30 million payable in publicly tradable shares of Enablence. Of this consideration, shares of Enablence equivalent to $5 million were deposited in escrow for a period of up to 12 months to cover, mainly, possible indemnification which may become due to Enablence in connection with breaches, if any, of the merger agreement by any of the other parties thereto and possible future claims relating to Teledata, if any, (ii) upon completion of the transaction all outstanding shareholders' loans granted to Teledata by us (in the aggregate amount of approximately $0.8 million, and which are convertible into Teledata shares) were assigned to Enablence. The abovementioned consideration includes the consideration for such assignment, (iii) each of the principal shareholders shall only be liable for part of the indemnification amounts that may become due to Enablence, according to its share of the consideration, and will not be liable for any breaches of the merger agreement by any of the other principal shareholders. The liability of each principal shareholder for its representations and obligations to Enablence will be limited to its share of the aggregate consideration, while its liability for representations and obligations relating to Teledata shall be limited (except in certain matters) to each such shareholder's share of the consideration held in escrow described above, (iv) the shares of Enablence received as part of the consideration are subject to a lock-up period of 6 to 12 months commencing from the closing date of the transaction  of which   as of March 1, 2011 30% has been released from the lock up, and (v) on the closing date of the transaction, all shareholders' guarantees granted by the principal shareholders to Teledata, and all obligations their commitments to grant shareholders guarantees or collateral for loans to Teledata, were cancelled. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | i. | In accordance with Teledata's capital structure and the shareholders' rights to Teledata's capital, we received aggregate proceeds of approximately $23.2 million, including approximately $3.0 million paid in cash, approximately $3.8 million paid in bonds of Enablence and approximately $16.4 million paid in shares of the Enablence based on their price on the TSX Venture Exchange on the closing date of the sale (of which Enablence shares representing approximately $2.3 million, based on their share price on the TSX Venture Exchange on the closing date of the transaction, are held in escrow for up to 12 moths). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ii. | Pursuant to the terms of the transaction, guarantees and commitments to grant guarantees which were provided in the past by us to Teledata in the aggregate amount of approximately $4.2 million were cancelled. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | iii. | We recorded a net gain in the second quarter of 2010 in the amount of approximately $22.4 million. |
|--------|------|----------------------------------------------------------------------------------------------------|

|   | · | Investment in Kyma Medical Technologies Ltd. In September 2010, we and Kyma signed an investment agreement according to which we invested $1 million in Kyma for 27% of Kyma's outstanding shares. Kyma is developing a remote, radar technology based, system for continuous monitoring of chronic heart failure, or CHF, to enable early treatment of pulmonary edema thereby reducing unnecessary hospitalization.  In January 2011, we exercised our right, pursuant to the investment agreement to invest an additional $4 million thereby increasing our shareholdings to 65% of Kyma's outstanding shares. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Repayment of Loans to Israel Discount Bank and DIC. In June 2010, our Audit Committee and Board of Directors approved in accordance with the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760-2000, the prepayment of our entire debt to Israel Discount Bank Ltd.in respect of loans granted to us by the bank in the aggregate amount of $30 million (without incurring a prepayment commission), on the interest payment dates in respect of the debt, the last of which was in September 2010. Therefore, and pursuant to the terms of the loan agreements with DIC, upon repayment of our entire debt to the bank in September 2010, our entire debt in respect of the loans granted to us by DIC in the aggregate amount of approximately $17.5 million (including interest) was repaid as well (without incurring a prepayment commission). The average effective rate of interest paid to DIC and the bank was 4.63% and 1.67% respectively (without taking into account any increase in the consumer price index or any change in the NIS-Dollar exchange rate) per year. Upon repayment of our  entire debt to the bank, the pledge on 3,359,676 Given Imaging shares held by us in favor of the Bank, then representing approximately 11% of Given Imaging's outstanding shares, was removed. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Repayment of RDC bank loans. During June 2010, RDC's entire debt in respect of loans granted to it in the amount of $10 million by Bank Mizrahi Tefahot Ltd. was repaid (without incurring a prepayment commission). As a result of such repayment, the pledge on 2,467,334 Given Imaging shares held by RDC in favor of this bank, then representing approximately 8% of Given Imaging's outstanding shares, was removed. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Repayment of RDC Shareholder loans During June 2010, RDC's entire debt in respect of loans granted to it by its shareholders (us and Rafael) in the aggregate amount of approximately $32 million was prepaid (without incurring a prepayment commission), of which an amount of approximately $13 million was repaid to Rafaeland an amount of approximately $19 million was repaid to us. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | RDC Dividend. In August 2010, RDC paid a special cash dividend in the aggregate amount of approximately $30 million. Our share of this dividend amounted to approximately $15 million. The balance of the dividend amount was distributed to Rafael. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Zvi Slovin resigns as Co- CEO. In June 2010, Dr. Zvi Slovin, resigned, at his instance and request, his position as our Co- CEO with effect from June 30, 2010. As a result, Mr. Ari Bronshtein became sole CEO of the Company.  Dr. Slovin remains employed by DIC and continues to provide us with business guidance and serves as a director of several group companies. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Investment in Medingo. In February 2008, Medingo received the second installment in the amount of $12.5 million out of the total amount of approximately $29 million raised in November 2007. As part of the financing round and in the aggregate, RDC invested $18 million, we invested $6.1 million (including $4.2 million resulting from the conversion of convertible loans previously granted to Medingo), and a U.S. venture capital fund together with other investors invested $5.1 million. As a result of the above transaction, we beneficially owned approximately 92% of the outstanding shares representing all outstanding shares of Medingo owned by us and RDC, or approximately 50% representing our direct holding and our concatenated share of the holding of RDC. In February 2009, then shareholders of Medingo signed a convertible loan agreement for extending to Medingo, loans in the aggregate amount of $5.5 million of which our share was $0.5 million and RDC's share was $4.6 million. In July 2009, then shareholders of Medingo, including us and RDC, granted Medingo an additional convertible loan in the aggregate amount of $8 million of which our and RDC's share was approximately $0.7 million and $6.7 million, respectively. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Impliant, Inc. In March 2008, we and other existing shareholders of Impliant granted a convertible loan in the amount $10 million to Impliant, in two installments, of which we granted $6 million. The first installment in the amount of $5 million was granted immediately and the second installment was granted in June 2008 following Impliant's achievement of a certain milestone as stipulated in the loan agreement. As a result of the above, we commenced consolidating Impliant as of March 31, 2008. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Investments in Pocared Diagnostics Ltd. |
|--------|--------|-----------------------------------------|

|   |  In March 2008, we granted Pocared a convertible loan in the amount of $5.0 million out of an aggregate amount of $14.0 million then raised by Pocared. The balance of the loan was granted by other existing shareholders of Pocared and a new investor. During April 2009, Pocared completed a financing round of $6.6 million of which our share was $2.4 million. Following the above transaction, we hold approximately 31% of Pocared's share capital on a fully diluted and on as converted basis. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Tender Offer to Purchase Given Imaging Shares. In June 2008 we completed a tender offer to purchase 1,462,640 ordinary shares of Given Imaging, representing 5% of Given Imaging's issued outstanding shares, for $16.54 per share in the aggregate amount of $24.5 million (including approximately $0.3 million related costs). After the transaction, our direct and indirect concatenated (through RDC) holding in Given Imaging increased to approximately 27.8% of Given Imaging's issued and outstanding shares (or a 32.4% beneficial ownership). DIC holds 16.1% of Given Imaging. Therefore, we together with DIC and RDC held approximately 48.5% of the issued and outstanding shares of Given Imaging. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Investment in BrainsGate. In August 2008, BrainsGate completed a financing round of $27.5 million. The round was initially an internal financing round (which was signed in January 2008) of $12.5 million of which we invested approximately $5.5 million. The financing round was increased in August 2008 by an additional $15.0 million of which $12.5 million was invested by Johnson & Johnson Development Corporation joined by VC-Fund Agate Medical Investments LP and the balance by existing shareholders, of which we invested an additional $1 million. Following payment of all aggregate investments, we hold approximately 21% of BrainsGate on a fully diluted and on an as converted basis. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Purchase of convertible debentures of Starling. During October 2008, we purchased 7,638,323 convertible debentures of Starling (previously issued by Starling as part of its initial public offering on the TASE in June 2007) in private transactions and additional 10,139,455 convertible debentures as a part of partial tender offer for a total amount of approximately NIS 6.9 million and NIS 9.2 million respectively (then approximately $2.0 million and $2.4 million respectively). Subsequent to the abovementioned transactions, we beneficially owned approximately 62% of the outstanding convertible debentures. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Dividend Distribution by Given Imaging. In March 2009, Given Imaging distributed a special cash dividend of approximately $0.54 per share, or $16 million in the aggregate, of which our and RDC's share was approximately $3.7 million and $1.4 million, respectively. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Dividend Distribution by NetVision. In April 2009, NetVision (TASE: NTSN) (then held 15.24% by us) distributed cash dividends of approximately NIS3.08 and NIS0.86 per share, respectively (approximately $0.73 and $0.23, respectively as of date of declaration) or NIS90 million and NIS26.0 million, respectively (approximately $21.2 million and $7.0 million, respectively as of date of declaration), in the aggregate. Our share in the above-mentioned dividends amounted to approximately NIS14.2 million and NIS4 million, respectively (approximately $3.4 million and $1 million, respectively, as of date of payment). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sale of 3DV. In June 2009, 3DV, in which we beneficially owned approximately 51% of the outstanding shares representing all the shares owned by us and RDC (or approximately 36% representing our direct holding and our concatenated share of the holding of RDC) completed the sale of substantially all of its assets to a third party and entered into voluntary liquidation. 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds of which we and RDC received approximately $3.1 million and $3.7 million, respectively. As a result of the sale of 3DV’s assets, we recorded a gain of approximately $6.1 million in 2009. In the third quarter of 2010, the balance of the consideration in the amount of $0.4 million and $0.6 million then held in escrow was released and paid to us and RDC respectively resulting in us recording an additional gain of approximately $1 million in the third quarter of 2010. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sela Semiconductor Engineering Laboratories Ltd. In September 2009, Camtek Ltd. an Israeli company publicly traded on the NASDAQ and the TASE: CAMT, acquired the entire share capital of SELA, in which we beneficially owned approximately 75% of the outstanding shares representing all the shares owned by us and RDC (or approximately 50% representing our direct holding and our concatenated share of the holding of RDC). As consideration for the shares, Camtek will pay SELA's selling shareholders contingent future payments in the aggregate amount of up to $9.5 million, depending on SELA's future revenues, of which our and RDCs portions are estimated to be up to $1.8 million and $4.5 million, respectively. To date, we and RDC have received $0.07 million and $0.17 respectively on account of such future payments. As a result of the transaction we recorded a gain of approximately $1.1 million in 2009 and an additional gain in the fourth quarter of 2010 of $1 million. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Sale of NetVision Ltd. In October 2009, we completed the sale of our holdings in NetVision, then representing 15.24% of NetVision to our associates, DIC and Clal Industries and Investments Ltd., or CII, in consideration of an aggregate amount of NIS 228.7 million (then approximately $60.7 million). DIC and CII are both majority-owned subsidiaries of IDBD. As a result, we recorded, in the fourth quarter of 2009, a gain of approximately $21.9 million. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | ChipX Inc. In November 2009, ChipX, then 28% held by us, completed a merger with GigOptix Inc, or GigOptix., a U.S. company traded "over-the-counter" in the United States (GGOX.OB), pursuant to which the shareholders of ChipX received 40% of the shares of the merged company, constituting about 26% of the total shares on a fully diluted basis, of which we own 8.71% on an issued and outstanding basis. As a result of the merger, we recognized a gain of approximately $1.5 million during the fourth quarter of 2009. These shares were subject to a lock up which ended on January 2, 2011. During the first quarter of 2011, we sold approximately 450,000 shares of GigOptix in open market sales for approximately $1.3 million as a result of which we will record, in the first quarter of 2011 a gain in the amount of $0.4 million. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Loans to Starling. In December 2009, we and RDC signed a loan agreement to provide Starling with a loan in the aggregate amount of $3.9 million, of which our and RDC's share is approximately $1.8 million and $2.1 million, respectively. The total loan amount was granted to Starling in a single installment during January 2010. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| B.  | Business Overview |
|----------|-------------------|

| (a) | Qualitative criterion – a company is a main company from our perspective, even though it does not meet our quantitative criterion below, due to our significant investment commitments therein, significant risks and exposure in connection with an investment therein, the potential inherent in the investment therein from the management’s perspective, significant value (current or potential) of our holding therein . |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (b) | Quantitative criterion – a company in which the total investment on our Statement of Financial Position exceeds 10% of our equity. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|

|  Company name                         |     Field |  Method of Accountingin Elron's Financial Statements |     Elron's and RDC's right to appoint directors      |    Percentage of shareholdings and voting rights | Percentage holding fully  diluted shareholdingandvoting rights |
|--------------------------------------------|-------------------------------|-----------------------------------------------------------|---------------------------------------------------------------------------|-----------------------------------------------------------------|-------------------------------------------------------------------------------|
|  ATLANTIUM TECHNOLOGIES LTD           | Clean technology              |   Equity Method                                 |  Two  directors (out of eight  directors) 1 | 23.44%                                                          | 20.22%                                                                        |
|  AQWISE - WISE WATER TECHNOLOGIES LTD | Clean technology              | Equity Method                                             |  Three directors (out of ten directors) 2                       |  34.03%                                                    |  29.95%                                                                  |
|  ACTYSAFE LTD                         | Motor Vehicle Safety          | Consolidated                                              |  five directors (out of five directors) 3                       |   100%4                                               |   85% 4                                                             |

|  RDC                               | Holding company  | Consolidated                         | Four directors (out of seven directors)          | 50.1%        | 50.1%        |
|-----------------------------------------|------------------|--------------------------------------|--------------------------------------------------|--------------|--------------|
|  B.P.T. BIO-PURE TECHNOLOGIES LTD. | Clean technology | Investments available for sale       |  one director (out of seven directors) |  17.45% |  15.88% |
|  BRAINSGATE LTD                    | Medical devices  | Equity Method                        |  one director (out of seven directors) | 23.28%       | 20.83%       |
|  JORDAN VALLEY SEMICONDUCTORS LTD  | Semiconductors   |  Investments available for sale |  one director (out of six directors)   |  18.83% |  17.56% |

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|     Company name |     Field |    Method of Accountingin Elron's Financial Statements |     Elron's and RDC's right to appoint directors                                                                                                                    | Percentage of shareholdings and voting rights | Percentage holding fully  diluted shareholding and voting rights |
|--------------------------------------|-------------------------------|-----------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------|-------------------------------------------------------------------------------------------|
| GIVEN IMAGING LTD.                   | Medical devices               | Equity Method                                                         | Public companytwo directors (out of nine directors who serving on the date of the report) are  officeholders of Elron                                                         |  31.73% 5(8.92% by RDC)                  |  26.10%5(7.34 % by RDC)                                                              |
|  WAVION LTD                     | Communications technology     | Consolidated                                                          | three directors (out of  five directors                                                                                                                                       | 66.96%                                        | 54.91%6                                                                                   |
| NOTAL VISION LTD                     |  Medical devices         |  Investments available for sale                                  |  One  director (out of seven directors)                                                                                                                             |  22.63%                                  |  17.29%                                                                              |
| NULENS LTD                           | Medical devices               | Equity Method                                                         | Two directors (out of nine directors)                                                                                                                                              | 34.74%                                        | 30.10%                                                                                    |
| STARLING ADVANCED COMMUNICATIONS LTD | Communications technology     | Consolidated                                                          |  Public company.three  directors (out of 9 directors who serve on the date of the report)  serve on Starling's board of directors are office holders of Elron7 | 68.05% 5(36.44% by RDC)                       | 59.83% 5(30.48 % by RDC)                                                                  |
| SAFEND LTD                           | Information technology        | Equity Method                                                         | one director (out of five directors)                                                                                                                                               | 25.61%                                        | 20.25%                                                                                    |
| SYNC-RX LTD                          | Medical devices               | Consolidated                                                          |  Three  directors (out of five directors) 8                                                                                                                         |  43.82%(87.47% byRDC) 4                  |  39.13%4(78.10% by RDC)                                                              |
| POCARED DIAGNOSTICS LTD              | Medical devices               | Equity Method                                                         |  one director  (out offour directors) 9                                                                                                                                  | 31.51%                                        | 30.32%                                                                                    |
|  PLYMEDIA ISRAEL (2006) LTD     | Internet technology           | Equity Method                                                         |  one director ( out of five directors)                                                                                                                                        | 27.55%                                        | 21.84%                                                                                    |
| KYMA MEDICAL TECHNOLOGIES LTD        | Medical devices               | Equity Method                                                         |  2 directors (out of  4  directors) 10                                                                                                                         | 27.32%                                        | 20.00%                                                                                    |

| 1 | Only one director was actually appointed by Elron. |
|---|----------------------------------------------------|

| 2 | Only two directors were actually appointed by Elron. |
|---|------------------------------------------------------|

| 3 | Four directors were actually appointed by RDC. |
|---|------------------------------------------------|

| 4 | Company only held by RDC. |
|---|---------------------------|

| 5 | Direct percentage of holdings by Elron and 100% of RDC''s percentage of shareholdings and voting rights. |
|---|----------------------------------------------------------------------------------------------------------|

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| 6 | Convertible loans not take into account, since the amount of the shares issuable upon conversion is not known in advance. |
|---|---------------------------------------------------------------------------------------------------------------------------|

| 7 | Elbit Systems Ltd. is also a shareholder of Starling. According to an agreement between Elron, RDC and Elbit Systems Ltd., Elron and RDC have undertaken to support the appointment of one director nominated by Elbit Systems Ltd. on Starling's Board of Directors. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 8 | Two directors were actually appointed by RDC. |
|---|-----------------------------------------------|

| 9 | Subsequent to the period covering this Annual Report, we received the right to appoint an additional director on Pocared's Board of Directors, such that we have the right to appoint two (out of six directors). For additional details, see Item 4 above. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10 | Subsequent to the period covering this Annual Report, Kyma became a consolidated company, as our shareholdings on Kyma increased to 65% and we received the right to appoint an additional director on Kyma's Board, such that we have the right to appoint three directors (out of five directors). For additional details, see Item 4 above. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 1.  | Group Companies Operating in the Medical Devices Field |
|----------|--------------------------------------------------------|

|   | (i) | Proof of technological feasibility – at this stage, preliminary tests are performed, the purpose of which is to prove the effectiveness of the technology. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Prototype design – at this stage, ex-vivo experiments and other experiments are usually performed for the purpose of development of the device and determination of its effectiveness. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | Preclinical studies – at this stage, testing is usually performed on animals, the purpose of which is to examine the safety and effectiveness of the device before testing it on humans. Based on the results received from these tests, the clinical end-point is determined, according to which the effectiveness of the device in the clinical trials will be determined. In addition, on the basis of the results received from these tests, the regulatory strategy is determined according to which the company will act for the purpose of receiving regulatory approval to market the device. |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (iv) | Clinical trials – at this stage, trials are performed on humans, and it includes several sub-stages: |
|--------|------|------------------------------------------------------------------------------------------------------------|

|   | a. | Trials for the purpose of completion of development of the device – at this stage trials are performed, the purpose of which is the completion of development of the device, on issues such as the device’s stability, the consistency of its features and others. At this stage, for the first time, feedback is received on the device from doctors and sampled patients making use thereof. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Trials for the purpose of proving the safety of the device – at this stage, and as part of the regulatory process, trials are performed for the purpose of proving the safety of the device. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Trials for the purpose of proving the effectiveness of the device – in accordance with the selected regulatory process, the company may be required to perform trials the purpose of which is to prove the effectiveness of the device. The effectiveness of the device is proven in accordance with the clinical end-point which was determined in the preclinical studies as aforesaid, and which will later be used, if and when the device shall be approved for marketing, to determine the manner of reimbursement by government bodies and/or insurance companies. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (v) | The filing of an application for approval to market the device – after receiving positive results in the clinical trials proving the safety and effectiveness of the device (in accordance with the regulatory requirements), the company, at this stage, applies to the relevant regulatory body for approval to market the device, such as the U.S. Food and Drug Administration, or the FDA or the European Medicines Agency, or EMA as described below). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (vi) | Commercialization of the device – in the event that the regulatory body in a particular country approves the device for marketing, the company will be entitled to market it in such country. The extent of the reimbursement for the cost of the device by government bodies and/or insurance companies may, in some cases, affect the sales potential of the device. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1. | CE Marking (“CE Standard”) for the marketing of a medical device in Europe – To the best of our knowledge and in reliance on publications, the CE standard granted by the EMA for products, which constitutes a manufacturer’s declaration whereby the product meets the mandatory criteria and the technical specifications of the relevant authorities such as health, safety and environment. For the purposes of testing the medical device’s compliance with the required standards, tests are carried out on the medical device, in the framework of which the technical characteristics of the medical device and the manufacturer’s quality control systems are tested, such that at the end of the process, the manufacturer is awarded the CE standard required for the sale thereof. To the best of our knowledge, and in reliance on publications, conducting human clinical trials in Europe is under the supervision of the Ethics Committee, an independent body in a member state of the European Union, whose responsibility it is to protect the rights, safety and wellbeing of human subjects involved in a clinical trial by, among other things, expressing an opinion on the clinical trial protocol, the suitability of the investigators involved in the trial and the adequacy of facilities and other things. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Procedure for receipt of FDA approval for the marketing of a medical device in the United States. – To the best of our knowledge and in reliance on publications, the FDA is a federal American organization whose role is to protect the American public’s health through the establishment and enforcement of a high product standard and through various regulatory requirements, which will ensure the safety and effectiveness of products such as drugs which are intended for human and veterinary use, biological products and medical devices. FDA requirements include, inter alia, the manufacturing of the medical devices in accordance with quality assurance regulation, receipt of scientific reports on the medical devices, the appointment of an American agent and provision of an opportunity for FDA representatives to supervise the manufacturing procedure at the plant. FDA approval for a medical device is granted according to compliance with several conditions of the relevant proceeding. The Premarket Notification 510(K) proceeding is a relatively short proceeding during which it is demonstrated to the FDA that the medical devices for which the approval is sought are equivalent, from the point of view of safety and efficacy, to other products from various fields which are marketed lawfully in the U.S. and are not subject to a Premarket Approval, or PMA, proceeding. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of certain devices, either for which there is no predicate device, or due to the level of risk associated with such devices. For such devices, FDA has determined that general and special controls alone are insufficient to assure their safety and efficacy. The PMA proceeding requires, inter alia, clinical trials at a larger scope which may extend the period of time until receipt of regulatory approvals and increase the costs required therefor.  In addition, a condition for conducting human clinical trials within the framework of the application procedure for FDA approval is the receipt of an investigational device exemption, or IDE, from the Institutional Review Board, or IRB. If the use of the medical device may involve a significant risk, the IDE must also be approved by FDA. Approval is required both from FDA and the IRB in order to initiate the study. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 3. | Procedure for receipt of the approval of the Ministry of Health for the marketing of a medical device in Israel.  To the best of our knowledge, in reliance on publications, a medical device company requires the approval of Israel's Ministry of Health's Unit for Medical Means and Devices or MOH Medical Devices Unit, to market its medical device in Israel.Medical devices are defined as a device, instrument, chemical substance, biological or technological product, which is used in medical treatment, or which is required for the action of a device or instrument which is used for treatment and which is not intended, in essence, to act as a medicinal measure. The MOH Medical Devices Unit is responsible for granting import permits of various types for medical devices and monitoring the marketing of medical devices in Israel.  In addition, to the best of our knowledge, in reliance on publications, one of the conditions for conducting human clinical trials in Israel is the receipt of approval of the research plan (protocol) from the Helsinki Committee, by virtue of the National Health Regulations (Human Clinical Trials) – 1980, as well as approval from the relevant hospital, and if necessary, approval from the MOH. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Cataracts: |
|--------|--------|------------|

----

|   | · | AMD |
|--------|--------|-----|

|   | · | Presbyopia |
|--------|--------|------------|

----

----

----

----

----

|   | · | Notal Vision - provides a system and services for remote monitoring from home, of AMDpatients at risk of vision loss, for the early detection of important visual changes. We hold 23% of Notal's outstanding share capital and 17% of Notal's fully diluted share capital. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Kyma- Kyma is developing an innovative remote patient monitoring (RPM) solution for Congestive Heart Failure (CHF) patients in order to enable early treatment of pulmonary oedema and reduce the need for unnecessary hospitalizations. As December 31, 2010, we hold 27% of Kyma's outstanding share capital and 20% of Kyma's fully diluted share capital. Thereafter we increased our holdings and currently hold 65% of Kyma's outstanding share capital and 56% of Kyma's fully diluted share capital. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Starling |
|--------|----|----------|

----

----

----

----

----

----

----

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|   | · | Wavion provides outdoor Wi-Fi base station solutions for outdoor wi-fi networks which provide increased coverage and capacity, enhanced penetration and immunity to interruptions relative to conventional wi-fi points of access .We hold 67% of Wavion's outstanding share capital and 55% of Wavion's fully diluted share capital. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Safend - provides endpoint protection solutions designed to protect organizations against data leakage and theft, and to ensure compliance with data protection regulation and privacy standards. We hold 26% of Safend's outstanding share capital and 20% of Safend's fully diluted share capital. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Aqwise provides solutions and services for biological water and wastewater treatment for local authorities and industrial markets. We hold 34% of Aqwise's outstanding share capital and 30% of Aqwise's fully diluted share capital. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | BPT provides solutions based on nano-filtration membranes for wastewater separation for industrial markets and local authorities. We hold 17% of BPT's outstanding share capital and 16% of BPT's fully diluted share capital |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Jordan Valley supplies equipment for the measurement of qualities of advanced materials for advanced production process control in the microelectronic industry. We hold 19% of Jordan Valley's outstanding share capital and 18% of Jordan Valley's fully diluted share capital. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C.  | Organizational Structure |
|----------|--------------------------|

| D | .           Property, Plants and Equipment |
|---|---------------------------------------------------------------------------------------------------|

| Item4A. | Unresolved Staff Comments |
|---------|---------------------------|

| Item5.  | Operating and Financial Review and Prospects |
|--------------|----------------------------------------------|

----

|   | 1. | Focus on investments in manner which vests us with the influence on their direction and management. |
|--------|----|-----------------------------------------------------------------------------------------------------|

|   | 2. | Investments in Israeli or Israeli related technology companies. |
|--------|----|-----------------------------------------------------------------|

|   | 3. | Involvement and the ability to influence the management and guidance of group companies including through active participation on their boards of directors and hands – on assistance to their management. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Increasing the value of our group companies, inter alia, by providing assistance in the advancement of their technology, forming strategic relationships, access to capital, development and operational guidance, business plan preparation and appointing the senior executive team. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

|   | · | Principles of accounting for holdings in group companies – Basis of consolidation, equity method of accounting. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | Business combinations and fair value adjustments |
|--------|--------|--------------------------------------------------|

|   | · | Impairment  of  investments in group companies |
|--------|--------|--------------------------------------------------------------------|

|   | · | Impairment of intangible assets |
|--------|--------|---------------------------------|

|   | · | Accounting for income taxes |
|--------|--------|-----------------------------|

|   | · | Provisions |
|--------|--------|------------|

|   | · | Financial assets including financial assets classified as available for sale. |
|--------|--------|-------------------------------------------------------------------------------|

----

|   | · | A transaction with the non-controlling interests, whether a sale or an acquisition, is accounted for as an equity transaction and will therefore not be recognized in the statement of income or have any effect on the amount of goodwill, respectively. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | A subsidiary's losses, even if resulting in a capital deficiency in a subsidiary, are allocated between the parent company and non-controlling interests, even if the non-controlling interests has not guaranteed or has no contractual obligation for sustaining the subsidiary's operations or of investing further amounts. However,  until the adoption of the Standards, non-controlling interest in subsidiaries having a deficit in the shareholders' equity took into account the losses of the subsidiaries up to the amount of the loans and liabilities (including the interest accrued in respect thereof) as well as commitments for granting loans only. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | On the loss or achievement of control of a subsidiary, the remaining investment, if any, is revalued to fair value against gain or loss from the sale and this fair value will represent the cost basis for the purpose of subsequent treatment. The same treatment applies upon the loss or achievement of significant influence over our associates. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

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| Year ended December 31,                 |
|-----------------------------------------|
| 2010                                    |   | 2009 |   | 2008 |
| RDCStarlingWavion1Sync-RxActySafe  |   | RDCMedingo3StarlingSync-RxXSIGHTS2Wavion1ActySafe  |   | RDCSELA4Medingo3StarlingSync-RxXSIGHTS2Wavion1Impliant5ActySafe |

----

| Year ended December 31,                                     |
|-------------------------------------------------------------|
| 2010                                                        |   | 2009 |   | 2008 |
| AtlantiumAqwiseBrainsGateGalil Medical10Given ImagingNuLens | SafendPocaredPLYmediaKymaTeledata9 |   | Impliant1Teledata9BrainsGateNuLensSafendAtlantiumEnurePocared3DV | BPT2PLYmediaGiven ImagingNetVision3ChipX4AqwiseNotal Vision8Galil Medical10 |   | Impliant1Teledata9BrainsGateNuLensSafendNeurosonixAtlantiumEnure PocaredBPT2PLYmediaGiven Imaging | NetVision3ChipX4Wavion5AqwiseKymaEllara6 Notal Vision8Galil Medical103DV7RADLIVE |

----

| Year ended December 31,                          |
|--------------------------------------------------|
| 2010                                             |   | 2009 |   | 2008 |
| BPTJordan ValleyNotal VisionEVSGigOptixEnablence |   | Jordan ValleyBPTEVSGigOptix |    | Jordan ValleyEVSM-Wise |

|                                                             |   | Year ended December 31,                |   |
|------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                             |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                                             |   | (millions of $, except per share data) |   |
| Net income (loss) attributable to Elron's shareholders           |   |                                   | 60.7   |   |   |   | (14.3 | ) |   |   | (71.8 | ) |
| Net income (loss) per share attributable to Elron's shareholders |   |                                   | 1.98   |   |   |   | (0.48 | ) |   |   | (2.43 | ) |

----

|                                                                                     |   | Year ended December 31, |   |
|------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                     |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                                                     |   | (millions of $)         |   |
|                                                                                     |   |                    |   |   | Audited |   |   |   |   |
| Income from sales                                                                        |   |                    | 9.6    |   |   |   | 9.9 |   |   |   | 6.2 |   |
| Gain from disposal of business and associates and changes in holdings in associates, net |   |                    | 160.0  |   |   |   | 31.8 |   |   |   | 0.8 |   |
| Financial income                                                                         |   |                    | 2.8    |   |   |   | 1.4 |   |   |   | 6.3 |   |
| Total income                                                                             |   |                    | 172.4  |   |   |   | 43.1 |   |   |   | 13.3 |   |
| Equity in losses of associates, net                                                      |   |                    | 10.9   |   |   |   | 10.5 |   |   |   | 40.1 |   |
| Cost of sales                                                                            |   |                    | 3.9    |   |   |   | 4.8 |   |   |   | 3.2 |   |
| Research and development expenses, net                                                   |   |                    | 18.2   |   |   |   | 25.7 |   |   |   | 29.9 |   |
| Selling and marketing expenses                                                           |   |                    | 6.6    |   |   |   | 9.0 |   |   |   | 7.5 |   |
| General and administrative expenses                                                      |   |                    | 13.6   |   |   |   | 15.9 |   |   |   | 19.0 |   |
| Amortization of intangible  assets                                             |   |                    | 1.4    |   |   |   | 1.4 |   |   |   | 1.1 |   |
| Financial expenses                                                                       |   |                    | 3.1    |   |   |   | 5.4 |   |   |   | 4.8 |   |
| Other expenses, net                                                                      |   |                    | 3.0    |   |   |   | 2.2 |   |   |   | 0.3 |   |
| Total costs and expenses                                                                 |   |                    | 60.8   |   |   |   | 75.0 |   |   |   | 106.0 |   |
| Income (loss) before taxes on income                                                     |   |                    | 115.6  |   |   |   | (31.8 | ) |   |   | (92.7 | ) |
| Tax on income (Tax benefit)                                                              |   |                    | 6.1    |   |   |   | (2.5 | ) |   |   | - |   |
| Income (loss)                                                                            |   |                    | 105.5  |   |   |   | (29.4 | ) |   |   | (92.7 | ) |
| Income (loss) attributable to the Company's shareholders                                 |   |                    | 60.7   |   |   |   | (14.3 | ) |   |   | (71.8 | ) |
| Income (loss) attributable to non-controlling interest                                   |   |                    | 44.8   |   |   |   | (15.1 | ) |   |   | (20.8 | ) |
| Basic income (loss) per share attributable to the Company's shareholders (in $)          |   |                    | 1.98   |   |   |   | (0.48 | ) |   |   | (2.43 | ) |
| Diluted income (loss) per share attributable to the Company's shareholders (in $)        |   |                    | 1.98   |   |   |   | (0.49 | ) |   |   | (2.44 | ) |

----

|    |   | Year ended December 31, |   |
|---------|--------|-------------------------|--------|
|    |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|    |   | (millions of $)         |   |
| Wavion2 |   |                    | 9.6    |   |   |   | 7.7 |   |   |   | 2.4 |   |
| SELA1   |   |                    | -      |   |   |   | 2.2 |   |   |   | 3.8 |   |
| Total   |   |                    | 9.6    |   |   |   | 9.9 |   |   |   | 6.2 |   |

----

| The following is in accordance with IFRS: |   | Year ended December 31, |   |   | Increase |   |   | Year ended December 31, |   |   | Increase |   |
|-------------------------------------------|--------|-------------------------|--------|--------|----------|--------|--------|-------------------------|--------|--------|----------|--------|
|                                      |   | 2010                    |   |   | 2009     |   |   | (Decrease)              |   |   | 2008     |   |   | (Decrease)* |   |
|                                      |   | (millions of $)         |   |   | %        |   |   | (millions of $)         |   |   | %        |   |
| Revenues                                  |   |                    | 157.8  |   |     |   | 141.8  |                    |   |   | 11.3     | %      |   |   | 125.1 |   |   |   | 13.3 | % |
| Operating income                          |   |                    | 7.7    |   |     |   | 10.7   |                    |   |   | (27.6    | )%     |   |   | 0.3 |   |   | NA |   |
| Net income attributable to shareholders   |   |                    | 13.1   |   |     |   | 17.5   |                    |   |   | (25      | )%     |   |   | 6.1 |   |   |   | 186 | % |

----

|                                    |   | Year ended December 31, |   |   | Increase |   |
|-----------------------------------------|--------|-------------------------|--------|--------|----------|--------|
|                                    |   | 2009                    |   |   | 2008     |   |   | (Decrease) |   |
|                                    |   | (millions of $)*        |   |   | %        |   |
| Revenues                                |   |                    | 331.2  |   |     |   | 327.0 |   |   |   | 1.3 |   |
| Operating income                        |   |                    | 41.2   |   |     |   | 29.5 |   |   |   | 39.7 |   |
| Net income attributable to shareholders |   |                    | 28.0   |   |     |   | 22.9 |   |   |   | 21.8 |   |

|                                  |   | Year ended December 31, |   |   | Increase |   |
|---------------------------------------|--------|-------------------------|--------|--------|----------|--------|
|                                  |   | 2009                    |   |   | 2008     |   |   | (Decrease) |   |
|                                  |   | (millions of $)         |   |   | %        |   |
| Revenues                              |   |                    | 49.7   |   |     |   | 49.3 |   |   |   | 0.8 |   |
| Operating loss                        |   |                    | (0.5   | )      |     |   | (2.0 | ) |   |   | (75 | ) |
| Net loss attributable to shareholders |   |                    | (0.9   | )      |     |   | (3.3 | ) |   |   | (71.7 | ) |

----

|                                |   | Comprehensive income       |   |    |                             |   |   |            |   |   |            |   |
|-------------------------------------|--------|----------------------------|--------|---------|----------------------------------|--------|--------|-----------------|--------|--------|-----------------|--------|
|                                |   |    Income (loss) |   |    |  Other comprehensive income |   |   | Dividend income |   |   | Interest income |   |   | Date received |   |
|                                |   | Thousand Dollars           |   |    |                             |   |   |            |   |
| Subsidiaries:                       |   |                       |   |    |                             |   |   |            |   |   |            |   |   |   |   |
| Elbit Ltd                           |   |                       | 5.2    |    |                             |   | 0.07   |            |   |   | 0.3             |   |   |   | - |   |   |   | - |   |
| D.E.P Technology holdings Ltd       |   |                       | 47.9   |    |                             |   | (0.5   | )          |   |   | -               |   |   |   | - |   |   |   | - |   |
| Mediagate                           |   |                       | -      |    |                             |   | -      |            |   |   | -               |   |   |   | - |   |   |   | - |   |
| Starling Advanced Communication Ltd |   |                       | (15.7  | )  |                             |   | -      |            |   |   | -               |   |   |   | 0.9 | * |   | During 2012 |   |
| Wavion, Inc.                        |   |                       | (3.2   | )  |                             |   | (0.06  | )          |   |   | -               |   |   |   | - |   |   |   | - |   |
| Medingo Ltd**                       |   |                       | (10.2  | )  |                             |   | -      |            |   |   | -               |   |   |   | 0.5 | *** |   | May-10 |   |

|                      |   |  Comprehensive income |   |   |                              |   |   |                   |   |   |                   |   |
|---------------------------|--------|----------------------------|--------|--------|-----------------------------------|--------|--------|------------------------|--------|--------|------------------------|--------|
|                      |   |    Income (loss) |   |   |   Other comprehensive income |   |   |   Dividend income |   |   |   Interest income |   |   |   Date received |   |
|                      |   | Thousand Dollars           |   |   |                              |   |   |                   |   |
| Associates:               |   |                       |   |   |                              |   |   |                   |   |   |                   |   |   |   |   |
| Given Imaging Ltd         |   |                       | 12.8   |   |                              |   | 12.5   |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Aqwise Ltd.               |   |                       | (0.5   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| NuLens Ltd.               |   |                       | (5.2   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| BrainsGate Ltd.           |   |                       | (9.5   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Safend Ltd.               |   |                       | (2.4   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Atlantium Inc.            |   |                       | (7.8   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Pocared Ltd.              |   |                       | (3.7   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | 0.1 |   |   | Jan-10 |   |
| Plymedia Inc.             |   |                       | 1      |   |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Kyma Medical Technologies |   |                       | (1     | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Impliant Inc.             |   |                       | (3.7   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Galil Medical Ltd.**      |   |                       | (0.6   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | (****) |   |   | Apr-10 |   |
| Teledata Networks Ltd.**  |   |                       | (9.1   | )      |                              |   | -      |                   |   |   | -                      |   |   |   | - |   |   |   | - |   |

----

|                                    |   |   Comprehensive income |   |   |                             |   |   |            |   |   |
|-----------------------------------------|--------|----------------------------------|--------|--------|----------------------------------|--------|--------|-----------------|--------|--------|
|                                    |   |    Income (loss)       |   |   |  Other comprehensive income |   |   | Dividend income |   |   |   Interest income |   |   Date received |
|                                    |   | Thousand Dollars            |   |   |                             |   |   |
| Subsidiaries:                           |   |                             |   |   |                             |   |   |
| RDC Rafael Development Corporation Ltd. |   |                             | 88.3   |   |                             |   | (11.5  | )          |   |   | 15 |   |   |   | 0.3 |   | Jun-10 |

|                              |   | Comprehensive income       |   |    |                             |   |   |                  |   |   |                   |   |
|-----------------------------------|--------|----------------------------|--------|---------|----------------------------------|--------|--------|-----------------------|--------|--------|------------------------|--------|
|                              |   |    Income (loss) |   |    |  Other comprehensive income |   |   |  Dividend income |   |   |   Interest income |   |   |   Date received |   |
|                              |   | Thousand Dollars      |   |    |                             |   |   |                  |   |
| Subsidiaries:                     |   |                       |   |    |                             |   |   |                  |   |   |                   |   |   |   |   |
| Actysafe Ltd.                     |   |                       | (0.3   | )       |                             |   | -      |                  |   |   | -                      |   |   |   | - |   |   |   | - |   |
| Xsights Ltd. (formerly PaperLynx) |   |                       | (1.1   | )       |                             |   | -      |                  |   |   | -                      |   |   |   |   |   |   |   |   |   |
| SyncRx Ltd                        |   |                       | (1.9   | )  |                             |   | -      |                  |   |   | -                      |   |   |   | - |   |   |   | - |   |

----

|              |   |  Comprehensive income |   |    |                             |   |   |                  |   |   |            |   |
|-------------------|--------|----------------------------|--------|---------|----------------------------------|--------|--------|-----------------------|--------|--------|-----------------|--------|
|              |   |    Income (loss) |   |    |  Other comprehensive income |   |   |  Dividend income |   |   | Interest income |   |   | Date received |   |
|              |   | Thousand Dollars      |   |    |                             |   |   |                  |   |
| Subsidiaries:     |   |                       |   |    |                             |   |   |                  |   |   |            |   |   |   |   |
|  Wavion Ltd. |   |                       | (3.3   | )  |                             |   | (0.06  | )                |   |   | -               |   |   |   | - |   |   |   | - |   |

|       |   | Year ended December 31, |   |
|------------|--------|-------------------------|--------|
|       |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|       |   | (millions of $)         |   |
| Corporate  |   |                    | 5.6    |   |   |   | 6.9 |   |   |   | 9.4 |   |
| Starling   |   |                    | 10.0   |   |   |   | 6.7 |   |   |   | 8.4 |   |
| Wavion 2   |   |                    | 8.6    |   |   |   | 7.8 |   |   |   | 5.4 |   |
| Medingo 3  |   |                    | 6.9    |   |   |   | 15.9 |   |   |   | 17.1 |   |
| RDC        |   |                    | 4.1    |   |   |   | 2.6 |   |   |   | 2.5 |   |
| SELA1      |   |                    | -      |   |   |   | 1.8 |   |   |   | 4.0 |   |
| Impliant 4 |   |                    | -      |   |   |   | 4.9 |   |   |   | 4.7 |   |
| Other 5    |   |                    | 3.1    |   |   |   | 3.9 |   |   |   | 4.8 |   |
|       |   |                    | 32.3   |   |   |   | 50.5 |   |   |   | 56.5 |   |

|   | 1 Sold in September 2009. |
|--------|---------------------------|

|   | 2 Consolidated from March 31, 2008. |
|--------|-------------------------------------|

|   | 3Sold in May 2010. |
|--------|--------------------|

|   | 4 Consolidated from March 31, 2008 through September 30, 2009. |
|--------|----------------------------------------------------------------|

|   | 5 Includes mainly Sync-Rx and XSIGHTS (XSIGHTS ceased operations in 2010 due to RDC's decision to cease investing in such company). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                                                   |   | Year ended                             |   |   | Three months ended |   |
|--------------------------------------------------------|--------|----------------------------------------|--------|--------|--------------------|--------|
|                                                   |   | December 31, 2010                      |   |   | March 31, 2010     |   |   | June 30, 2010 |   |   | September 30, 2010 |   |   | December 31, 2010 |   |
|                                                   |   | (millions of $, except per share data) |   |
| Net income (loss) attributable to Elron's shareholders |   |                                   | 60.7   |   |               |   | (12.9 | ) |   |   | 81.1 |   |   |   | (4.5 | ) |   |   | (3.0 | ) |

|                                                   |   | Year ended                             |   |   | Three months ended |   |
|--------------------------------------------------------|--------|----------------------------------------|--------|--------|--------------------|--------|
|                                                   |   | December 31, 2009                      |   |   | March 31, 2009     |   |   | June 30, 2009 |   |   | September 30, 2009 |   |   | December 31, 2009 |   |
|                                                   |   | (millions of $, except per share data) |   |
| Net (income) loss attributable to Elron's shareholders |   |                                   | (14.3  | )      |               |   | (12.2 | ) |   |   | (6.7 | ) |   |   | (11.5 | ) |   |   | 16.1 |   |

----

|                                                                                            |   | Year ended        |   |   | Three months ended |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                                                            |   | December 31, 2010 |   |   | March 31, 2010     |   |   | June 30, 2010 |   |   | September 30, 2010 |   |   | December 31, 2010 |   |
|                                                                                            |   | (millions of $)   |   |
| Income from sales                                                                               |   |              | 9.6    |   |               |   | 1.8 |   |   |   | 1.7 |   |   |   | 1.9 |   |   |   | 4.3 |   |
| Gain (loss) from disposal of business and associates and changes in holdings in associates, net |   |              | 160.0  |   |               |   | (0.07 | ) |   |   | 156.6 |   |   |   | 1.0 |   |   |   | 2.3 |   |
| Financial income                                                                                |   |              | 2.8    |   |               |   | 0.5 |   |   |   | 1.0 |   |   |   | 2.2 |   |   |   | 1.4 |   |
| Total income                                                                                    |   |              | 172.4  |   |               |   | 2.1 |   |   |   | 159.4 |   |   |   | 5.1 |   |   |   | 8.0 |   |
| Equity in losses of associates, net                                                             |   |              | 10.9   |   |               |   | 4.5 |   |   |   | 2.6 |   |   |   | 2.7 |   |   |   | 1.1 |   |
| Cost of sales                                                                                   |   |              | 3.9    |   |               |   | 0.7 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |   | 1.7 |   |
| Research and development expenses, net                                                          |   |              | 18.2   |   |               |   | 6.3 |   |   |   | 4.4 |   |   |   | 3.9 |   |   |   | 3.6 |   |
| Selling and marketing expenses                                                                  |   |              | 6.6    |   |               |   | 2.1 |   |   |   | 1.9 |   |   |   | 1.2 |   |   |   | 1.4 |   |
| General and administrative expenses                                                             |   |              | 13.6   |   |               |   | 4.6 |   |   |   | 3.2 |   |   |   | 2.2 |   |   |   | 3.5 |   |
| Amortization of intangible  assets                                                    |   |              | 1.4    |   |               |   | 0.4 |   |   |   | 0.4 |   |   |   | 0.4 |   |   |   | 0.3 |   |
| Financial expenses                                                                              |   |              | 3.0    |   |               |   | 1.6 |   |   |   | 2.4 |   |   |   | 1.3 |   |   |   | 0.03 |   |
| Other expenses (income), net                                                                    |   |              | 3.1    |   |               |   | (0.3 | ) |   |   | 3.3 |   |   |   | (1.9 | ) |   |   | 2.0 |   |
| Total costs and expenses                                                                        |   |              | 60.8   |   |               |   | 19.9 |   |   |   | 19.0 |   |   |   | 10.5 |   |   |   | 13.6 |   |
| Income (loss) before taxes on income                                                            |   |              | 115.6  |   |               |   | (17.8 | ) |   |   | 140.4 |   |   |   | (5.4 | ) |   |   | (5.7 | ) |

| (Tax on income) Tax benefit                             |   |   | (6.1  | )      |   |   | 0.3   |   |   |   | (8.8  | )      |   |   | 0.04 |   |   |   | 2.4  |   |
|---------------------------------------------------------|--------|--------|-------|--------|--------|--------|-------|--------|--------|--------|-------|--------|--------|--------|------|--------|--------|--------|------|--------|
| Income (loss)                                           |   |   | 105.5 |   |   |   | (17.5 | )      |   |   | 131.6 |   |   |   | (5.4 | )      |   |   | 3.3  |   |
| Income (loss) attributable to the Company's shareholder |   |   | 66.7  |   |   |   | (12.9 | )      |   |   | 81.1  |   |   |   | 4.5  |   |   |   | (3.0 | )      |
| Income (loss) attributable to non-controlling interest  |   |   | 44.8  |   |   |   | (4.6  | )      |   |   | 50.5  |   |   |   | 0.9  |   |   |   | (0.3 | )      |

----

|                                                                                              |   | Year ended        |   |   | Three months ended |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                                                              |   | December 31, 2009 |   |   | March 31, 2009     |   |   | June 30, 2009 |   |   | September 30, 2009 |   |   | December 31, 2009 |   |
|                                                                                              |   | (millions of $)   |   |
| Income from sales                                                                                 |   |              | 9.9    |   |               |   | 3.4 |   |   |   | 2.1 |   |   |   | 1.9 |   |   |   | 2.5 |   |
| Income (loss) from disposal of business and associates and changes in holdings in associates, net |   |              | 31.8   |   |               |   | (0.07 | ) |   |   | 6.5 |   |   |   | 0.4 |   |   |   | 24.9 |   |
| Financial income                                                                                  |   |              | 1.4    |   |               |   | 1.1 |   |   |   | 1.4 |   |   |   | 0.6 |   |   |   | 0.1 |   |
| Total income                                                                                      |   |              | 43.1   |   |               |   | 4.5 |   |   |   | 10.1 |   |   |   | 2.8 |   |   |   | 27.5 |   |
| Equity in losses of associates, net                                                               |   |              | 10.5   |   |               |   | 4.6 |   |   |   | 2.8 |   |   |   | 2.5 |   |   |   | 0.6 |   |
| Cost of sales                                                                                     |   |              | 4.8    |   |               |   | 1.5 |   |   |   | 1.1 |   |   |   | 1.2 |   |   |   | 1.0 |   |
| Research and development expenses, net                                                            |   |              | 25.7   |   |               |   | 5.2 |   |   |   | 6.3 |   |   |   | 5.9 |   |   |   | 8.3 |   |
| Selling and marketing expenses                                                                    |   |              | 9.0    |   |               |   | 1.9 |   |   |   | 2.2 |   |   |   | 2.9 |   |   |   | 2.0 |   |
| General and administrative expenses                                                               |   |              | 15.9   |   |               |   | 4.4 |   |   |   | 2.3 |   |   |   | 4.8 |   |   |   | 4.3 |   |
| Amortization of intangible  assets                                                      |   |              | 1.4    |   |               |   | 0.3 |   |   |   | 0.3 |   |   |   | 0.4 |   |   |   | 0.4 |   |
| Financial expenses                                                                                |   |              | 5.4    |   |               |   | 1.0 |   |   |   | 2.8 |   |   |   | 2.8 |   |   |   | 0.8 |   |
| Other expenses (income), net                                                                      |   |              | 2.2    |   |               |   | 0.6 |   |   |   | 1.4 |   |   |   | 0.1 |   |   |   | 0.1 |   |
| Total costs and expenses                                                                          |   |              | 75.0   |   |               |   | 19.5 |   |   |   | 19.2 |   |   |   | 20.6 |   |   |   | 17.5 |   |
| Income (loss) before taxes on income                                                              |   |              | (31.8  | )      |               |   | (15.0 | ) |   |   | (9.1 | ) |   |   | (17.8 | ) |   |   | 10.0 |   |
| Tax on income (Tax benefit)                                                                       |   |              | 2.5    |   |               |   | - |   |   |   | - |   |   |   | - |   |   |   | (6.1 | ) |
| Income (loss)                                                                                     |   |              | (29.4  | )      |               |   | (15.0 | ) |   |   | (9.1 | ) |   |   | (17.8 | ) |   |   | 105.5 |   |
| Income (loss) attributable to the company's shareholders                                          |   |              | (14.3  | )      |               |   | (12.2 | ) |   |   | (6.7 | ) |   |   | (11.5 | ) |   |   | 16.1 |   |
| Income (loss) attributable to non-controlling interest                                            |   |              | (15.1  | )      |               |   | (2.8 | ) |   |   | (2.4 | ) |   |   | (6.3 | ) |   |   | (3.6 | ) |

| B.  | Liquidity and Capital Resources |
|----------|---------------------------------|

|                                                                                              |   | December 31, 2010 |   |   | December 31, 2009 |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                                                                              |   | (audited)         |   |
|                                                                                              |   | (millions of $)   |   |
| Total assets in the consolidated statement of financial position                                  |   |              | 250.3  |   |              |   | 213.1 |   |
| Investments in associate companies and available for sale assets (including assets held for sale) |   |              | 146.8  |   |              |   | 127.8 |   |
| Other long-term receivables                                                                       |   |              | 28.2   |   |              |   | 0.9 |   |
| Current assets (excluding assets classified as held for sale)                                     |   |              | 69.6   |   |              |   | 73.9 |   |
| Intangible assets, net                                                                            |   |              | 3.6    |   |              |   | 7.5 |   |
| Current liabilities                                                                               |   |              | 14.8   |   |              |   | 25.9 |   |
| Long-term liabilities                                                                             |   |              | 16.0   |   |              |   | 65.1 |   |
| Total liabilities                                                                                 |   |              | 30.8   |   |              |   | 91.0 |   |
| Equity including non-controlling interest                                                         |   |              | 219.4  |   |              |   | 122.1 |   |

----

|                                                                        |   | Year ended        |   |   | Three months ended |   |
|-----------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
| Elron's and RDC's primary cash flows (non-consolidated) (*)                 |   | December 31, 2010 |   |   | December 31, 2009  |   |   | December 31, 2010 |   |   | December 31, 2009 |   |
|                                                                        |   | audited           |   |   | unaudited          |   |
|                                                                        |   | (millions of $)   |   |
| Proceeds received from disposal of non-current investments of Elron and RDC |   |              | 114.3  |   |               |   | 68.5 |   |   |   | 0.1 |   |   |   | 61.5 |   |
| Dividends received from Elron's and RDC's group companies                   |   |              | -      |   |               |   | 9.5 |   |   |   | - |   |   |   | - |   |
| Investments in Elron's and RDC's group companies (**)                       |   |              | 36.7   |   |               |   | 33.5 |   |   |   | 6.9 |   |   |   | 8.9 |   |
| Raising of  Elron's and RDC's debt                                |   |              | -      |   |               |   | 18.0 |   |   |   | - |   |   |   | - |   |
| Repayment of Elron's and RDC's loans (***)                                  |   |              | 70.6   |   |               |   | - |   |   |   | - |   |   |   | - |   |
| Dividend distributed by RDC (****)                                          |   |              | 15.0   |   |               |   | - |   |   |   | - |   |   |   | - |   |

----

|   | · | In June 2010, our Audit Committee and Board of Directors approved the prepayment of our entire debt to Israel Discount Bank Ltd.  in respect of loans granted to us by the Bank in the aggregate amount of $30 million granted to us by the bank (without incurring a prepayment commission), on the interest payment dates in respect of the debt, the last of which was in September 2010. Upon repayment of our entire debt to the Bank in September 2010, our entire debt in respect of the loans granted to us by DIC in the amount of approximately $17.5 million were repaid as well, pursuant to the terms of the loan agreements with DIC. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In June 2010, RDC's entire debt in respect of loans granted to it in the amount of $10 million granted to it by Bank Mizrahi Tefahot Ltd. ("Bank Mizrahi") was prepaid. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In June 2010, RDC's entire debt in respect of loans granted to it in the aggregate amount of approximately $32 million granted to it by its shareholders was prepaid,  of which, the amount of approximately $13 million was repaid to Rafael and the amount of approximately $19 million was repaid to us. The repayment of RDC's loan to us has no impact on the cash and liabilities balance in the consolidated statement of financial position as of December 31, 2010. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                       |   | Elron  |   |   | RDC    |   |
|----------------------------|--------|--------|--------|--------|--------|--------|
|                       |   | 2010   |   |   | 2009   |   |   | 2010 |   |   | 2009 |   |
| Consolidated companies (*) |   |   |   |   |   |   |   |   |   |   |   |   |
| ($ in milllons)            |   |   |   |   |   |   |   |   |   |   |   |   |
| Starling                   |   |   | 8.7    |   |   |   | 2.7 |   |   |   | 10.0 |   |   |   | 3.1 |   |
| Wavion                     |   |   | 3.4    |   |   |   | 2.7 |   |   |   | - |   |   |   | - |   |
| Medingo                    |   |   | 0.4    |   |   |   | 1.2 |   |   |   | 4.2 |   |   |   | 11.4 |   |
| Sync-Rx                    |   |   | -      |   |   |   | - |   |   |   | 3.5 |   |   |   | 1.5 |   |
| Other                      |   |   | -      |   |   |   | - |   |   |   | 1.3 |   |   |   | 1.5 |   |
| Total Investments          |   |   | 12.5   |   |   |   | 6.6 |   |   |   | 19.0 |   |   |   | 17.5 |   |

----

|                                           |   | Elron  |   |   | RDC    |   |
|------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                           |   | 2010   |   |   | 2009   |   |   | 2010 |   |   | 2009 |   |
| Associates and other investments               |   |   |   |   |   |   |   |   |   |   |   |   |
| NuLens                                         |   |   | 2.0    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Safend                                         |   |   | 0.3    |   |   |   | 0.2 |   |   |   | - |   |   |   | - |   |
| Brainsgate                                     |   |   | -      |   |   |   | 0.5 |   |   |   | - |   |   |   | - |   |
| BPT                                            |   |   | -      |   |   |   | 0.5 |   |   |   | - |   |   |   | - |   |
| Pocared                                        |   |   | 1.4    |   |   |   | 5.0 |   |   |   | - |   |   |   | - |   |
| Kyma (**)                                      |   |   | 1.0    |   |   |   | 0.5 |   |   |   | - |   |   |   | - |   |
| Impliant                                       |   |   | -      |   |   |   | 2.0 |   |   |   | - |   |   |   | - |   |
| Notal Vision                                   |   |   | 0.4    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other                                          |   |   | -      |   |   |   | 0.4 |   |   |   | - |   |   |   | 0.4 |   |
|                                           |   |   | 5.2    |   |   |   | 9.0 |   |   |   | - |   |   |   | 0.4 |   |
| Total corporate  and RDC investments |   |   | 17.7   |   |   |   | 15.6 |   |   |   | 19.0 |   |   |   | 17.9 |   |

|                             |   | Elron  |   |   | RDC    |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| Consolidated companies           |   |   |   |   |   |   |
| Kyma (*)                         |   |   | 4      |   |   |   | - |   |
| Starling                         |   |   | 0.7    |   |   |   | 0.8 |   |
|                             |   |   |   |   |   |   |   |   |
| Associates and other investments |   |   |   |   |   |   |   |   |
| Pocared                          |   |   | 2.6    |   |   |   | - |   |
|                             |   |   |   |   |   |   |   |   |
| Total corporate investments      |   |   | 7.3    |   |   |   | 0.8 |   |

----

|   | · | On February 10, 2009, Given Imaging declared a cash dividend of approximately $0.54 per share, or $16.0 million in the aggregate, of which our and RDC's share is approximately $3.7 million and $1.4 million, respectively. Payment of this dividend was distributed on March 10, 2009. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | On March 10, 2009 and on August 12, 2009, NetVision declared a special cash dividend of approximately NIS 3.08 and NIS 0.86 per share, respectively (approximately $0.73 and $0.23, respectively), or NIS 90.0 million and NIS 26.0 million, respectively (approximately $21.2 million and $7.0 million, respectively), in the aggregate, of which our share is approximately NIS 14.2 million and NIS 4.0 million, respectively (approximately $3.3 million and $1.0 million, respectively). Payment of these dividends took place on April 7, 2009 and on September 9, 2009, respectively. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In August 2010, RDC declared a special cash dividend in the aggregate amount of approximately $30 million. Our share in such dividend amounted to approximately $15.0 million. The balance amount was distributed to Rafael. Payment of the dividend took place in August 2010. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| Liabilities                  |   | 2011       |   |   | 2012       |   |   | 2013       |   |   | 2014   |   |   | No specific repayment date |   |   | Total  |   |   | FairValue |   |
|------------------------------|--------|------------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|--------|----------------------------|--------|--------|--------|--------|--------|-----------|--------|
| (US$ Equivalent in millions) |   |
|                         |   |       |   |   |       |   |   |       |   |   |   |   |   |                       |   |   |   |   |   |      |   |
|                         |   |       |   |   |       |   |   |       |   |   |   |   |   |                       |   |   |   |   |   |      |   |
| Fixed Rate (US$)             |   |       | 0.3    |   |       |   | 0.3    |       |   |   | 0.2    |   |   |                       | -      |   |   |   | -      |      |   |   | 0.8 |   |   |   | 0.8 |   |
| Average interest rate        |   | LIBOR + 6% |   |   | LIBOR + 6% |   |   | LIBOR + 6% |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |
|                         |   |       |   |   |       |   |   |       |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |   |   |   |
| Variable Rate (US$)          |   |       | 0.8    |   |       |   | -      |       |   |   | -      |   |   |                       | -      |   |   |   | 8.4    |      |   |   | 9.2 |   |   |   | 9.2 |   |
| Average interest rate        |   | LIBOR      |   |   |       |   |   |       |   |   |   |   |   |                       |   |   | LIBOR  |   |   |      |   |   |   |   |   |   |

----

|                                            |   |          | Gain (loss) from changes in interest rates |   |
|-------------------------------------------------|--------|---------------|--------------------------------------------|--------|
|                                            |   |          | Increase                                   |   |   | Decrease |   |
|                                            |   | Fair value    |                                       |   | 2% at absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% at absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                                         |   | millions of $ |                                       |
| Sensitivity to changes in dollar interest rates |   |          | 3.3                                        |   |   |   | (0.1 | ) |   |   | (0.01 | ) |   |   | (0.01 | ) |   |   | 0.1 |   |   |   | 0.01 |   |   |   | 0.01 |   |

|                                                                                  |   |          |  Gain (loss) from changes in other market factors |   |
|---------------------------------------------------------------------------------------|--------|---------------|--------------------------------------------------------|--------|
|                                                                                  |   |          | Increase                                               |   |   | Decrease |   |
|                                                                                  |   | Fair value    |                                                   |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                                                                               |   | millions of $ |                                                   |
| Sensitivity to changes in the NIS-dollar exchange rate                                |   |          | (1.8                                                   | )      |   |   | (0.2 | ) |   |   | (0.1 | ) |   |   | 0.2 |   |   |   | 0.1 |   |
| Sensitivity to changes in share prices of investments accounted as available for sale |   |          | 37.4                                                   |   |   |   | 3.7 |   |   |   | 1.9 |   |   |   | (3.7 | ) |   |   | (1.9 | ) |
| Sensitivity to changes in the price of convertible debentures issued by subsidiary    |   |          | (3.5                                                   | )      |   |   | (0.4 | ) |   |   | (0.2 | ) |   |   | 0.4 |   |   |   | 0.2 |   |

----

|                                             |   |          | Gain (loss) from changes in interest rates |   |
|--------------------------------------------------|--------|---------------|--------------------------------------------|--------|
|                                             |   |          | Increase                                   |   |   | Decrease |   |
|                                             |   | Fair value    |                                       |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                                          |   | millions of $ |                                       |
| Sensitivity to changes nominal NIS interest rate |   |          | (18.2                                      | )      |   |   | 0.6 |   |   |   | 0.08 |   |   |   | 0.04 |   |   |   | (0.6 | ) |   |   | (0.08 | ) |   |   | (0.04 | ) |
| Sensitive to changes in dollar interest rates    |   |          | (47                                        | )      |   |   | 1.2 |   |   |   | 0.2 |   |   |   | 0.1 |   |   |   | (1.3 | ) |   |   | (0.2 | ) |   |   | (0.1 | ) |
|                                             |   |          |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                                                                |   |          | Gain (loss) from changes in other market factors |   |
|-------------------------------------------------------------------------------------|--------|---------------|--------------------------------------------------|--------|
|                                                                                |   |          | Increase                                         |   |   | Decrease |   |
|                                                                                |   | Fair value    |                                             |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                                                                             |   | millions of $ |                                             |
| Sensitivity to changes in the NIS-dollar exchange rate                              |   |          | (4.1                                             | )      |   |   | (0.4 | ) |   |   | (0.2 | ) |   |   | 0.4 |   |   |   | 0.2 |   |
| Sensitive to changes in the Consumer Price Index                                    |   |          | (18.2                                            | )      |   |   | (0.4 | ) |   |   | (0.2 | ) |   |   | 0.4 |   |   |   | 0.2 |   |
| Sensitive to changes in share prices of investments accounted as available for sale |   |          | 14.5                                             |   |   |   | 1.5 |   |   |   | 0.7 |   |   |   | (1.5 | ) |   |   | (0.7 | ) |
| Sensitivity to changes in the price of convertible debentures issued by subsidiary  |   |          | (3.4                                             | )      |   |   | (0.3 | ) |   |   | (0.2 | ) |   |   | 0.3 |   |   |   | 0.2 |   |

----

|   | 1. | The instruments that appear below are not necessarily presented in the financial statements at fair value. |
|--------|----|------------------------------------------------------------------------------------------------------------|

|   | 2. | Starling's operating currency (NIS) is different from that of ours and our other subsidiaries (U.S. Dollar). Accordingly, no sensitivity analyses were carried out in relation to the exchange rate in financial instruments held by Starling. It should be noted that the effect of the difference between Starling's currency and our currency is reflected in our shareholders' equity under capital reserves from translation differences. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | The exchange rates according to which the sensitivity analyses were carried out are the closing rates on the day of calculation. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------|

|                                                      |   |          | Gain (loss) from changes in dollar interest rates |   |
|-----------------------------------------------------------|--------|---------------|---------------------------------------------------|--------|
|                                                      |   |          | Increase                                          |   |   | Decrease |   |
|                                                      |   | Fair value    |                                              |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                                                   |   | millions of $ |                                              |
| Other long-term receivables                               |   |          | 3.8                                               |   |   |   | (0.1 | ) |   |   | (0.03 | ) |   |   | (0.02 | ) |   |   | 0.1 |   |   |   | 0.03 |   |   |   | 0.02 |   |
| Loans from banksand others (including current maturities) |   |          | (0.5                                              | )      |   |   | 0.01 |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.01 | ) |   |   | (0.02 | ) |   |   | (0.01 | ) |
|                                                      |   |          | 3.3                                               |   |   |   | (0.09 | ) |   |   | (0.01 | ) |   |   | (0.01 | ) |   |   | 0.09 |   |   |   | 0.01 |   |   |   | 0.01 |   |

|                                         |   |          | Gain (loss) from changes in thedollar-NIS exchange rate |   |
|----------------------------------------------|--------|---------------|---------------------------------------------------------|--------|
|                                         |   |          | Increase                                                |   |   | Decrease |   |
|                                         |   | Fair value    |                                                    |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                                      |   | millions of $ |                                                    |
| Current Assets:                              |   |          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other current assets and trade receivables   |   |          | 1.1                                                     |   |   |   | 0.1 |   |   |   | 0.06 |   |   |   | (0.1 | ) |   |   | (0.06 | ) |
| Cash and cash equivalents                    |   |          | 3.8                                                     |   |   |   | 0.4 |   |   |   | 0.2 |   |   |   | (0.4 | ) |   |   | (0.2 | ) |
| Non-current assets:                          |   |          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term receivables                        |   |          | 0.2                                                     |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.02 | ) |   |   | (0.01 | ) |
| Current liabilities:                         |   |          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables and other current liabilities |   |          | (6.9                                                    | )      |   |   | (0.7 | ) |   |   | (0.3 | ) |   |   | 0.7 |   |   |   | 0.3 |   |
|                                         |   |          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   |          | (1.8                                                    | )      |   |   | (0.18 | ) |   |   | (0.03 | ) |   |   | 0.18 |   |   |   | 0.03 |   |

----

|                               |   |          | Gain (loss) from changes in theprice of shares |   |
|------------------------------------|--------|---------------|------------------------------------------------|--------|
|                               |   |          | Increase                                       |   |   | Decrease |   |
|                               |   | Fair value    |                                           |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                            |   | millions of $ |                                           |
| Other investments                  |   |          | 20.2                                           |   |   |   | 2.0 |   |   |   | 1.0 |   |   |   | (2.0 | ) |   |   | (1.0 | ) |
| Assets classified as held for sale |   |          | 17.2                                           |   |   |   | 1.7 |   |   |   | 0.9 |   |   |   | (1.7 | ) |   |   | (0.9 | ) |
|                               |   |          | 37.4                                           |   |   |   | 3.7 |   |   |   | 1.9 |   |   |   | (3.7 | ) |   |   | (1.9 | ) |

|                   |   |          | Gain (loss) from changes in theprice of convertible debentures |   |
|------------------------|--------|---------------|----------------------------------------------------------------|--------|
|                   |   |          | Increase                                                       |   |   | Decrease |   |
|                   |   | Fair value    |                                                           |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                |   | millions of $ |                                                           |
| Convertible debentures |   |          | (3.5                                                           | )      |   |   | (0.4 | ) |   |   | (0.2 | ) |   |   | 0.4 |   |   |   | 0.2 |   |

|                                                      |   |          | Gain (loss) from changes in dollar interest rates |   |
|-----------------------------------------------------------|--------|---------------|---------------------------------------------------|--------|
|                                                      |   |          | Increase                                          |   |   | Decrease |   |
|                                                      |   | Fair value    |                                              |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                                                   |   | millions of $ |                                              |
| Loans from banksand others (including current maturities) |   |          | (47.0                                             | )      |   |   | 1.2 |   |   |   | 0.2 |   |   |   | 0.1 |   |   |   | (1.3 | ) |   |   | (0.2 | ) |   |   | (0.1 | ) |

----

|                    |   |          | Gain (loss) from changes in nominal NIS interest rates |   |
|-------------------------|--------|---------------|--------------------------------------------------------|--------|
|                    |   |          | Increase                                               |   |   | Decrease |   |
|                    |   | Fair value    |                                                   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                 |   | millions of $ |                                                   |
| Loans from shareholders |   |          | (18.2                                                  | )      |   |   | 0.6 |   |   |   | 0.08 |   |   |   | 0.04 |   |   |   | (0.6 | ) |   |   | (0.08 | ) |   |   | (0.04 | ) |

|                                         |   |          | Gain (loss) from changes in the dollar-NIS exchange rate |   |
|----------------------------------------------|--------|---------------|----------------------------------------------------------|--------|
|                                         |   |          | Increase                                                 |   |   | Decrease |   |
|                                         |   | Fair value    |                                                     |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                                      |   | millions of $ |                                                     |
| Current Assets:                              |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other current assets and trade receivables   |   |          | 1.1                                                      |   |   |   | 0.1 |   |   |   | 0.06 |   |   |   | (0.1 | ) |   |   | (0.06 | ) |
| Cash and cash equivalents                    |   |          | 21.7                                                     |   |   |   | 2.2 |   |   |   | 1.1 |   |   |   | (2.2 | ) |   |   | (1.1 | ) |
| Non-current assets:                          |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term receivables                        |   |          | 0.2                                                      |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.02 | ) |   |   | (0.01 | ) |
| Current liabilities:                         |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables and other current liabilities |   |          | (8.9                                                     | )      |   |   | (0.9 | ) |   |   | (0.4 | ) |   |   | 0.9 |   |   |   | 0.4 |   |
| Non-current liabilities:                     |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans from shareholders                      |   |          | (18.2                                                    | )      |   |   | (1.8 | ) |   |   | (0.9 | ) |   |   | 1.8 |   |   |   | 0.9 |   |
| NIS-Dollar forward:                          |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Not recognized as an accounting hedge**      |   |          | ***                                                      |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.02 | ) |   |   | (0.01 | ) |
|                                         |   |          |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   |          | (4.1                                                     | )      |   |   | (0.36 | ) |   |   | (0.12 | ) |   |   | 0.36 |   |   |   | 0.12 |   |

----

|                    |   |          | Gain (loss) from changes in the Israeli Consumer Price Index |   |
|-------------------------|--------|---------------|--------------------------------------------------------------|--------|
|                    |   |          | Increase                                                     |   |   | Decrease |   |
|                    |   | Fair value    |                                                         |   |   | 2% |   |   |   | 1% |   |   |   | 2% |   |   |   | 1% |   |
| Section                 |   | millions of $ |                                                         |
| Loans from shareholders |   |          | (18.2                                                        | )      |   |   | (0.4 | ) |   |   | (0.2 | ) |   |   | 0.4 |   |   |   | 0.2 |   |

|              |   |          | Gain (loss) from changes in theprice of shares |   |
|-------------------|--------|---------------|------------------------------------------------|--------|
|              |   |          | Increase                                       |   |   | Decrease |   |
|              |   | Fair value    |                                           |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section           |   | millions of $ |                                           |
| Other investments |   |          | 14.5                                           |   |   |   | 1.5 |   |   |   | 0.7 |   |   |   | (1.5 | ) |   |   | (0.7 | ) |

|                   |   |          | Gain (loss) from changes in theprice of convertible debentures |   |
|------------------------|--------|---------------|----------------------------------------------------------------|--------|
|                   |   |          | Increase                                                       |   |   | Decrease |   |
|                   |   | Fair value    |                                                           |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                |   | millions of $ |                                                           |
| Convertible debentures |   |          | (3.4                                                           | )      |   |   | (0.3 | ) |   |   | (0.2 | ) |   |   | 0.3 |   |   |   | 0.2 |   |

| C.  | Research and Development |
|----------|--------------------------|

----

| D. | Trend Information |
|----|-------------------|

| E. | Off- Balance Sheet Arrangements |
|----|---------------------------------|

| F. | Tabular Disclosure of Contractual Obligations |
|----|-----------------------------------------------|

| Type of Obligation                |   | 2011   |   |   | 2012   |   |   | 2013   |   |   | 2014   |   |   | Total  |   |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan from banks                   |   |   | 0.9    |   |   |   | 0.3    |   |   |   | 0.2    |   |   |   | -      |   |   |   | 1.4 |   |
| Starling's Convertible Debentures |   |   | 1.5    |   |   |   | 1.4    |   |   |   | 1.4    |   |   |   |   |   |   |   | 4.3 |   |
| Leases                            |   |   | 1.0    |   |   |   | 0.8    |   |   |   | 0.4    |   |   |   | 0.4    |   |   |   | 2.6 |   |

| Item 6. | Directors, Senior Management and Employees |
|---------|--------------------------------------------|

| A.  | Directors and Senior Management |
|----------|---------------------------------|

----

| Name                         |   | Age    |   | Position                           |
|------------------------------|--------|--------|--------|------------------------------------|
|                         |   |   |   |                               |
| Arie Mientkavich(5) (4)      |   | 68     |   | Chairman of the Board of Directors |
|                         |   |   |   |                               |
| Avraham Asheri(1)(4)         |   | 73     |   | Director                           |
|                         |   |   |   |                               |
| Gad Arbel(1)(2)(4)           |   | 62     |   | External Director                  |
|                         |   |   |   |                               |
| Prof. Gabi Barbash           |   | 61     |   | Director                           |
|                         |   |   |   |                               |
| Rona Dankner(6)              |   | 27     |   | Director                           |
|                         |   |   |   |                               |
| Ami Erel(5) (4)              |   | 63     |   | Director                           |
|                         |   |   |   |                               |
| Yaacov Goldman (1)(2)(3) (4) |   | 55     |   | External Director                  |
|                         |   |   |   |                               |
| Shay Livnat(5) (6)           |   | 52     |   | Director                           |
|                         |   |   |   |                               |
| Dori Manor(4) (5) (6)        |   | 43     |   | Director                           |
|                         |   |   |   |                               |
| Arie Ovadia(4)               |   | 62     |   | Director                           |

|  Executive Officers   Name |   | Age    |   | Position                                      |
|------------------------------------------------|--------|--------|--------|-----------------------------------------------|
|                                           |   |   |   |                                          |
| Ari Bronshtein                                 |   | 41     |   | Chief Executive Officer                       |
|                                           |   |   |   |                                          |
| Yaron Elad                                     |   | 33     |   | Vice -President & Chief Financial Officer |

| (1) | Member of our Audit Committee. |
|-----|--------------------------------|

| (2) | External director under the Israeli Companies Law. |
|-----|----------------------------------------------------|

| (3) | Designated "financial expert" under the Sarbanes-Oxley Act of 2002. |
|-----|---------------------------------------------------------------------|

| (4) | Designated "financial expert" under the Israeli Companies Law. |
|-----|----------------------------------------------------------------|

| (5) | Director or officer of IDB Holding Corporation, or IDBH, IDBD and/or DIC. |
|-----|---------------------------------------------------------------------------|

| (6) | Rona Dankner is the daughter of Nochi Dankner, Shay Livnat is the son of Avraham Livnat and Dori Manor is the son of Isaac and Ruth Manor.  See "Item 7—Major Shareholders and Related Party Transactions —Major Shareholders." |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

| B.  | Compensation |
|----------|--------------|

|   | a. | The officer's contribution to investments and exit transactions by the Company. |
|--------|----|---------------------------------------------------------------------------------|

|   | b. | The Company's business performance during the year. |
|--------|----|-----------------------------------------------------|

|   | c. | The officer's contribution to the Company's business, profits, strength and stability. |
|--------|----|----------------------------------------------------------------------------------------|

|   | d. | The Company's need to retain officers of unique qualifications, knowledge or expertise. |
|--------|----|-----------------------------------------------------------------------------------------|

| a. | The officer’s contribution to the investments made by the Company and the investments’ realizations that have been performed. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------|

| b. | The Company’s business performance during the year. |
|----|-----------------------------------------------------------|

| c. | The officer’s contribution to the Company’s business, profits, strength and stability. |
|----|----------------------------------------------------------------------------------------------------|

| d. | The Company’s need to retain officers of unique qualifications, knowledge or expertise. |
|----|-----------------------------------------------------------------------------------------------|

| e. | The level of responsibility imposed on the officer. |
|----|-----------------------------------------------------|

| f. | Changes which occurred in the officer's responsibility during the year. |
|----|-------------------------------------------------------------------------|

----

| g. | The satisfaction from the officer's performance (including its evaluation of the level of involvement and care which the officer demonstrates within the performance of his position). |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| h. | Evaluation of the officer's ability to work in coordination and cooperation with the team. |
|----|--------------------------------------------------------------------------------------------|

| i. | The officer's contribution to appropriate corporate governance and control and ethics environment. |
|----|----------------------------------------------------------------------------------------------------|

----

| 1. | The said bonus, which is equivalent to approximately 9.2 monthly salaries of the chairman of the board in 2010, reflects Mr. Mientkavich’s contribution to the Company and is fair and reasonable, inter alia in view of the Company’s business performance in 2010. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2. | The bonus is granted in light of the activity and special contribution of the chairman of the board to the Company’s business in the context of performance of his duties in 2010, particularly for leading the Company in the processes for the sale of Medingo and Teledata, in addition to his continuous leadership, since taking office, of the Company’s cost-saving efforts, focusing of managerial input and the investment in some of the Group’s companies. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | Based on figures that were presented to the board of directors, the cost of the chairman of the board’s terms of employment, including the annual bonus, on the whole, relative to the Company’s business and results is reasonable and acceptable for officers in his position, in a public company of the Company’s type and of its scope of business and does not exceed the range of companies examined.  In addition, the overall cost of employment meets market standards relative to the accepted norm and is fair and reasonable in a public company of the Company’s type and scope of business. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | The grant of the bonus is in the ordinary course of business and will not have a material effect on the Company’s profitability, assets or liabilities. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | The grant of an annual bonus to the chairman of the board is made in the framework of his terms of employment, which were approved, inter alia, by the general meeting of the shareholders in May 2007, whereby the board of directors shall consider the grant of an annual bonus to the chairman of the board, in such amount as the board of directors shall determine, and all subject to the approval of the Company’s shareholders meeting. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6. | In determining the scope of the bonus, the board of directors considered, inter alia, the following parameters: The contribution of the chairman of the board to investments made by the Company and to the realization of investments made; the Company’s business performance during the year; the contribution of the chairman of the board to the Company’s business, profits, strength and stability; the Company’s need to retain a chairman of the board having unique skills, knowledge, experience and expertise; the extent of the responsibility imposed on the chairman of the board; the satisfaction with the functioning of the chairman of the board; the chairman of the board’s contribution to proper corporate governance, control environment and ethics. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                               |   | Cash and Cash-Equivalent Forms of Compensation(in thousands of U.S. $) |   |
|----------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                               |   | Salaries, Fees, Directors'Fees, Commissions andBonuses                 |   |
| 2010(1) (2)                                        |   |                                                                   |   |
| All Directors as a group, consisting of 10 persons |   |                                                                   | 466    |   |
| All Officersas a group, consisting of 1 person     |   |                                                                   | 1026   |   |

|   | (1) | Does not include payments by DIC to officers of the Company employed by DIC as part of the Services Agreement |
|--------|-----|---------------------------------------------------------------------------------------------------------------|

|   | (2) | See below –   "Payments paid during the period of this Annual Report to the five highest salary receivers amongst our officers and officers in our group companies" |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  Information on compensation receiver | *Compensation for services                                 | Total             |
|--------------------------------------------|------------------------------------------------------------|-------------------|
|                                       |                                                       |              |   | Thousand Dollars |   |
| Name                                       |  Position                                             | Employment date   | Type of Position | Shareholdings (Fully diluted) | Salary | Bonus | Share-based payments | Management fee |   |
| Avishai Friedman                           | Former RDC Chief Executive Officer                    | October, 2005 (1) | - | -  | - | 475 (2) | 1,585 (2) | - | 2,060 |
| Nahum (Humi) Shamir                        | Chief Executive Office and President of Given Imaging | April, 2006       | 100% |   - | 484 (3) | 552 (4) | 802 (5) | - | 1,838 |
| Yuval Yanay                                | Chief Financial Officer of Given Imaging                   | August, 2005      | 100% | - | 473 (6) | 274 (7) | 331 (8) | - | 1,078 |
| Arie Mientkavich                           | Chairman                                                   | January, 2007     | 50% | 0.4% | 502 (9) | 334(10) | 190 (11), (12) | - | 1,026 |
| Dr. Zvi Slovin                             | Former Co-Chief Executive Officer                          | May, 2009 (13)    | 100% | 0.04% | 449 (14) | 158 (15) | 324 (16) | - | 931 |

|  Information on compensation receiver |                    | *Compensation for services |  Total      |
|--------------------------------------------|-------------------------|----------------------------|------------------|
|                                       |                    |                       |             | Thousand Dollars |   |
| Name                                       | Position                | Employment date            | Type of Position | Holdings in company's corporate capital (Fully diluted) | Salary | Bonus | Share-based payments | Management fee |   |
| Ari Bronshtein                             | Chief Executive Officer | May, 2009 (17)             | (17)             | - | 419 (18) | - | - | - | 419 |

----

|   | (1)  | On January 12, 2010, Mr. Avishai Friedman’s employment and position in RDC was terminated at the latter’s initiative. |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | (2)  | The numbers indicated in the “Bonus” column and in the “Share-Based Payment” column refer to payments received by Mr. Friedman from RDC in the context of a settlement agreement with him following the termination of his employment with RDC and various demands raised by him in relation to the terms of his employment and termination thereof. The bonus amount took into consideration the difference between (a) the maximum value ascribed to Medingo’s shares that were held by Mr. Friedman on the eve of the sale thereof, based on the consideration in the transaction for its sale, and (b) the amount that was paid de facto by Medingo’s purchaser on the closing date of such transaction. For details regarding Medingo’s sale transaction, see Item 4A above. |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3)  | The amount paid by Given Imaging includes all of the following components: 12 monthly salaries in the sum of NIS 131,000 per monthly salary (approximately. $35,000), social benefits and related benefits, as customary in the United States, health insurance and car maintenance. The engagement between the parties shall terminate 24 months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. |
|--------|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4)  | The amount of the bonus for 2010 (the “Annual Bonus”) was determined in accordance with the bonus plan for 2010 for the officer, which was approved at the beginning of the same year by the compensation committee, the audit committee and the board of directors of Given Imaging. According to the bonus plan, a target amount was predetermined for the officer in respect of 2010, which is equal to 150% of his total current salaries in this year. The Annual Bonus for the officer was dependent upon two components as specified below, the weight of each component being expressed as a certain percentage of the said target amount. Most of the Annual Bonus was dependent upon the component of achieving certain pre-determined sales and net profit targets for Given Imaging on a consolidated basis in 2010, which are expressed in a matrix method according to various possible combinations between sales and profit as aforesaid, and could range between 50% and 200% of the weight of such component in the bonus plan, according to the extent of achievement of such targets, whilst in the event that the sales level or net profit level is lower than a certain pre-determined minimum threshold, no bonus will be paid in respect of this component. The balance of the Annual Bonus was dependent upon the component of achieving certain predetermined personal targets for the officer in accordance with his areas of responsibility, some of which are measurable (such as fulfillment of certain predefined tasks) and some qualitative (such as general level of performance) according to the evaluation of Given Imaging’s board of directors. Based on all of the components of the said bonus plan, the Annual Bonus for the officer could reach up to a maximum sum of approximately 200% of the total current salaries of the officer in 2010. The calculation and amount of the actual Annual Bonus were also approved by the compensation committee, the audit committee and the board of directors of Given Imaging, and are subject to the approval of its general meeting, which is expected to be held in June 2011. |
|--------|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (5)  | In connection with his office as President of Given Imaging, Given Imaging allotted to Mr. Shamir stock options as well as restricted share units in the framework of an option plan and a restricted share unit grant plan of Given Imaging, in accordance with the following details: |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In May 2006, Given Imaging allotted to Mr. Shamir options for the purchase of 300,000 ordinary shares of Given  Imaging at an exercise price of $17.78 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of grant, and they are exercisable until May 2013. In addition, at the same time, Given Imaging allotted to Mr. Shamir 100,000 restricted share units of Given Imaging, exercisable under terms identical to the terms of the options which were granted on that date, 37,500 units of which were exercised in 2010. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | In July 2007, Given Imaging allotted to Mr. Shamir options for the purchase of 100,000 ordinary shares of Given at an exercise price of $29.42 per share, exercisablein 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until July 2014. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | In June 2008, Given Imaging allotted to Mr. Shamir options for the purchase of 100,000 ordinary shares of Given Imaging at an exercise price of $16 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until July 2015. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | In August 2009, Given Imaging allotted to Mr. Shamir options for the purchase of 125,000 ordinary shares of Given Imaging at an exercise price of $11.55 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until August 2015. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | In June 2010, Given Imaging allotted to Mr. Shamir 57,000 restricted share units, 50% of which are in lock-up to two years and 25% up to three and four years, respectively, from the date of allotment thereof. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | The amount indicated in the “Share-Based Payment” column expresses the expense recorded by Given Imaging according to accounting standard IFRS2, in respect of the grant of options and restricted share units to Mr. Shamir, as specified above. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (6) | The amount paid by Given Imaging includes all of the following components: 12 monthly salaries, 90% linked to the consumer price index (as of December 2010 – NIS 111,000 per monthly salary (approximately $30,000), social benefits and related benefits, as customary, and loss of earning capacity insurance. The engagement between the parties shall terminate 12 months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | The amount of the bonus for 2010 (the “Annual Bonus”) was determined in accordance with the bonus plan for 2010 for the officer, which was approved at the beginning of the same year by the compensation committee, the audit committee and the board of directors of Given Imaging. According to the bonus plan, a target amount was predetermined for the officer in respect of 2010, which is equal to100% of his total current salaries in this year. The Annual Bonus for the officer was dependent upon two components as specified below, the weight of each component being expressed as a certain percentage of the target amount. Most of the Annual Bonus was dependent upon the component of achieving certain pre-determined sales and net profit targets for Given Imaging on a consolidated basis in 2010, which were expressed in a matrix method according to various possible combinations between sales and profit as aforesaid, and could range between 50% and 200% of the weight of such component in the bonus plan, according to the extent of achievement of such targets, while in the event that the sales level or net profit level were lower than a certain pre-determined minimum threshold, no bonus would be paid in respect of this component. The balance of the Annual Bonus was dependent upon the component of achieving certain personal targets predetermined for the officer in accordance with his areas of responsibility, some of which are measurable (such as fulfillment of certain predefined tasks) and some qualitative (such as general level of performance) according to the evaluation of Given Imaging’s CEO. Based on all of the components of the said bonus plan, the Annual Bonus for the officer could reach up to a maximum sum of approximately 170% of the total current salaries of the officer in 2010. The calculation and amount of the actual Annual Bonus were also approved by the compensation committee, the audit committee and the board of directors of Given Imaging. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | In connection with his position as CFO of Given Imaging, Given Imaging allotted to Mr. Yanai stock options as well as restricted share units in the framework of an option plan and a restricted share unit grant plan of Given Imaging, in accordance with the following details: |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In May 2006, Given Imaging allotted to Mr. Yanai options for the purchase of 30,000 ordinary shares of Given Imaging at an exercise price of $21.77 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until May 2011. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (b) | In March 2007, Given Imaging allotted to Mr. Yanai options for the purchase of 65,000 ordinary shares of Given Imaging at an exercise price of $20.74 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until March 2014. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | In February 2008, Given Imaging allotted to Mr. Yanai options for the purchase of 65,000 ordinary shares of Given Imaging at an exercise price of $16.04 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until February 2015. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | In February 2009, Given Imaging allotted to Mr. Yanai options for the purchase of 70,000 ordinary shares of Given Imaging at an exercise price of $8.20 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until February 2015. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | In February 2010, Given Imaging allotted to Mr. Yanai 32,000 restricted share units, 50% of which are locked-up for up to two years and 25% up to three and four years, respectively, from the date of allotment thereof. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | The amount includes all of the following components: 12 months salaries linked to the consumer price index (as of December 2010 – NIS 130,000 per monthly salary (approximately $30,000), social benefits and related benefits, as customary, and loss of earning capacity insurance and accommodation expenses. In May 2007, the Company’s shareholders approved (after receiving approval from the Company’s audit committee and board of directors) the Company’s engagement in an agreement with Mr. Arie Mientkavich for his employment as the Company’s Chairman of the board as of January 8, 2007. According to the agreement, Mr. Mientkavich will be employed on a part-time (50%) basis. The engagement between the parties shall terminate three months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. According to the employment agreement, the grant of an annual bonus as well as options in the Company to the Chairman is at the discretion of the Board of Directors, in an amount to be determined by the Board of Directors, and subject to the approval of the Company's shareholders |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (10) | On March 10, 2011, the Company’s board of directors approved (after receiving the approval of the Company’s audit committee) the payment of a bonus for the year 2010 subject to the approval of the Company’s shareholders meeting. Regarding the board of directors' reasons pertaining to the entirety of the employment terms of the chairman of our board and the reasons of the audit committee and board of directors with respect to the bonus, see above in this Item 6B. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (11) | In May 2007, the Company allotted to Mr. Mientkavich, in the framework of the Company’s option plan, 120,000 options for the purchase of ordinary shares of the Company at an exercise price of $15.53 per option (subject to adjustments), exercisable in 4 equal annual portions starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and until May 2012, all subject to the terms and conditions of the aforesaid plan. The amount indicated in the “Share-Based Payment” column includes approximately. $85 thousand recorded by the Company as an expense in its financial statements for 2010, according to accounting standard IFRS2, due to the grant of options to Mr. Mientkavich, as specified above. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (12) | In connection with his office as a director at Given Imaging, Given Imaging allotted to Mr. Mientkavich stock options as well as restricted share units in the framework of an option plan and a restricted share unit grant plan of Given Imaging, in accordance with the following details: |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In July 2007, Given Imaging allotted to Mr. Mientkavich options for the purchase of 35,000 ordinary shares of Given Imaging at an exercise price of $29.42 per share, exercisable in 4 equal annual portions starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until July 2014. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | In June 2008, Given Imaging allotted to Mr. Mientkavich options for the purchase of 10,000 ordinary shares of Given at an exercise price of $16 per share, exercisable from the first anniversary of allotment thereof, and until July 2015. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | In August 2009, Given Imaging allotted to Mr. Mientkavich options for the purchase of 10,000 ordinary shares of Given Imaging at an exercise price of $11.55 per share, exercisable from the first anniversary of allotment thereof, and  until August 2014. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | In June 2010, Given Imaging allotted to Mr. Mientkavich 4,545 restricted share units, that are locked-up until the date of the nearest general shareholders meeting of Given which is expected to take place at the end of May 2011. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (13) | Dr. Zvi Slovin is not employed by the Company, but by DIC and served as the Company’s co-CEO in accordance with the Services Agreement with DIC. In June 2010, Dr. Slovin, at his instance, terminated his office as co-CEO of the Company, and ceased to be a senior officer of the Company. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (14) | The amount includes all of the following components and they are paid by DIC and not by the Company, as specified in Section (6) above: 12 monthly salaries linked to the consumer price index (as of December 2010 – NIS 95,000 per monthly salary (approximately $26,768), social benefits and related benefits, as customary, car and loss of earning capacity insurance. The engagement between Dr. Slovin and DIC shall terminate three months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. It should be noted that part of the compensation relates to Dr. Slovin’s term of office as co-CEO of the Company and part is attributed to the period in which he did not serve as an officer. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (15) | The amount of the bonus  for 2010 was approved by the board of directors (after receipt of approval of the audit committee) in March 10, 2011. For the considerations of the Audit Committee and the board of directors, see this Item 6. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (16) | In November 2009, Medingo allotted to Dr. Slovin in the framework of his office as its Chairman of the board of directors, 2,551 options for the purchase of ordinary shares of Medingo at an exercise price of $106 per share (subject to adjustments) in the framework of an option plan of Medingo. Dr. Slovin was entitled to exercise, and indeed exercised, the options upon the closing of the transaction for the sale thereof. The amount indicated in the “Share-Based Payment” column expresses the expense recorded by Medingo in its financial statements for 2010, according to accounting standard IFRS2, in respect of the grant of options to Dr. Slovin, as specified above. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (17) | Mr. Bronshtein is not employed by the Company, but by DIC, and in the framework of his position as Vice President in DIC he also serves as the Company’s CEO, in accordance with the Service Agreement with DIC. In addition, Mr. Bronshtein also serves as Vice President in DIC. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (18) | The amount includes all of the following components that are paid by DIC and not by the Company, as specified in Section (6) above: 12 monthly salaries linked to the consumer price index (as of December 2010 – NIS 84,000 per monthly salary (approximately $23,667)), social benefits and related benefits, as customary, car (including gross-up) and loss of earning capacity insurance. The engagement between Mr. Bronshtein and DIC shall terminate three months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | d. | Below are the details of the compensation given to each one of the Company’s related parties, who are not included among those specified above, whether  the compensation was given to him by the Company or by a corporation controlled by the Company: |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Directors’ fees which do not exceed the customary remuneration that was paid by the Company or that the Company is required to pay and that has not yet been paid for the year 2010 to persons who were the directors of the Company during this period, 11 directors in total as aforesaid, amounted to approximately $466,000. Of such amount, in 2010 a sum of approximately $25,000 was paid to IDBH for the service of an officer thereof as a director of the Company, a sum of approximately $70,000 was paid to DIC for the service of two officers and an employee thereof as directors of the Company, and a sum of approximately $26,000 was paid to Dori Manor, a controlling shareholder of the Company, for his office as a director of the Company. Since September 2010, Ms. Rona Dankner, a director of the Company and the daughter of the controlling shareholder of the Company, Mr. Nochi Dankner, waived the entire director’s remuneration that she is entitled to receive from the Company. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Terms of Employment of Chairman of the Board of Directors. |
|--------|----|------------------------------------------------------------|

|   | 2. | Consulting Agreement with a Director. |
|--------|----|---------------------------------------|

|   | 3. | Commencing from September 2010. Rona Dankner informed us that she would continue serving as a director of Elron waiving compensation for such service. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1. | Chairman of the Board of Directors. |
|--------|----|-------------------------------------|

|   | 2. | Director. |
|--------|----|-----------|

|   | 3. | Officers. |
|--------|----|-----------|

| C.  | Board Practices |
|----------|-----------------|

----

----

|   | · | an employment relationship; |
|--------|--------|-----------------------------|

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

|   | · | control; and |
|--------|--------|--------------|

|   | · | service as an "office holder", as defined below in "Item 10 – Additional Information – Memorandum and Articles of Association", excluding service as a director who was appointed to serve as an external director in a company which is going to initially offer its shares to the public. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders, or their representatives, which voted at the meeting, vote in favor of election of the director, without taking abstentions into account. According to the Israeli Companies Law, a "controlling shareholder" is a person who has the ability to direct the activities of a company, other than if this power derives solely from his/her position on the board of directors or any other position with the company. A person is presumed to be a controlling shareholder if he or she holds half or more of the following: (i) voting rights in the general meeting, or (ii) rights to appoint directors or the chief executive officer; or |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | The total number of shares held by non-controlling shareholders, which voted against the election of the director, does not exceed one percent of the aggregate voting rights in the company. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

| D.  | Employees |
|----------|-----------|

| As of December 31,            |   | 2010   |   |   | 2009   |   |     | 2008   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|----------|--------|--------|
| Management and Administration |   |   | 1*     |   |   |   |  1* |   |   |   | 27 |   |

----

| E.  | Share Ownership |
|----------|-----------------|

| Director                                                         |   | Ordinary Shares |      |
|------------------------------------------------------------------|--------|-----------------|-----------|
| Arie Mientkavich, Chairman(1)                                    |   |            | 90,000    |   |
| Ami Erel(1)                                                 |   |            | 0         |   |
| Gad Arbel                                                        |   |            | 0         |   |
| Avraham Asheri                                                   |   |            | 0         |   |
| Prof. Gabi Barbash                                               |   |            | 0         |   |
| Rona Dankner                                                |   |            | 0         |   |
| Avraham Fischer(1)                                          |   |            | 0         |   |
| Yaacov Goldman                                                   |   |            | 0         |   |
| Shay Livnat(1)                                                   |   |            | 0         |   |
| Dori Manor(1)                                               |   |            | 0         |   |
| Arie Ovadia                                                      |   |            | 0         |   |
|                                                             |   |            |      |   |
| All officers and directors as a group (consisting of 14 persons) |   |            | 90,000(2) |   |

| (1) | Director or officer of DIC, IDBD or IDBH. Ownership excludes shares beneficially owned by these companies. |
|-----|------------------------------------------------------------------------------------------------------------|

| (2) | Options to purchase 90,000 of our ordinary shares currently exercisable or exercisable within 60 days of March 1, 2011. |
|-----|-------------------------------------------------------------------------------------------------------------------------|

----

| Date of Grant |   | Aggregate No. of Options |    |   | Aggregate No. of Options Granted to Officers (or former Officers) |   |    | Exercise Price |   | Expiry Date |
|---------------|--------|--------------------------|---------|--------|-------------------------------------------------------------------|--------|---------|----------------|--------|-------------|
|          |   |                     |    |   |                                                              |   |    |           |   |        |
| March 2006    |   |                     | 5,000   |   |                                                              |   | -       |           |   | $           | 9.05 |   | March 2011 |
| May 2007      |   |                     | 120,000 |   |                                                              |   | 120,000 |           |   | $           | 15.53 |   | May  2012 |
| January 2008  |   |                     | 10,000  |   |                                                              |   | 10,000  |           |   | $           | 10.57 |   | January 2013 |

| Type    |   | Number |   | Expiry  |        | Exercise Price |   |   | Fair Value of Aggregate Grant in $000 |   |
|---------|--------|--------|--------|---------|-------------|----------------|--------|--------|---------------------------------------|--------|
| Options |   |   | 35,000 |    | July 2014   |           | $      | 29.42  |                                  |   | $ | 373 |   |
| Options |   |   | 10,000 |    | June 2015   |           | $      | 16     |                                  |   | $ | 45 |   |
| Options |   |   | 10,000 |    | August 2014 |           | $      | 11.55  |                                  |   | $ | 44 |   |
| RSUs    |   |   | 4,545  | *  |        |           |   |   |                                  |   | $ | 80 |   |

----

  

| Item 7. | Major Shareholders and Related Party Transactions |
|---------|---------------------------------------------------|

| A. | Major Shareholders |
|----|--------------------|

|  Name and Address                                    |   | Number ofOrdinary Shares |              |   | Percent of OutstandingOrdinary Shares |   |   | Percent ofOrdinary Shares on a fully diluted basis |
|-----------------------------------------------------------|--------|--------------------------|-------------------|--------|--------------------------------------------|--------|--------|----------------------------------------------------|
| Discount Investment Corporation Ltd. (1) Tel Aviv, Israel |   |                     |   14,966,339 |   |                                       |   | 50.46  | %                                                  |   |   |   50.06 | % |
| All Officers and Directors as a group (2)            |   |                     | 90,000            |   |                                       |   | 0.9    | %                                                  |   |   | 0.3 | % |

|   | The above table does not include (i) 146 of our ordinary shares held by indirect subsidiaries of IDBD for their own account and (ii) 1,291,145.68 of our ordinary shares held for members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds and insurance policies, which are managed by subsidiaries of Clal Insurance Enterprises Holdings Ltd., or Clal Insurance, an entity controlled by IDBD. Clal Insurance disclaims beneficial ownership of such shares. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| B.  | Related Party Transactions |
|----------|----------------------------|

----

----

----

|   |   |                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   | (1)    | The coverage under the Policy was limited to $30 million per claim and in the aggregate during the policy period. |
|   |   |                                                                                                              |
|   | (2)    | The annual premium to be paid with respect to the policy was approximately $117,000.                              |

----

| C.  | Interests of Experts and Counsel |
|----------|----------------------------------|

| Item 8. | Financial Information |
|---------|-----------------------|

| A.  | Consolidated Statements and Other Financial Information |
|----------|---------------------------------------------------------|

----

----

| B.  | Significant Changes |
|----------|---------------------|

----

  

| Item 9.     | The Offer and Listing |
|---------------------------------|-----------------------|

| A.  | Offer and Listing Details |
|----------|---------------------------|

|                                 |   | U.S.         |   |   | U.S.        |   |   | TASE      |   |   | TASE      |   |
|--------------------------------------|--------|--------------|--------|--------|-------------|--------|--------|-----------|--------|--------|-----------|--------|
| Period                               |   | High(U.S. $) |   |   | Low(U.S. $) |   |   | High(NIS) |   |   | Low (NIS) |   |
|                                 |   |         |   |   |        |   |   |      |   |   |      |   |
| Annually                             |   |         |   |   |        |   |   |      |   |   |      |   |
|                                 |   |         |   |   |        |   |   |      |   |   |      |   |
| 2005                                 |   |         | 13.09  |   |        |   | 9.61   |      |   |   | 60.05     |   |   |   | 46.41 |   |
| 2006                                 |   |         | 12.80  |   |        |   | 8.75   |      |   |   | 55.79     |   |   |   | 40.81 |   |
| 2007                                 |   |         | 17.41  |   |        |   | 10.27  |      |   |   | 68.66     |   |   |   | 39.50 |   |
| 2008                                 |   |         | 12.37  |   |        |   | 1.07   |      |   |   | 45.50     |   |   |   | 4.45 |   |
| 2009                                 |   |         | 8.43   |   |        |   | 1.36   |      |   |   | 29.69     |   |   |   | 5.00 |   |
| 2010                                 |   |         | 8.67   |   |        |   | 4.66   |      |   |   | 32.25     |   |   |   | 16.98 |   |
|                                 |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| Quarterly                            |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
|                                 |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| First Quarter 2009                   |   |         | 2.43   |   |        |   | 1.48   |      |   |   | 10.36     |   |   |   | 5.46 |   |
| Second Quarter 2009                  |   |         | 3.57   |   |        |   | 1.75   |      |   |   | 13.88     |   |   |   | 8.57 |   |
| Third Quarter 2009                   |   |         | 8.43   |   |        |   | 2.94   |      |   |   | 28.51     |   |   |   | 11.71 |   |
| Fourth Quarter 2009                  |   |         | 7.88   |   |        |   | 4.63   |      |   |   | 29.69     |   |   |   | 18.30 |   |
| First Quarter 2010                   |   |         | 8.67   |   |        |   | 7.1    |      |   |   | 32.25     |   |   |   | 27.1 |   |
| Second Quarter 2010                  |   |         | 8.46   |   |        |   | 5.2    |      |   |   | 31.9      |   |   |   | 19.9 |   |
| Third Quarter 2010                   |   |         | 6.1    |   |        |   | 4.7    |      |   |   | 23.71     |   |   |   | 18.26 |   |
| Fourth Quarter 2010                  |   |         | 6.05   |   |        |   | 4.66   |      |   |   | 21.6      |   |   |   | 16.98 |   |
|                                 |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| Most recent six months               |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| October 2010                         |   |         | 6.05   |   |        |   | 5.51   |      |   |   | 21.6      |   |   |   | 19.81 |   |
| November 2010                        |   |         | 5.59   |   |        |   | 4.66   |      |   |   | 20.35     |   |   |   | 16.98 |   |
| December 2010                        |   |         | 5.43   |   |        |   | 4.91   |      |   |   | 19.53     |   |   |   | 18.06 |   |
| January 2011                         |   |         | 5.65   |   |        |   | 5.08   |      |   |   | 20.6      |   |   |   | 18.62 |   |
| February 2011                        |   |         | 5.69   |   |        |   | 4.93   |      |   |   | 20.72     |   |   |   | 18.12 |   |
| March 1, 2011 through March 10, 2011 |   |         | 8.50   |   |        |   | 7.55   |      |   |   | 32.40     |   |   |   | 28.52 |   |

| B. | Plan of Distribution |
|----|----------------------|

| C. | Markets |
|----|---------|

| D. | Selling Shareholders |
|----|----------------------|

----

| E. | Dilution |
|----|----------|

| F. | Expenses of the Issue |
|----|-----------------------|

| Item 10. | Additional Information |
|----------|------------------------|

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

| B.  | Memorandum and Articles of Association |
|----------|----------------------------------------|

----

|   | · | amendments to our Articles of Association and our Memorandum of Association; |
|--------|--------|------------------------------------------------------------------------------|

|   | · | appointment or termination of our auditors; |
|--------|--------|---------------------------------------------|

|   | · | appointment and dismissal of directors; |
|--------|--------|-----------------------------------------|

|   | · | approval of interested party actions and transactions requiring general meeting approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law due to a personal interest of a controlling shareholder or a director or an executive officer of ours; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | increase or reduction of our authorized share capital and alterations of our share capital; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | a merger as provided in section 320 of the Israeli Companies Law; |
|--------|--------|-------------------------------------------------------------------|

|   | · | the exercise of the Board of Directors' powers by a general meeting, if the Board of Directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in section 52(a) of the Israeli Companies Law; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | any matter that is required to be adopted by resolution of a general meeting pursuant to the Israeli Companies Law or in accordance with our Articles of Association. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (a) | all of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and |
|--------|-----|------------------------------------------------------------------------------------------------------------------------|

|   | (b) | approval of the shareholders at a general meeting is required if the majority of the Board of Directors have a personal interest in the matter. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | any amendment to the Articles of Association; |
|--------|--------|-----------------------------------------------|

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

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

|   | · | approval of interested party acts and transactions that require general meeting approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law due to a personal interest of a controlling shareholder or a director or an executive officer of ours. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| C.  | Material Contracts |
|----------|--------------------|

----

----

----

| D.  | Exchange Controls |
|----------|-------------------|

----

| E.  | Taxation |
|----------|----------|

----

----

| % of Foreign Ownership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | Tax Rate |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
| Over 25% but less than 49%                                                                                                             |   |     | 25     | % |
| 49% or more but less than 74%                                                                                                          |   |     | 20     | % |
| 74% or more but less than 90%                                                                                                          |   |     | 15     | % |
| 90% or more                                                                                                                            |   |     | 10     | % |

----

|   | · | Tax “holiday” package for a “Privileged Enterprise”: a tax exemption applies to undistributed profits for two to fifteen years depending on geographical location of the “Privileged Enterprise” and the level of foreign ownership. Company tax rates of between 10% and 25% apply to distributed exempt profits or profits derived subsequent to the exempt period. The total period of tax benefits is seven to fifteen years; or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Grant / Reduced tax package for an “Approved Enterprise”: Fixed asset grants up to 24% for enterprises in a development area and reduced company tax rates between 0% and 25% for seven to 15 years. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

----

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

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

|   | · | an estate, the income of which may be included in gross income for U.S. federal income tax purposes regardless of its source; or |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

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

----

----

----

----

----

----

| F.  | Dividends and Paying Agents |
|----------|-----------------------------|

| G.  | Statement by Experts |
|----------|----------------------|

| H.  | Documents on Display |
|----------|----------------------|

----

| I.  | Subsidiary Information |
|----------|------------------------|

| Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
|----------|------------------------------------------------------------|

| Item 12. | Descriptions of Securities Other Than Equity Securities |
|----------|---------------------------------------------------------|

   

| Item 13. | Defaults, Dividend Arrearages and Delinquencies |
|----------|-------------------------------------------------|

| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
|----------|------------------------------------------------------------------------------|

| Item 15. | Controls and Procedures |
|----------|-------------------------|

----

| Item 16. | [Reserved] |
|----------|------------|

| Item 16A. | Audit Committee Financial Expert |
|-----------|----------------------------------|

| Item 16B.  | Code of Ethics |
|-----------------|----------------|

----

  

| Item 16C. | Principal Accountant Fees and Services |
|-----------|----------------------------------------|

|                             |   | 2009                     |   |   | 2010   |   |
|----------------------------------|--------|--------------------------|--------|--------|--------|--------|
|                             |   | (in thousands of U.S. $) |   |
|                             |   |                     |   |
| Audit Fees (1)                   |   |                     | 454    |   |   |   | 406 |   |
| Tax Fees (2)                     |   |                     | 32     |   |   |   | 37 |   |
| Audit-Related  Fees(3) |   |                     | 40     |   |   |   | 36 |   |
| All Other Fees (4)               |   |                     | 24     |   |   |   | 13 |   |
|    Total          |   |                     | 550    |   |   |   | 492 |   |

| (1) Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor can reasonably provide, and include statutory audits; consents; and assistance with and review of documents filed with the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) Tax Fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for tax refund; tax consultations, such as assistance and representation in  connection with tax audits and appeals requests for rulings or technical advice from taxing authority; and tax planning services. (3) Audit-Related Fees include fees billed for accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; audit of prospectuses prepaid by subsidiaries assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; and assistance with internal control reporting requirements.  |
| (4) All Other Fees consists of services relating to Elron's subsidiaries status as "approved enterprise/beneficiary enterprise".                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

  

| Item 16D. | Exemptions from the Listing Standards for Audit Committees |
|-----------|------------------------------------------------------------|

| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
|-----------|------------------------------------------------------------------------|

----

| Period       | Total Number of Shares  Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that may yet be purchased under the Plans or Programs |
|--------------|---------------------------------------------|------------------------------|----------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| May 26, 2010 |   22,284                               | NIS 20.79                    | None                                                                             | none                                                                                                         |
| May 31, 2010 | 439,095                                     | NIS 24.399                   | None                                                                             | none                                                                                                         |
| June 1, 2010 |   44,475                               | NIS 24.5                     | None                                                                             | none                                                                                                         |
| June 6, 2010 |   19,369                               | NIS 22.41                    | None                                                                             | none                                                                                                         |

| Item 16F. | Change in Registrant’s Certifying Accountant. |
|-----------|-----------------------------------------------------|

| Item 16G. | Corporate Governance |
|-----------|----------------------|

  

| Item 17. | Financial Statements |
|----------|----------------------|

| Item 18. | Financial Statements |
|----------|----------------------|

----

  

| Item 19. | Exhibits |
|----------|----------|

| Exhibit No. | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 1.1         | Articles of Association (English translation), consolidated version including amendments approved by the Company's shareholders on December 28, 2006, incorporated by reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for the year ended December 31, 2006, filed with SEC on June 27, 2007.                                                                                                        |
| 1.2         | Memorandum of Association of Elron Electronic Industries Ltd., incorporated by reference to Exhibit 1.2 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000, filed with the SEC on June 8, 2001.                                                                                                                                                                                      |
| 4.1         | Services Agreement dated as of March 19, 2009 by and between the registrant and Discount Investment Corporation Ltd., incorporated by reference to Exhibit 99.2 to Form 6-K, filed with the SEC on March 24, 2009.                                                                                                                                                                                                       |
| 4.2         | Joint Venture Agreement, dated as of April 1993, among Discount Investment Corporation Ltd., PEC Israel Economic Corporation, Rafael Armament Development Authority Ltd. and Galram Technology Industries Limited (“Joint Venture Agreement”), incorporated by reference to Exhibit 10.4 to Amendment No. 5 to the Company’s Registration Statement on Form F-4, filed with the SEC on March 14, 2002. |
| 4.3         | Amendment to Joint Venture Agreement, dated December 30, 2007, incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 20F for the year ended December 31, 2007 filed with the SEC on June 30, 2008.                                                                                                                                                                                             |
| 8.1         | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                    |
| 11.1        | Code of Ethics, incorporated by reference to Exhibit 11.1 to the Company’s Annual Report on Form 20-F, filed with the SEC on June 29, 2004.                                                                                                                                                                                                                                                                        |
| 12.1        | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                  |
| 12.2        | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                  |
| 13.1        | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                 |
| 13.2        | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                 |
| 15.1        | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for Elron Electronic Industries Ltd., dated March 10, 2011.                                                                                                                                                                                                                                                                           |
| 15.2        | Consent of Somekh Chaikin, a Member firm of KPMG International for Given Imaging Ltd., dated March 10, 2011.                                                                                                                                                                                                                                                                                                             |

|   | * | This document is being furnished in accordance with SEC Release No. 33-8212 and 34-47551. |
|--------|---|-------------------------------------------------------------------------------------------|

----

|   |   |                           | Dated: March 10, 2011 | ELRON ELECTRONIC INDUSTRIES LTD.                                                                                                 |
|--------|--------|--------------------------------|-----------------------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                           |  By:        | /s/ Ari Bronshtein                                                                                                               |
|   |   |                           | Name:            | Ari Bronshtein                                                                                                                   |
|   |   |                           | Title:           | Chief Executive Officer                                                                                                     |
|   |   |       | By:              | /s/ Yaron Elad                    |
|   |   |                           | Name:            | Yaron Elad                                                                                                                       |
|   |   |                           | Title:           | Vice President & Chief Financial Officer                                                                                     |

----

----

| Consolidated Financial Statements for the year ended December 31, 2010 |
|------------------------------------------------------------------------|

|                                                                                                        |   | Page    |
|-------------------------------------------------------------------------------------------------------------|--------|---------|
|                                                                                                        |   |    |   |
| Report of Independent Registered Public Accounting Firm                                                     |   | F - 2   |   |
|                                                                                                        |   |    |   |
| Consolidated Statements of Financial Position                                                               |   | F - 3   |   |
|                                                                                                        |   |    |   |
| Consolidated Statements of Income                                                                           |   | F - 5   |   |
|                                                                                                        |   |    |   |
| Consolidated Statements of Comprehensive Income                                                             |   | F - 6   |   |
|                                                                                                        |   |    |   |
| Consolidated Statements of Changes in Equity                                                                |   | F - 7   |   |
|                                                                                                        |   |    |   |
| Consolidated Statements of Cash Flows                                                                       |   | F - 10  |   |
|                                                                                                        |   |    |   |
| Notes to the Consolidated Financial Statements                                                              |   | F - 12  |   |
|                                                                                                        |   |    |   |
| Appendix to the Consolidated Financial Statements - Details relating to Investments as of December 31, 2010 |   | F - 112 |   |

----

| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER     |
|------------------|--------------------------------------|
| March 10, 2011   | A Member of Ernst & Young Global |

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER     |
|------------------|--------------------------------------|
| March 10, 2011   | A Member of Ernst & Young Global |

----

| Consolidated Statements of Financial Position as of |
|-----------------------------------------------------|

|                                                |   |   |   |        | December 31 |    |   | December 31 |   |
|-----------------------------------------------------|--------|--------|--------|-------------|-------------|---------|--------|-------------|--------|
|                                                |   |   |   |        | 2010        |    |   | 2009        |   |
|                                                |   | Note   |   | $ thousands |        |
|                                                |   |   |   |        |        |    |   |        |   |
| Current assets                                      |   |   |   |        |        |    |   |        |   |
| Cash and cash equivalents                           |   | 4      |   |        |        | 56,539  |   |        |   | 64,747 |   |
| Restricted cash                                     |   |   |   |        |        | 365     |   |        |   | 60 |   |
| Trade receivables                                   |   | 5      |   |        |        | 3,061   |   |        |   | 2,084 |   |
| Other current assets                                |   | 6      |   |        |        | 4,324   |   |        |   | 3,391 |   |
| Inventories                                         |   | 7      |   |        |        | 5,356   |   |        |   | 3,582 |   |
|                                                |   |   |   |        |        |    |   |        |   |   |   |
|                                                |   |   |   |        |        | 69,645  |   |        |   | 73,864 |   |
|                                                |   |   |   |        |        |    |   |        |   |   |   |
| Assets held for sale                                |   | 8      |   |        |        | 17,211  |   |        |   | – |   |
|                                                |   |   |   |        |        |    |   |        |   |   |   |
| Non-current assets                                  |   |   |   |        |        |    |   |        |   |   |   |
| Investments in associates                           |   | 3      |   |        |        | 109,369 |   |        |   | 113,237 |   |
| Other investments (accounted as available for sale) |   | 9      |   |        |        | 20,221  |   |        |   | 14,527 |   |
| Other long-term receivables                         |   | 10     |   |        |        | 28,218  |   |        |   | 940 |   |
| Property, plant and equipment, net                  |   | 11     |   |        |        | 2,079   |   |        |   | 2,991 |   |
| Intangible assets, net                              |   | 12     |   |        |        | 3,595   |   |        |   | 7,521 |   |
|                                                |   |   |   |        |        |    |   |        |   |   |   |
|                                                |   |   |   |        |        | 163,482 |   |        |   | 139,216 |   |
|                                                |   |   |   |        |        |    |   |        |   |   |   |
| Total assets                                        |   |   |   |        |        | 250,338 |   |        |   | 213,080 |   |

----

| Consolidated Statements of Financial Position as of |
|-----------------------------------------------------|

|                                                    |   |   |   |        | December 31 |    |   | December 31 |   |
|---------------------------------------------------------|--------|--------|--------|-------------|-------------|---------|--------|-------------|--------|
|                                                    |   |   |   |        | 2010        |    |   | 2009        |   |
|                                                    |   | Note   |   | $ thousands |        |
|                                                    |   |   |   |        |        |    |   |        |   |
| Current liabilities                                     |   |   |   |        |        |    |   |        |   |
| Short term credit and loans from banks and others       |   | 15     |   |        |        | 850     |   |        |   | 10,865 |   |
| Trade payables                                          |   | 13     |   |        |        | 3,856   |   |        |   | 4,273 |   |
| Other current liabilities                               |   | 14     |   |        |        | 8,801   |   |        |   | 9,627 |   |
| Current maturities of convertible debentures            |   | 15     |   |        |        | 1,275   |   |        |   | 1,172 |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
|                                                    |   |   |   |        |        | 14,782  |   |        |   | 25,937 |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
| Long-term liabilities                                   |   |   |   |        |        |    |   |        |   |   |   |
| Long term loans from banks and others                   |   | 15     |   |        |        | 535     |   |        |   | 36,981 |   |
| Loans from shareholders                                 |   | 15     |   |        |        | – |   |        |   | 16,737 |   |
| Convertible debentures                                  |   | 15     |   |        |        | 2,110   |   |        |   | 2,211 |   |
| Royalty bearing government grants                       |   | 16     |   |        |        | 8,385   |   |        |   | 8,685 |   |
| Employee benefits                                       |   |   |   |        |        | 134     |   |        |   | 194 |   |
| Other long term liabilities                             |   |   |   |        |        | 153     |   |        |   | 242 |   |
| Deferred taxes                                          |   | 21     |   |        |        | 4,746   |   |        |   | – |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
|                                                    |   |   |   |        |        | 16,063  |   |        |   | 65,050 |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
| Equity attributable to the Company’s shareholders |   | 17     |   |        |        |    |   |        |   |   |   |
| Issued capital                                          |   |   |   |        |        | 9,573   |   |        |   | 9,573 |   |
| Share premium                                           |   |   |   |        |        | 190,378 |   |        |   | 190,328 |   |
| Capital reserves                                        |   |   |   |        |        | 14,855  |   |        |   | 10,067 |   |
| Accumulated Deficit                                     |   |   |   |        |        | (18,885 | )      |        |   | (83,499 | ) |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
|                                                    |   |   |   |        |        | 195,921 |   |        |   | 126,469 |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
| Non-controlling interests                               |   |   |   |        |        | 23,572  |   |        |   | (4,376 | ) |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
| Total equity                                            |   |   |   |        |        | 219,493 |   |        |   | 122,093 |   |
|                                                    |   |   |   |        |        |    |   |        |   |   |   |
| Total liabilities and equity                            |   |   |   |        |        | 250,338 |   |        |   | 213,080 |   |

|                               |   |                    |   |                                        |
|------------------------------------|--------|-------------------------|--------|---------------------------------------------|
| Arie Mientkavich                   |   | Ari Bronshtein          |   | Yaron Elad                                  |
| Chairman of the Board of Directors |   | Chief Executive Officer |   | Vice President &Chief Financial Officer |

----

| Consolidated Statements of Income |
|-----------------------------------|

|                                                                         |   |   |   |                                      | For the year ended |           |   | For the year ended |   |    | For the year ended |   |
|------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------|--------------------|----------------|--------|--------------------|--------|---------|--------------------|--------|
|                                                                         |   |   |   |                                      | December 31        |           |   | December 31        |   |    | December 31        |   |
|                                                                         |   |   |   |                                      | 2010               |           |   | 2009               |   |    | 2008               |   |
|                                                                         |   |   |   |                                      | $ thousands        |           |
|                                                                         |   | Note   |   | (except for income (loss) per share data) |               |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |
| Income                                                                       |   |   |   |                                      |               |           |   |               |   |    |               |   |
| Income from sales                                                            |   |   |   |                                      |               | 9,608          |   |               |   | 9,904   |               |   |   | 6,237 |   |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Gain from disposal of investee companies and changes in holdings, net        |   | 20.A   |   |                                      |               |   160,010 |   |               |   | 31,802  |               |   |   | 783 |   |
| Financial income                                                             |   | 20.F   |   |                                      |               | 2,739          |   |               |   | 1,413   |               |   |   | 6,259 |   |
|                                                                         |   |   |   |                                      |               | 172,357        |   |               |   | 43,119  |               |   |   | 13,279 |   |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Cost and Expenses                                                            |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Cost of sales                                                                |   | 20.B   |   |                                      |               | 3,948          |   |               |   | 4,824   |               |   |   | 3,200 |   |
| Research and development expenses, net                                       |   | 20.C   |   |                                      |               | 18,209         |   |               |   | 25,699  |               |   |   | 29,911 |   |
| Selling and marketing expenses                                               |   | 20.D   |   |                                      |               | 6,551          |   |               |   | 8,985   |               |   |   | 7,525 |   |
| General and administrative expenses                                          |   | 20.E   |   |                                      |               | 13,577         |   |               |   | 15,865  |               |   |   | 19,065 |   |
| Equity in losses of associates, net                                          |   | 20.G   |   |                                      |               | 10,863         |   |               |   | 10,514  |               |   |   | 40,146 |   |
| Amortization of intangible assets                                            |   |   |   |                                      |               | 1,484          |   |               |   | 1,416   |               |   |   | 1,061 |   |
| Financial expenses                                                           |   | 20.F   |   |                                      |               | 3,031          |   |               |   | 5,434   |               |   |   | 4,800 |   |
| Other expenses, net                                                          |   | 20.H   |   |                                      |               | 3,136          |   |               |   | 2,230   |               |   |   | 257 |   |
|                                                                         |   |   |   |                                      |               | 60,799         |   |               |   | 74,967  |               |   |   | 105,965 |   |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Income (loss) before taxes on income                                         |   |   |   |                                      |               | 111,558        |   |               |   | (31,848 | )                  |   |   | (92,686 | ) |
| Taxes on income (tax benefit)                                                |   | 21     |   |                                      |               | 6,112          |   |               |   | (2,453  | )                  |   |   | (32 | ) |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Net income (loss)                                                            |   |   |   |                                      |               | 105,446        |   |               |   | (29,395 | )                  |   |   | (92,654 | ) |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Attributable to:                                                             |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| The Company’s shareholders                                             |   |   |   |                                      |               | 60,678         |   |               |   | (14,304 | )                  |   |   | (71,834 | ) |
| Non-controlling interests                                                    |   |   |   |                                      |               | 44,768         |   |               |   | (15,091 | )                  |   |   | (20,820 | ) |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
|                                                                         |   |   |   |                                      |               | 105,446        |   |               |   | (29,395 | )                  |   |   | (92,654 | ) |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Net income (loss) per share attributable to the Company’s shareholders |   | 22     |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Basic net income (loss) per share                                            |   |   |   |                                      |               | 1.98           |   |               |   | (0.48   | )                  |   |   | (2.43 | ) |
|                                                                         |   |   |   |                                      |               |           |   |               |   |    |               |   |   |   |   |
| Diluted net income (loss) per share                                          |   |   |   |                                      |               | 1.98           |   |               |   | (0.49   | )                  |   |   | (2.44 | ) |

----

| Consolidated Statements of Comprehensive Income |
|-------------------------------------------------|

|                                                                                                            |   | For the year ended |    |   | For the year ended |   |    | For the year ended |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------|--------------------|--------|---------|--------------------|--------|
|                                                                                                            |   | December 31        |    |   | December 31        |   |    | December 31        |   |
|                                                                                                            |   | 2010               |    |   | 2009               |   |    | 2008               |   |
|                                                                                                            |   | $ thousands        |    |
|                                                                                                            |   |               |    |   |               |   |    |               |   |
| Net income (loss)                                                                                               |   |               | 105,446 |   |               |   | (29,395 | )                  |   |   | (92,654 | ) |
|                                                                                                            |   |               |    |   |               |   |    |               |   |   |   |   |
| Other comprehensive income (loss)(after tax):                                                                   |   |               |    |   |               |   |    |               |   |   |   |   |
| Reserve from revaluation of investment following consolidation                                                  |   |               | – |   |               |   | – |               |   |   | 5,219 |   |
| Gain(loss) from available for sale financial assets                                                             |   |               | 9,585   |   |               |   | 5,001   |               |   |   | (1,990 | ) |
| Available-for-sale financial assets classified to the statement of income                                       |   |               | – |   |               |   | (84     | )                  |   |   | (2,266 | ) |
| Foreign currency translation differences for foreign operations                                                 |   |               | (1,269  | )      |               |   | (45     | )                  |   |   | 902 |   |
| Foreign currency translation differences charged to the statement of income upon disposal of foreign operations |   |               | – |   |               |   | (4,330  | )                  |   |   | – |   |
| Actuarial gains (losses) from defined benefit plan                                                              |   |               | (57     | )      |               |   | 15      |               |   |   | 69 |   |
| Company’s share of other comprehensive income (loss) of associates                                        |   |               | (204    | )      |               |   | 455     |               |   |   | (609 | ) |
|                                                                                                            |   |               |    |   |               |   |    |               |   |   |   |   |
| Total other comprehensive income                                                                                |   |               | 8,055   |   |               |   | 1,012   |               |   |   | 1,325 |   |
|                                                                                                            |   |               |    |   |               |   |    |               |   |   |   |   |
| Total comprehensive income (loss)                                                                               |   |               | 113,501 |   |               |   | (28,383 | )                  |   |   | (91,329 | ) |
|                                                                                                            |   |               |    |   |               |   |    |               |   |   |   |   |
| Attributable to:                                                                                                |   |               |    |   |               |   |    |               |   |   |   |   |
| Company’s shareholders                                                                                    |   |               | 69,100  |   |               |   | (13,381 | )                  |   |   | (70,485 | ) |
| Non-controlling interests                                                                                       |   |               | 44,401  |   |               |   | (15,002 | )                  |   |   | (20,844 | ) |
|                                                                                                            |   |               |    |   |               |   |    |               |   |   |   |   |
| Total comprehensive income (loss)                                                                               |   |               | 113,501 |   |               |   | (28,383 | )                  |   |   | (91,329 | ) |

----

| Consolidated Statements of Changes in Equity |
|----------------------------------------------|

|                                                                                                           |   | Attributable to the Company’s shareholders |   |          |   |                                                                     |   |                                                   |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|---------------|--------|--------------------------------------------------------------------------|--------|--------------------------------------------------------|
|                                                                                                           |   | Issued capital                                   |   | Share Premium |   | Capital reserves in respect of transaction with controlling shareholders |   | Revaluation reserve from consolidation of subsidiaries |   |   | Capital reserves in respect of available for sale financial assets |   |   | Capital reserves from translation differences |   |   | Capital reserves from transactions with non- controlling interests |   | Capital reserve from classification of available for sale assets as held for sale |   | Accumulated deficit from share based payments |   |   | Accumulated deficit |   |   | Total |   | Non-controlling interests |   |   | Totalequity |   |
|                                                                                                           |   | $ thousands                                 |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2010                                                                                     |   | 9,573                                            |   | 190,328       |   | 217                                                                      |   | 4,127                                                  |   |   | 5,000 |   |   | 723 |   |   | – |   | – |   | 1,180 |   |   | (84,679 | ) |   | 126,469 |   | (4,376 | ) |   | 122,093 |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss) for the year                                                                 |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | 9,502 |   |   | (951 | ) |   | – |   | – |   | – |   |   | 60,549 |   |   | 69,100 |   | 44,401 |   |   | 113,501 |   |
| Share-based payments in respect of awards issued by subsidiaries                                               |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | – |   | 1,039 |   |   | 1,039 |   |
| Expiration of options in respect of awards issued by subsidiaries                                              |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | 80 |   | – |   | – |   |   | – |   |   | 80 |   | (80 | ) |   | – |   |
| Share based payments                                                                                           |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | 88 |   |   | – |   |   | 88 |   | – |   |   | 88 |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of options into shares                                                                                |   | –                                          |   | 50            |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | (74 | ) |   |   74 |   |   |   50 |   |   – |   |   |   50 |   |
| Purchase of options from non-controlling interests                                                             |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | – |   | (255 | ) |   | (255 | ) |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary in stages to retained earnings |   | –                                          |   | –       |   | –                                                                  |   | (3,977                                                 | ) |   | – |   |   | – |   |   | – |   | – |   | – |   |   | 3,977 |   |   | – |   | – |   |   | – |   |
| Increase in the non-controlling interest due to additional investment in subsidiary                            |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | – |   | 641 |   |   | 641 |   |
| Dividend to non-controlling interests                                                                          |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | – |   | (14,997 | ) |   | (14,997 | ) |
| Capital reserve from transaction with controlling shareholders (*)                                             |   | –                                          |   | –       |   | 134                                                                      |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | 134 |   | – |   |   | 134 |   |
| Classification of non- current assets as held for sale (**)                                                    |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | (4,209 | ) |   | – |   |   | – |   | 4,209 |   | – |   |   | – |   |   | – |   | – |   |   | – |   |
| Change in non- controlling interests due to sale of a subsidiary                                               |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   | – |   |   | – |   |   | – |   | (2,801 | ) |   | (2,801 | ) |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2010                                                                                   |   | 9,573                                            |   | 190,378       |   | 351                                                                      |   | 150                                                    |   |   | 10,293 |   |   | (228 | ) |   | 80 |   | 4,209 |   | 1,194 |   |   | (20,079 | ) |   | 195,921 |   | 23,572 |   |   | 219,493 |   |

| (*)  | For additional information, see note 17 (e). |
|------|----------------------------------------------|
| (**) | For additional information, see note 8.      |

----

| Consolidated Statements of Changes in Equity |
|----------------------------------------------|

|                                                                                                           |   | Attributable to the Company’s shareholders |   |          |   |                                                                     |   |                                                   |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|---------------|--------|--------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                                                           |   | Issued capital                                   |   | Share Premium |   | Capital reserves in respect of transaction with controlling shareholders |   | Revaluation reserve from consolidation of subsidiaries |   |   | Capital reserves in respect of available for sale financial assets |   |   | Capital reserves from translation differences |   |   | Accumulated deficit from share based payments |   | Accumulated deficit |   |   | Total |   |   | Non- controlling interests |   |   | Totalequity |   |
|                                                                                                           |   | $ thousands                                      |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009                                                                                     |   | 9,573                                            |   | 190,328       |   | –                                                                  |   | 4,751                                                  |   |   | (211 | ) |   | 5,117 |   |   | 1,053 |   | (71,105 | ) |   | 139,506 |   |   | 6,545 |   |   | 146,051 |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                              |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | 5,211 |   |   | (4,394 | ) |   | – |   | (14,198 | ) |   | (13,381 | ) |   | (15,002 | ) |   | (28,383 | ) |
| Share-based payments in respect of awards issued by subsidiaries                                               |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   |   | – |   |   | 2,395 |   |   | 2,395 |   |
| Share based payments                                                                                           |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | 127 |   | – |   |   | 127 |   |   | – |   |   | 127 |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary in stages to retained earnings |   | –                                          |   | –       |   | –                                                                  |   | (624                                                   | )      |   | – |   |   | – |   |   | – |   | 624 |   |   | – |   |   | – |   |   | – |   |
| Deconsolidation of company that ceased being consolidated                                                      |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   |   | – |   |   | (1,625 | ) |   | (1,625 | ) |
| Increase in the non-controlling interest due to additional investment in subsidiary                            |   | –                                          |   | –       |   | –                                                                  |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   |   | – |   |   | 3,528 |   |   | 3,528 |   |
| Transaction with non-controlling interests                                                                     |   | –                                          |   | –       |   | 217                                                                      |   | –                                                |   |   | – |   |   | – |   |   | – |   | – |   |   | 217 |   |   | (217 | ) |   | – |   |
|                                                                                                           |   |                                             |   |          |   |                                                                     |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2009                                                                                   |   | 9,573                                            |   | 190,328       |   | 217                                                                      |   | 4,127                                                  |   |   | 5,000 |   |   | 723 |   |   | 1,180 |   | (84,679 | ) |   | 126,469 |   |   | (4,376 | ) |   | 122,093 |   |

----

| Consolidated Statements of Changes in Equity |
|----------------------------------------------|

|                                                                                                           |   | Attributable to the Company’s shareholders |   |          |   |                                                   |   |   |                                                               |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|---------------|--------|--------------------------------------------------------|--------|--------|--------------------------------------------------------------------|
|                                                                                                           |   | Issuedcapital                                    |   | Share Premium |   | Revaluation reserve from consolidation of subsidiaries |   |   | Capital reserves in respect of available for sale financial assets |   |   | Capital reserves from translation differences |   | Accumulated deficit from share based payments |   | Accumulated deficit |   |   | Total |   |   | Non-controlling interests |   |   | Totalequity |   |
|                                                                                                           |   | $ thousands                                      |   |
|                                                                                                           |   |                                             |   |          |   |                                                   |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2008                                                                                     |   | 9,573                                            |   | 190,328       |   | –                                                |   |   | 4,220                                                              |   |   | 4,217 |   | 675 |   | 600 |   |   | 209,613 |   |   | 3,043 |   |   | 212,656 |   |
|                                                                                                           |   |                                             |   |          |   |                                                   |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                              |   | –                                          |   | –       |   | 5,219                                                  |   |   | (4,431                                                             | ) |   | 900 |   | – |   | (72,173 | ) |   | (70,485 | ) |   | (20,844 | ) |   | (91,329 | ) |
| Share-based payments in respect of awards issued by subsidiaries                                               |   | –                                          |   | –       |   | –                                                |   |   | –                                                            |   |   | – |   | – |   | – |   |   | – |   |   | 1,925 |   |   | 1,925 |   |
| Share based payment                                                                                            |   | –                                          |   | –       |   | –                                                |   |   | –                                                            |   |   | – |   | 378 |   | – |   |   | 378 |   |   | – |   |   | 378 |   |
| Increase in the non-controlling interest due to issuance of shares by a subsidiary                             |   | –                                          |   | –       |   | –                                                |   |   | –                                                            |   |   | – |   | – |   | – |   |   | – |   |   | 18,631 |   |   | 18,631 |   |
|                                                                                                           |   |                                             |   |          |   |                                                   |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary in stages to retained earnings |   | –                                          |   | –       |   | (468                                                   | )      |   | –                                                            |   |   | – |   | – |   | 468 |   |   | – |   |   | – |   |   | – |   |
| Increase in non-controlling interest due to initial consolidation                                              |   | –                                          |   | –       |   | –                                                |   |   | –                                                            |   |   | – |   | – |   | – |   |   | – |   |   | 3,790 |   |   | 3,790 |   |
| Balance at December 31, 2008                                                                                   |   | 9,573                                            |   | 190,328       |   | 4,751                                                  |   |   | (211                                                               | ) |   | 5,117 |   | 1,053 |   | (71,105 | ) |   | 139,506 |   |   | 6,545 |   |   | 146,051 |   |

----

| Consolidated Statements of Cash Flows |
|---------------------------------------|

|                                                                                 |   | For the     |     |   | For the     |   |    | For the     |   |
|--------------------------------------------------------------------------------------|--------|-------------|----------|--------|-------------|--------|---------|-------------|--------|
|                                                                                 |   | year ended  |     |   | year ended  |   |    | year ended  |   |
|                                                                                 |   | December 31 |     |   | December 31 |   |    | December 31 |   |
|                                                                                 |   | 2010        |     |   | 2009        |   |    | 2008        |   |
|                                                                                 |   | $ thousands |     |
|                                                                                 |   |        |     |   |        |   |    |        |   |
| Cash flows from operating activities                                                 |   |        |     |   |        |   |    |        |   |
| Net income (loss)                                                                    |   |        | 105,446  |   |        |   | (29,395 | )           |   |   | (92,654 | ) |
|                                                                                 |   |        |     |   |        |   |    |        |   |   |   |   |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: |   |        |     |   |        |   |    |        |   |   |   |   |
| Adjustment to the profit or loss items:                                              |   |        |     |   |        |   |    |        |   |   |   |   |
| Depreciation and amortization                                                        |   |        | 2,412    |   |        |   | 2,958   |        |   |   | 2,050 |   |
| Financial expenses, net                                                              |   |        | 1,777    |   |        |   | 949     |        |   |   | 647 |   |
| Stock based compensation and changes in liability in respect of call options         |   |        | 1,131    |   |        |   | 2,398   |        |   |   | 2,128 |   |
| Accrued interest on loans from shareholders                                          |   |        | 742      |   |        |   | 1,561   |        |   |   | 176 |   |
| Gain from sale of investments in available for sale financial assets                 |   |        | (28      | )      |        |   | (85     | )           |   |   | (239 | ) |
| Reevaluation of restricted cash                                                      |   |        | –  |   |        |   | 83      |        |   |   | 389 |   |
| Loss from sale of property and equipment                                             |   |        | 66       |   |        |   | 64      |        |   |   | 8 |   |
| Impairment of investments                                                            |   |        | 1,780    |   |        |   | 1,853   |        |   |   | 909 |   |
| Loss from impairment of intangible assets                                            |   |        | 2,421    |   |        |   | – |        |   |   | – |   |
| Change in fair value of convertible debentures                                       |   |        | 1,331    |   |        |   | 921     |        |   |   | (2,143 | ) |
| Loss from early redemption of convertible debentures                                 |   |        | –  |   |        |   | – |        |   |   | 359 |   |
| Gain from disposal of investee companies and changes in holdings, net                |   |        | (160,010 | )      |        |   | (31,802 | )           |   |   | (783 | ) |
| Equity in losses of associates, net                                                  |   |        | 10,863   |   |        |   | 10,514  |        |   |   | 40,146 |   |
| Taxes on income                                                                      |   |        | 6,112    |   |        |   | – |        |   |   | (111 | ) |
| Other                                                                                |   |        | (2,637   | )      |        |   | 323     |        |   |   | 1,565 |   |
|                                                                                 |   |        | (134,040 | )      |        |   | (10,263 | )           |   |   | 45,101 |   |
|                                                                                 |   |        |     |   |        |   |    |        |   |   |   |   |
| Changes in Assets and Liabilities:                                                   |   |        |     |   |        |   |    |        |   |   |   |   |
| Increase in trade receivables                                                        |   |        | (977     | )      |        |   | (1,103  | )           |   |   | (99 | ) |
| Decrease (increase) in other current assets                                          |   |        | (591     | )      |        |   | 62      |        |   |   | 1,752 |   |
| Increase in inventories                                                              |   |        | (2,501   | )      |        |   | (2,634  | )           |   |   | (329 | ) |
| Decrease in liabilities in respect of government grants                              |   |        | (1,282   | )      |        |   | (589    | )           |   |   | (1,270 | ) |
| Increase in trade payables                                                           |   |        | 371      |   |        |   | 307     |        |   |   | 8 |   |
| Increase (decrease) in other current liabilities                                     |   |        | 651      |   |        |   | (1,444  | )           |   |   | 793 |   |
|                                                                                 |   |        | (4,329   | )      |        |   | (5,401  | )           |   |   | 855 |   |
|                                                                                 |   |        |     |   |        |   |    |        |   |   |   |   |
| Cash paid and received during the year for:                                          |   |        |     |   |        |   |    |        |   |   |   |   |
| Taxes received                                                                       |   |        | 770      |   |        |   | – |        |   |   | – |   |
| Taxes paid                                                                           |   |        | (1,734   | )      |        |   | – |        |   |   | – |   |
| Interest paid                                                                        |   |        | (2,708   | )      |        |   | (1,542  | )           |   |   | (1,742 | ) |
| Interest received                                                                    |   |        | 931      |   |        |   | 593     |        |   |   | 1,095 |   |
|                                                                                 |   |        | (2,741   | )      |        |   | (949    | )           |   |   | (647 | ) |
|                                                                                 |   |        |     |   |        |   |    |        |   |   |   |   |
| Net cash used in operating activities                                                |   |        | (35,664  | )      |        |   | (46,008 | )           |   |   | (47,345 | ) |

----

| Consolidated Statements of Cash Flows |
|---------------------------------------|

|                                                                                             |   | For the     |    |   | For the     |   |    | For the     |   |
|--------------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                                                                                             |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                                                                                             |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                                                                                             |   | 2010        |    |   | 2009        |   |    | 2008        |   |
|                                                                                             |   | $ thousands |    |
|                                                                                             |   |        |    |   |        |   |    |        |   |
| Cash flows from investment activities                                                            |   |        |    |   |        |   |    |        |   |
| Purchase of property and equipment                                                               |   |        | (1,267  | )      |        |   | (1,293  | )           |   |   | (1,331 | ) |
| Investment in associates and other companies                                                     |   |        | (5,155  | )      |        |   | (8,630  | )           |   |   | (57,765 | ) |
| Purchase of intangible assets                                                                    |   |        | (216    | )      |        |   | (172    | )           |   |   | – |   |
| Proceeds from sale of property and equipment                                                     |   |        | 78      |   |        |   | 105     |        |   |   | 68 |   |
| Proceeds from sale of investments in subsidiaries net of cash disposed of due to deconsolidation |   |        | 107,395 |   |        |   | (1,044  | )           |   |   | – |   |
| Proceeds from sale of associates and other companies                                             |   |        | 5,062   |   |        |   | 66,290  |        |   |   | – |   |
| Dividend received from associates                                                                |   |        | – |   |        |   | 9,553   |        |   |   | – |   |
| Proceeds from sale of available for sale assets                                                  |   |        | 157     |   |        |   | 728     |        |   |   | 29,452 |   |
| Acquisition of investments in subsidiaries less cash acquired                                    |   |        | – |   |        |   | – |        |   |   | (117 | ) |
| Investment in restricted cash                                                                    |   |        | – |   |        |   | – |        |   |   | (3,184 | ) |
| Proceeds from restricted cash                                                                    |   |        | – |   |        |   | – |        |   |   | 10,294 |   |
| Investments in deposits                                                                          |   |        | (285    | )      |        |   | (430    | )           |   |   | (228 | ) |
| Proceeds from long term deposits                                                                 |   |        | – |   |        |   | 430     |        |   |   | 17,040 |   |
|                                                                                             |   |        |    |   |        |   |    |        |   |   |   |   |
| Net cash provided by (used in) investment activities                                             |   |        | 105,769 |   |        |   | 65,537  |        |   |   | (5,771 | ) |
|                                                                                             |   |        |    |   |        |   |    |        |   |   |   |   |
| Cash flows from financing activities                                                             |   |        |    |   |        |   |    |        |   |   |   |   |
| Receipt of government grants                                                                     |   |        | 1.499   |   |        |   | 3,250   |        |   |   | 1,025 |   |
| Repayment of government grants                                                                   |   |        | (314    | )      |        |   | (266    | )           |   |   | – |   |
| Proceeds from exercise of options                                                                |   |        | 50      |   |        |   | – |        |   |   | – |   |
| Proceeds from issuance of convertible debentures and options to convertible debentures           |   |        | – |   |        |   | – |        |   |   | 3,184 |   |
| Investment of non-controlling interests in subsidiaries                                          |   |        | 641     |   |        |   | 3,528   |        |   |   | 13,080 |   |
| Award paid to CEO by controlling shareholders                                                    |   |        | 134     |   |        |   | – |        |   |   | – |   |
| Dividend paid to non-controlling interest                                                        |   |        | (14,997 | )      |        |   | – |        |   |   | – |   |
| Purchase of options from non-controlling interests                                               |   |        | (255    | )      |        |   | – |        |   |   | – |   |
| Receipt of long-term loans from shareholders                                                     |   |        | – |   |        |   | 9,000   |        |   |   | 6,000 |   |
| Repayment of long-term loans from shareholders                                                   |   |        | (16,279 | )      |        |   | – |        |   |   | – |   |
| Receipt of long-term loans from banks and others                                                 |   |        | 6,750   |   |        |   | 13,500  |        |   |   | 31,078 |   |
| Repayment of other long-term loans and liabilities                                               |   |        | (52,500 | )      |        |   | (565    | )           |   |   | – |   |
| Repayment of convertible debentures (in 2008- early redemption)                                  |   |        | (1,150  | )      |        |   | – |        |   |   | (4,401 | ) |
| Short-term credit from banks and others, net                                                     |   |        | (264    | )      |        |   | (593    | )           |   |   | 424 |   |
| Net cash provided by (used in) financing activities                                              |   |        | (76,685 | )      |        |   | 27,854  |        |   |   | 50,390 |   |
| Exchange rate differences in respect of cash and cash equivalents                                |   |        | (1,628  | )      |        |   | – |        |   |   | – |   |
| Increase (decrease) in cash and cash equivalents                                                 |   |        | (8,208  | )      |        |   | 47,383  |        |   |   | (2,726 | ) |
|                                                                                             |   |        |    |   |        |   |    |        |   |   |   |   |
| Cash and cash equivalents as of beginning of the year                                            |   |        | 64,747  |   |        |   | 17,364  |        |   |   | 20,090 |   |
|                                                                                             |   |        |    |   |        |   |    |        |   |   |   |   |
| Cash and cash equivalents as of end of the year                                                  |   |        | 56,539  |   |        |   | 64,747  |        |   |   | 17,364 |   |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | Elron Electronic Industries Ltd. (“Elron” or “the Company”) is a high technology operational holding company with holdings in private and public companies in various technology fields such as medical devices and other fields. The Company is an Israeli-resident company incorporated in Israel, traded on the Tel-Aviv Stock Exchange and the Over-The-Counter market in the United States. Its registered address is 3 Azrieli Center, Triangle Tower, 42nd floor, Tel Aviv.                                                                                                                                                                                                                         |
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The Company’s controlling shareholder is Discount Investment Corporation Ltd. (“DIC”), an Israeli-resident company, traded on the Tel-Aviv Stock Exchange. DIC holds an approximately 50.46% interest in the Company as of December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | DIC’s parent company is IDB Development Corporation Ltd. (“IDB”), which is wholly-owned by IDB Holding Corporation Ltd. The control nucleus of DIC is comprised of Ganden Holdings Ltd., Manor Holdings B.A. Ltd. and Avraham Livnat Ltd., which have a voting agreement between them regarding their shares in IDB Holding Corporation Ltd. The ultimate parent company of IDB Holding Corporation Ltd. is Ganden Holdings Ltd., and Mr. Nochi Dankner is the ultimate controlling shareholder.                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Pursuant to the decision of the Company's Board of Directors from November 12, 2009, on January 6, 2010, the Company voluntarily delisted its ordinary shares from the NASDAQ Global Select Market. At this stage, the Company intends to terminate the registration of itsordinary shares under the Securities Exchange Act of 1934, as amended, as soon as possible under SEC rules, thereby releasing Elron from its obligation to file reports with the SEC. Deregistration will be possible depending on the amount of the Company's share held by persons resident in the U.S or the trading volume in the Company's shares in the U.S. The Company cannot projectwhen and if such deregistration will take place. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | As a result, in the preparation of its financial statements as of December 31, 2009, the Company is now required to comply with reporting requirements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) instead of generally accepted accounting principles in the United States (“US GAAP”). Elron’s consolidated financial statements for the year ended December 31, 2009 were the Company’s initial annual financial statements prepared in conformity with IFRS. Accordingly, January 1, 2008 was the Company’s date of transition to IFRS.                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | In the first quarter of 2010 Elron commenced reporting in accordance with the reporting obligations under Chapter F of the Israel Securities Law (1968) applicable to reporting companies in Israel. Up until January 2010, the Company reported in accordance with the reporting obligations under Chapter E3 of the Israel Securities Law (1968) applicable to reporting companies in Israel which are dual-listed.                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | As aforementioned, Elron’s ordinary shares continue to be registered in the U.S. under SEC rules, and as such, in addition to the reporting requirements under Chapter F of the Israel Securities Law as aforementioned, the Company continues to comply with reporting requirements in accordance with U.S. applicable securities laws and regulations, as long as those apply for Elron.                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | These financial statements were approved by the Company’s Board of Directors on March 10, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Definitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | In these financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | IFRS - Standards and interpretations that were issued by the International Accounting Standards Board (IASB) and which include International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) along with the interpretations to these standards of the International Financial Reporting Interpretations Committee (IFRIC) andinterpretations of the Standing Interpretations Committee (SIC), respectively.                                                                                                                                                                                                                                                                                      |

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| Notes to the Consolidated Financial Statements                      |
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| (USD in thousands, except for price per share and number of shares) |

|   | Group companies/the Group - Elron and companies in which the Company has invested and in whose management the Company is involved, including through the appointment of directors.                                         |
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|   |                                                                                                                                                                                                                       |
|   | Investee companies - Consolidated companies, associates and other investments.                                                                                                                                             |
|   |                                                                                                                                                                                                                       |
|   | Subsidiaries/consolidated companies - Companies that are controlled by the Company (as defined in IAS 27 (2008)) and whose accounts are consolidated with those of the Company.                                            |
|   |                                                                                                                                                                                                                       |
|   | Associates - Companies over which the Company has significant influence and that are not subsidiaries and are accounted for in these consolidated financial statements in accordance with the equity method of accounting. |
|   |                                                                                                                                                                                                                       |
|   | Other investments and Other companies - Companies in which the Company has invested and that are neither subsidiaries nor associates (accounted for as available for sale investments).                                    |
|   |                                                                                                                                                                                                                       |
|   | RDC – RDC Rafael Development Corporation Ltd.                                                                                                                                                                        |
|   |                                                                                                                                                                                                                       |
|   | Related parties - As defined in IAS 24 with respect to “Related Parties”.                                                                                                                                      |
|   |                                                                                                                                                                                                                       |
|   | Principal shareholders/Controlling shareholders - As defined in the Israel Securities Regulations (Preparation of Annual Financial Statements), 2010.                                                                      |
|   |                                                                                                                                                                                                                       |
|   | Dollar - The US dollar.                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                       |
|   | CPI - The Israeli Consumer Price Index, as published by the Israeli Central Bureau of Statistics.                                                                                                                          |
|   |                                                                                                                                                                                                                       |
|   | Government- Government of the state of Israel.                                                                                                                                                                             |

| A.     | Basis of presentation of the financial statements |
|--------|---------------------------------------------------|
|   |                                              |   |
|   | 1.                                                | Measurement basis |
|   |                                              |   |
|   |                                              | The Company’s consolidated financial statements have been prepared on a cost basis, except for the following: derivative financial instruments, available for sale financial instruments, non-current assets held for sale, investments in associates accounted for using the equity method of accounting, deferred tax assets and deferred tax liabilities, convertible debentures designated at fair value through profit or loss, employee benefit liabilities and government grant liabilities. |
|   |                                              |   |
|   |                                              | See below for additional information regarding the measurement of these assets and liabilities. |
|   |                                              |   |
|   | 2.                                                | The preparation format of the financial statements |
|   |                                              |   |
|   |                                              | These financial statements have been prepared in accordance with IFRS and in conformity with the provisions of the Israeli Securities Regulations (Annual Financial Statements), 2010. |
|   |                                              |   |
|   | 3.                                                | Consistent accounting policies |
|   |                                              |   |
|   |                                              | The accounting policies adopted in the financial statements are consistent with those followed in all periods presented, except as noted in section 4 below with respect to changes in accounting policies in view of the adoption of new standards. |

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| Notes to the Consolidated Financial Statements                      |
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| (USD in thousands, except for price per share and number of shares) |

|   | 4.     | Changes in accounting policies in view of the adoption of new standards                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                            |   |
|   |   | IFRS 3 (Revised) - Business Combinations and IAS 27 (Amended) - Consolidated and Separate Financial Statements: |
|   |   |                                                                                                            |   |
|   |   | According to the new Standards:                                                                                 |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | The definition of a business was broadened so that it contains also activities and assets that are not managed as a business as long as the seller is capable of operating them as a business. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | Non-controlling interests, and consequently the goodwill, can be measured either at full fair value or at the proportionate share in the acquiree’s fair value of net identifiable assets on the acquisition date, this separately in respect of each business combination transaction. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | Contingent consideration in a business combination is measured at fair value and changes in the fair value of the contingent consideration, which do not represent adjustments to the acquisition cost in the measurement period, are not recognized as goodwill adjustments. If the contingent consideration is classified as a financial derivative within the scope of IAS 39, it will be measured at fair value through profit or loss. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | Direct acquisition costs attributed to a business combination transaction are recognized in the statement of income as incurred rather than as part of the acquisition cost. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | Subsequent measurement of a deferred tax asset for acquired temporary differences which did not meet the recognition criteria at acquisition date will be against profit or loss and not as adjustment to goodwill. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | A subsidiary’s losses, even if resulting in a capital deficiency in the subsidiary, will be allocated between the parent company and non-controlling interests, even if the non-controlling interests have not guaranteed or have no contractual obligation for sustaining the subsidiary or of investing further amounts. |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | A transaction, whether sale or purchase, with non-controlling interests is accounted for as an equity transaction. Accordingly, the acquisition of non-controlling interests by the Group is recognized as an increase or decrease in equity (capital reserve for transactions with non-controlling interests) and is calculated as the difference between the consideration paid by the Group and the proportionate amount of the non-controlling interests acquired and derecognized on the acquisition date. Upon the disposal of an interest in a subsidiary that does not result in a loss of control, an increase or decrease is recognized in equity (capital reserve for transactions with non-controlling interests) for the amount of the difference between the consideration received by the Group and the carrying amount of the non-controlling interests in the subsidiary which have been added to the Company’s equity (as for non-controlling interests that had been included in other comprehensive income, the company reattributes the cumulative amounts recognized in other comprehensive income between the company’s owners and the non-controlling interests). |
|   |   |                                                                                                            |   |
|   |   | –                                                                                                         | Any reclassification or redesignation of the existing assets and liabilities on the acquisition date is done in accordance with the contractual terms, economic circumstances and other pertinent conditions that exist at the acquisition date, except for leases and insurance contracts. |

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| Notes to the Consolidated Financial Statements                      |
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| (USD in thousands, except for price per share and number of shares) |

|   |   | –                                                                                                                                                                                                                                                                                                                                                                                                                                                             | In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition date fair value and recognize the resulting gain or loss, if any, including reversal of deferred amounts, in other comprehensive income. On the loss of control over a subsidiary, the remaining interests, if any, will be revalued to fair value against gain or loss from the sale and this fair value will represent the cost basis for the purpose of subsequent treatment. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | –                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Cash flows from transactions with non-controlling interests (with no change in status) will only be classified in the statement of cash flows under cash flows from financing activities (and can no longer be classified under cash flows from investing activities).                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | The Standards were adopted prospectively from January 1, 2010. The adoption of the Standards has affected the Company’s accounting for subsidiaries and non-controlling interests mainly with respect to allocation of losses to non-controlling interests, but may in the future affect accounting for consolidating and deconsolidating subsidiaries and recognition of gain upon a change of ownership, or the accounting for business combinations.       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations:                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | According to the amendment to IFRS 5, when the parent decides to sell part of its interest in a subsidiary so that after the sale the parent retains a non-controlling interest, such as rights conferring significant influence, all the assets and liabilities attributed to the subsidiary will be classified as held for sale and the relevant criteria of IFRS 5 will apply, including the presentation as a discontinued operation.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Another amendment specifies the disclosures required in respect of non-current assets (or disposal groups) that are classified as held for sale or discontinued operations. Pursuant to the amendment, only the disclosures required in IFRS 5 will be provided. Disclosures in other IFRSs apply to such assets only if they require specific disclosures in respect of those non-current assets or disposal groups.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | The amendments are applied prospectively from January 1, 2010. The amendments did not have a material effect on the Company's financial statements.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | IAS 1 - Presentation of Financial Statements:                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | The amendment to IAS 1 discusses the classification of liabilities as current or non-current with respect to convertible financial instruments. According to the amendment, a liability’s terms that allow the counterparty, at any time, to settle the entity’s liability by issuing its equity instruments will not in themselves affect the classification of the liability in the statement of financial position as either current or non-current. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | The amendment is applied retrospectively to comparative data starting from January 1, 2010. The amendment did not have a material effect on the Company’s financial statements.                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | IAS 7 - Statement of Cash Flows:                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | According to the amendment to IAS 7, only cash flows that had been recognized as an asset may be classified as cash flows from investing activities. The amendment is applied retrospectively as of January 1, 2010. The amendment did not have a material effect on the Company’s financial statements.                                                                                                                                                      |

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| Notes to the Consolidated Financial Statements                      |
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| (USD in thousands, except for price per share and number of shares) |

|   |   | IAS 36 - Impairment of Assets:                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | The amendment to IAS 36 clarifies the required accounting unit to which goodwill will be allocated for the purpose of testing the impairment of goodwill. According to the amendment, the highest possible level for allocating goodwill recognized in a business combination is an operating segment as defined in IFRS 8, “Operating Segments”, before aggregation for reporting purposes. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | The amendment is applied prospectively as of January 1, 2010. The amendment did not have a material effect on the Company’s financial statements.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | IAS 39 - Financial Instruments: Recognition and Measurement:                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                                       | The amendment to IAS 39 clarifies that a company may designate a portion of the change in fair value or the fluctuation in cash flows of a financial instrument as a hedged item. The amendment is applied as from January 1, 2010 with retrospective application of comparative data, but hedging relations cannot be re-designated. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                                       | Also according to the amendment to IAS 39, only forward contracts signed between a buyer and a seller regarding the sale or purchase of a controlled entity in the context of a future business combination are not within the scope of IAS 39 when the forward contract period does not exceed the normal period required for obtaining all the transaction necessary approvals. The amendment is applied prospectively starting from January 1, 2010 to all unexpired contracts. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | The Group has early adopted the amendments to the following IFRS Standards as of these financial statements.                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | IFRS 3 (Revised) - Business Combinations, in regards to the following amendments:                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                                       | The measurement of non-controlling interests: |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     | The amendment limits the circumstances in which it is possible to choose the measurement of non-controlling interests based on their fair value on the date of acquisition or at their proportionate share in the recognized amounts of the acquiree’s identifiable net assets. According to the amendment, this possibility is only available for types of non-controlling interests that entitle their holders to ownership interests and a proportionate (pro rata) share in the acquiree’s net assets in the event of liquidation (usually shares). In contrast, for other types of non-controlling interests (such as options that represent equity instruments of the acquiree) no such choice is available, and they should be measured at fair value on the acquisition date, unless another measurement basis is required by IFRS, such as IFRS 2. The amendment is applied (retrospectively) from the date of adopting IFRS 3 (Revised) for the first time. |

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| Notes to the Consolidated Financial Statements                      |
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| (USD in thousands, except for price per share and number of shares) |

|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Share-based payment awards in a business combination:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The amendment describes the accounting treatment in a business combination of an exchange of the acquiree's share-based payment awards (whether the acquirer is obligated or chooses to exchange them) with the acquirer's share-based payment awards. Accordingly, the acquirer should allocate a portion of the value of the award to the consideration for the business combination and a portion as an expense in the period following the acquisition. However, if the award expires as a result of the business combination and is exchanged for a new award, the value of the new award in accordance with IFRS 2 should be recognized as an expense in the period following the acquisition and should not be included as part of the consideration for the acquisition. Furthermore, if share-based payment awards are not exchanged, then, if the instruments have vested, they should form part of the non-controlling interests and are measured pursuant to the provisions of IFRS 2, and if the instruments have not vested, they should be measured at the value that would have been used had they been re-granted on the acquisition date whereby this amount is allocated between the non-controlling interests and a post-acquisition expense. The amendment has been applied (retrospectively) from the date of first time adoption of IFRS 3 (Revised). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The above amendments did not have a material effect on the Company’s financial position, operating results and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Amendment to IAS 1:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The Group has early adopted the amendment to IAS 1 starting from these financial statements. According to the amendment, the changes between the opening and the closing balances of each component of other comprehensive income may be presented in the statement of changes in equity or in the notes accompanying the annual financial statements. The Group has elected to present said changes in the notes accompanying the financial statements, as disclosed in Note 17 below. The amendment is applied retrospectively to comparative data. |

| B.     | Significant accounting judgments, estimates and assumptions used in the preparation of the financial statements                                                                                                                                                                                                                                                                                                                                                                               |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The preparation of the Company’s consolidated financial statements in conformity with IFRS requires the managements of the Company and the investee companies to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, expenses and disclosure of contingent liabilities. It is clarified that the actual results may differ from these estimates.                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The preparation of accounting estimates used in the preparation of the Company’s consolidated financial statements requires the managements of the Company and the investee companies to make assumptions regarding circumstances and events that involve considerable uncertainty. The managements prepare the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Presented below is a description of the critical accounting estimates that were used in preparing the consolidated financial statements of the Company, which required the managements of the Company and the investee companies to make assumptions regarding significantly uncertain circumstances and events.                                                                                                                                                                              |

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| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | 1.     | Legal claims                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | When assessing the possible outcomes of legal claims that were filed against the Company and its investee companies, the companies relied on the opinions of their legal counsel. The opinions of their legal counsel are based on the best of their professional judgment, and take into consideration the current stage of the proceedings and the legal experience accumulated with respect to the various matters. As the results of the claims will ultimately be determined by the courts, they may be different from such estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 2.     | Impairment of non-financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | The Company examines at each reported date whether there have been any events or changes in circumstances which would indicate impairment of one or more of the non-financial assets. When indications of impairment exist, the Company examines whether the carrying amount of the assets can be recovered from the discounted cash flows anticipated to be derived from the asset, and if necessary, it records an impairment provision necessary to record the assets at the amount of the recoverable value. The cash flows are discounted using a discount rate before taxes that reflects current market assessments of the time value of money and the risks specific to the asset. The estimates regarding cash flows are based on past experience with respect to this asset or similar assets, and on the best possible assessments of the Group regarding the economic conditions that will exist during the remaining useful life of the asset. At times, these assessments are made by independent valuation experts.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 3.     | Valuation of intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | The Company is required to allocate the purchase price of investee companies (other than in the acquisition of non-controlling interests that do not confer control) to the assets and liabilities of such investee companies on the basis of their estimated fair value. At times, the Company contracts independent valuation experts to assist in determining the fair value of such assets and liabilities. Such valuations require management to make significant estimates and assumptions. The material intangible assets that were recognized with the assistance of evaluators include commercial customer relations, technology, and in process research and development. Critical estimates that were used to estimate the useful life of such intangible assets include, inter alia, the estimated life of the customer relations and of the other intangible assets as well as anticipated market developments. Management’s estimates regarding the fair value and useful life are based on assumptions considered reasonable by management, but are uncertain, and therefore the actual results may be different than anticipated by management. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 4.     | Deferred tax assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | Deferred tax assets are recognized for unused carryforward tax losses and temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Further details are given in Note 21. As of December 31, 2009 and 2010 the Company did not recognize deferred tax assets. However, the Group did recognize a deferred tax liability as stated in Note 21.F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

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| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Determining the fair value of an unquoted financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The fair value of unquoted financial assets in Level 3 of the fair value hierarchy of IFRS 7 is determined using valuation techniques including an option-pricing model. The model’s assumptions consist of the price of the underline asset, which is the value of the estimated company’s equity, exercise price, expected volatility, expected life, expected dividend and risk-free interest rate. The price of the underline asset is determined based upon recent financing rounds, if any, or based upon projected future cash flows discounted at current discount rates applicable for items with similar terms and risk characteristics. The projected future cash flows and discount rates are subject to uncertainty and include consideration of inputs such as liquidity risk, credit risk and volatility. Further details are given in Note 8. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Impairment of available-for-sale financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Group assesses at each reported date whether there is objective evidence that the value of the asset is impaired and an impairment loss is incurred. In testing impairment, as above, the Group has made judgments as to indications that support objective evidence of impairment of fair values, including a significant or prolonged decline in the fair value. See also Note 2.M.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| C.     | The operating cycle                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The Company’s operating cycle is 12 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| D.     | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | Owing to the first-time adoption of IFRS 3 (Revised) and IAS 27 (2008), the Group has changed its accounting policy for business combinations and transactions with non-controlling interests. For more information, see A.4 above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity. The effect of potential voting rights that are exercisable at the reported date is considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | Significant intercompany balances and transactions and gains or losses resulting from intercompanytransactions are eliminated in full in the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The financial statements of the Company and of the subsidiaries are prepared as of the same dates and periods. The accounting policy in the financial statements of the subsidiaries was applied consistently and uniformly with the policy applied in the financial statements of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The non-controlling interest in respect of subsidiaries represents the non-controlling shareholders’ share of the total comprehensive income or losses of the subsidiaries and the net assets based on their fair values on the acquisition date of the subsidiaries. Up to December 31,2010, the non-controlling interest in subsidiaries having a deficit in the shareholders’ equity takes into account the losses of the subsidiaries up to the amount of the loans and liabilities (including the interest accrued in respect thereof) as well as commitments for granting loans. Commencing from January 1, 2010, if the non-controlling interest does not have commitments for granting loans, losses are attributed to non-controlling interests based on the relative share of the non-controlling interests in the consolidated company, even if they result in a negative balance of non-controlling interests in the consolidated statement of financial position. Losses accrued through December 31, 2009, were not reallocated between the equity holders of the Company and the non-controlling interests. The non-controlling interest is presented as part of the Company’s shareholders’ equity in a separate amount. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | Commencing from January 1, 2010, a transaction with non-controlling interests, whether a sale or an acquisition, is accounted for as an equity transaction. As such, further acquisitions of non-controlling interests by the Company are recognized directly in equity (capital reserves in respect of transaction with non-controlling interests). Any difference between the amount of the adjustment to non-controlling interest (reflecting the change in relative interest in the subsidiary) and the consideration paid or received by the parent on the change in holding is recognized directly in equity. In disposal of equity interests while control is retained, the company should take into consideration realization of goodwill attributed to the subsidiary, if any, comprehensive income and capital reserves from translation differences, in accordance with the decrease in holdings in the subsidiary. Until December 31, 2009, additional goodwill was recognized in respect of the acquisition of non-controlling interests and the effect of the sale of non-controlling interests was recorded in profit or loss.                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   | Starting from January 1, 2010, in a business combination achieved in stages, equity rights in the acquiree that had been previously held by the acquirer prior to obtaining control are measured at the acquisition date fair value and included in the acquisition consideration by recognizing the gain or loss resulting from the fair value measurement. In business combinations achieved in stages that occurred until December 31, 2009, all identifiable assets, liabilities and contingent liabilities of the acquired entity were re-measured at fair value on the date of gaining control and initial consolidation. Any difference arising from such re-measurement on the date of gaining control was included in a capital reserve account. Such capital reserve account created in respect of amortizable assets was re-classified to retained earnings in direct relation with the related asset amortization, or when the item or investment was realized in all or in part. Such capital reserve account created in respect of inventories and financial instruments was recognized in the statement of comprehensive income and loss on the same basis. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   | When the Group loses common control over a company, it measures and recognizes its remaining investment at fair value. Any difference between the carrying amount of the former company under common control as of the date on which common control ceases and the fair value of any remaining investment and any consideration from disposal is recognized in profit or loss. If the remaining investment is subject to significant influence, it is treated as an investment in an associate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

| E.     | Functional currency and foreign currency |
|--------|------------------------------------------|
|   |                                     |   |
|   | 1.                                       | Functional currency and presentation currency |
|   |                                     |   |
|   |                                     | The financial statements are presented in U.S. dollars, the Company’s functional currency, and are rounded to the nearest thousand, unless stated otherwise. |
|   |                                     |   |
|   |                                     | The functional currency, which is the currency that best reflects the economic environment in which the Company operates and conducts its transactions, is separately determined for each Group entity. The functional currency of the main investee companies is the U.S. dollar. The functional currency of Starling Advanced Communications Ltd. (“Starling”), a subsidiary, is the NIS. |
|   |                                     |   |
|   |                                     | When a Group entity’s functional currency differs from the Company’s functional currency, that entity represents a foreign operation whose financial statements are translated so that they can be included in the consolidated financial statements as follows: |

|   |   | a) | Assets and liabilities for each reported date presented (including comparative data) are translated at the closing rate at each reported date. Goodwill and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate at each reported date. |
|--------|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Income and expenses for each period presented in the statement of income (including comparative data) are translated at average exchange rates for the presented periods; however, if exchange rates fluctuate significantly, income and expenses are translated at the exchange rates at the date of the transactions. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing at the date of incurrence.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Retained earnings are translated based on the opening balance translated at the exchange rate at that date and other relevant transactions (such as dividend) during the period are translated as described in b) and c) above.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | All resulting translation differences are recognized as a separate component of other comprehensive income (loss) in equity “foreign currency translation reserve”.                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | Upon the full or partial disposal of a foreign operation, the relevant part of the other comprehensive income (loss) is recognized in the statement of income. Effective January 1, 2010, upon the partial disposal of a foreign operation which is a subsidiary resulting in the retention of control thereon, the relative portion of the cumulative amount recognized in other comprehensive income is reattributed to non-controlling interests.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | Intercompany loans for which settlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in that foreign operation and are accounted for as part of the investment and the exchange rate differences arising on these loans (net of their tax effect) are recognized in the same component of equity as discussed in e) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   | 2.     | Transactions in foreign currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | Transactions denominated in foreign currency are recorded on initial recognition at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currency existing as of the reporting date are translated into the functional currency at the exchange rate at every reporting date. The exchange rate differences in respect of the monetary items are the difference between amortized cost in the functional currency at the beginning of the period, adjusted for the effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the Company’s functional currency using the exchange rate on the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the exchange rate on the date that the fair value was determined. Exchange rate differences in respect of these foreign currency translation adjustments in consecutive periods are recorded in the statement of income, other than those arising from translation adjustments of non-monetary equity instruments classified as available for sale, and loans to foreign operations that form part of the net investment in foreign operations, which are recognized in other comprehensive income. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   | 3.     | Index-linked monetary items                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                    |
|   |   | Monetary assets and liabilities linked to the changes in the CPI are adjusted at the relevant index at each reported date according to the terms of the agreement. Linkage differences arising from the adjustment, as above, are recognized in the statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

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| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| F.     | Financial instruments |
|--------|-----------------------|
|   |                  |   |
|   | 1.                    | Non-derivative financial instruments |
|   |                  |   |
|   |                  | Non-derivative financial instruments include cash and cash equivalents, trade and other receivables, investments in equity instruments and debt instruments in other companies, debentures issued by a subsidiary, loans and credit received, and trade and other payables. |
|   |                  |   |
|   |                  | Financial assets: |
|   |                  |   |
|   |                  | The Group initially recognizes loans and receivables and deposits on the date that they are created. All other financial assets acquired in an ordinary course purchase, including assets designated at fair value through profit or loss, are recognized initially on the trade date. |
|   |                  |   |
|   |                  | Financial instruments are recognized initially at fair value plus, any directly attributable transaction costs, unless they are classified at fair value through profit or loss or as available for sale assets. |
|   |                  |   |
|   |                  | A financial asset is eliminated when the Group’s contractual rights to the cash flows deriving from the financial asset expire. |
|   |                  |   |
|   |                  | Ordinary course sales of financial assets are recognized on the trade date, meaning on the date the Group undertook to sell the asset. |
|   |                  |   |
|   |                  | The Group classifies its financial assets according to the following categories: |
|   |                  |   |
|   |                  | Cash and cash equivalents |
|   |                  |   |
|   |                  | Cash includes cash balances available for immediate use. Cash equivalents include short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value. |
|   |                  |   |
|   |                  | Loans and receivables |
|   |                  |   |
|   |                  | Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not traded on an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method while taking into consideration transaction costs and deducting any impairment losses which are recognized in profit or loss under financial expenses. |
|   |                  |   |
|   |                  | Financial assets at fair value through profit or loss |
|   |                  |   |
|   |                  | A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Upon initial recognition, attributable transaction costs are recognized in profit or loss when incurred. These financial assets measured at fair value, and the changes therein are recognized in profit or loss. |
|   |                  |   |
|   |                  | As of December 31, 2010 and 2009, the Group did not have such assets. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | Available for sale financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Available-for-sale financial investments include equity and debt securities. Equity investments classified as available-for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss, nor treated according to the equity method of accounting. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale financial investments are subsequently measured at fair value and changes therein are recognized directly in other comprehensive income and presented within equity in an available for sale reserve, except in the case of impairment. When an investment is derecognized or in the case of impairment, the cumulative gain or loss in the available-for-sale reserve is transferred to profit or loss, under other income or other expenses, as relevant. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Financial liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The Group has the following non-derivative financial liabilities: credit and loans from banks and others, and trade and other payables. The Group initially recognizes debt securities issued on the date that they are originated. All other financial liabilities (including financial liabilities designated at fair value through profit or loss) are recognized initially on the trade date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or cancelled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Financial liabilities, other than financial liabilities designated at fair value through profit or loss, are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. Amortization of liabilities using the effective interest method is recognized in profit or loss under financial expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Financial liabilities designated at fair value through profit or loss, including derivatives, are measured at fair value at every reported date, and changes in value are recognized in the statement of income. The Company has designated convertible debentures issued by a subsidiary as belonging to this group (see Note 15).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 2.     | Fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The fair value of financial assets measured at fair value through profit or loss and of available-for-sale financial assets is determined with reference to their quoted closing bid price as of the reporting date without any deduction of transaction costs, and in the absence of such a quoted price, by other appropriate valuation methods. (see Note 2.B).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | The fair value of foreign currency forward contracts is estimated on the basis of quotes of banks/brokers or on the basis of the discounted difference between the forward price specified in the contract and the present forward price in respect of the remaining period to maturity of the contract, while using a risk-free interest rate usually based on government debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

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| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| G.     | Issuance of a unit of securities                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The issuance of a unit of securities involves the allocation of the proceeds received to the components of the unit based on the following order: first to financial liabilities that are measured each period at fair value through profit or loss, and then to financial liabilities that are measured only upon initial recognition at fair value. The remaining residual is the value of the equity component. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The direct issuance costs are attributed specifically to the securities issued. The shared issuance costs are allocated to each component pro rata to the amounts determined for each component.                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| H.     | Share capital                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Costs directly attributable to issuance of ordinary shares and warrants exercisable to shares classified as equity are recognized as a deduction from equity.                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| I.     | Inventories                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Inventories are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs.                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Cost of inventories is determined as follows:                                                                                                                                                                                                                                                                                                                                                                      |

| Raw materials    | – | At cost of purchase using the “first-in, first-out” method.                                    |
|------------------|---------|------------------------------------------------------------------------------------------------------------|
|             |    |                                                                                                       |
| Work in progress | – | On the basis of average cost including materials, labor and other direct and indirect production expenses. |
|             |    |                                                                                                       |
| Finished goods   | – | On the basis of average cost including materials, labor and other direct and indirect production expenses. |

| J.     | Associates accounted for using the equity method of accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | Associates are those entities in which the Company has significant influence or the ability to significantly influence the financial and operating policies, but control as defined in IAS 27 (2008) was not achieved. In assessing whether or not the Company has significant influence over an entity, the Company takes into consideration ownership of potential voting rights that are immediately exercisable, directly or through subsidiaries, and their impact. Associates are accounted for using the equity method of accounting. The Company’s consolidated financial statements include the Group’s share of the income and expenses of equity accounted investees, after adjustments required to align the accounting policies with those of the Group for uniform accounting policies, from the date that significant influence commences until the date that significant influence ceases. In addition, the financial statements of the Company and of the associates are prepared as of the same dates and periods. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Group has an obligation to support the investee or has made payments on behalf of the investee, or has granted it loans or guarantees. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | In circumstances where the Company’s ownership in an associate is in the form of a preferred security or other senior security, the Company recognizes losses based on the ownership level of the particular associate’s security or loan held by the Company that grants it the preferred rights, and to which the equity method is being applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | Excess cost of associates is presented as part of the investment. Goodwill relating to the acquisition of an associate is initially measured as the excess cost of an investment in an associate over the Company’s interest in the fair value of the group company’s identifiable assets (including identifiable intangible assets) net of the fair value of its identifiable liabilities (after the allocation of taxes). Excess cost allocated in an associate to identifiable assets and identifiable liabilities having a finite useful life is amortized according to the said useful life. Goodwill is not systematically amortized, and is examined as part of the overall investment, in the framework of the examination performed by the Company in order to identify the possible need for impairment of the value of the investment. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The Company determines at each reporting period whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the income statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The Group’s share of the operating results of the associate is shown in the statement of comprehensive income as Group’s share of earnings (losses) of associates and other comprehensive income (loss) net of the associate attributable to the Group is presented in other comprehensive income (loss) in the relevant item in equity. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | When the Company loses its significant influence in an associate previously treated at equity, the remaining investment is revalued to its fair value on the date when significant influence is lost and is accounted for as an available for sale investment. The Company recognizes in profit or loss any difference between the fair value of any retained investment and any proceeds from disposing of the part interest in the associate, and the carrying amount of the investment at the date when significant influence is lost.                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| K.     | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Items of property, plant and equipment are measured at cost less accumulated depreciation, less accumulated impairment losses, if any, and excluding day-to-day servicing expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The cost includes expenditures that are directly attributable to acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labor and borrowing costs as well as any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. The cost of purchased software that is integral to the functioning of the related equipment is capitalized to the cost of that equipment.                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | An item of property, plant and equipment that was purchased in consideration for another non-monetary item in a transaction having a commercial substance is measured at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Gains and losses on disposal of an item of property, plant and equipment are recognized in the statement of income as other income (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Depreciation is recognized in the statement of income on a straight-line basis over the estimated useful lives of each part of an item of the property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The estimated useful lives for the current and comparative periods are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

| Computers, office furniture and equipment |   | 3-17 years (mainly 3 years) |
|-------------------------------------------|--------|-----------------------------|
| Motor vehicles                            |   | 7 years                     |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term (including the extension option held by the Group and intended to be exercised) and the expected life of the improvement.                                                                                                                                                                                                                                                                                                                                               |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | The useful life, depreciation method and residual value of an asset are reviewed at least each year-end, and are adjusted as needed.                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | Depreciation of the assets is discontinued at the earlier of the date on which the asset is classified as held for sale or date on which the asset is eliminated. An asset is eliminated from the financial statements on the date of sale or when economic benefits are no longer expected from use of the asset. Gain or loss from disposition of the asset (calculated as the difference between the net proceeds from disposition and the depreciated cost in the financial statements) is included in the statement of income in the period the asset is disposed of. |

| L.     | Intangible assets |
|--------|-------------------|
|   |              |   |   |
|   | 1.                | Research and development |
|   |              |   |   |
|   |              | Research expenses undertaken with the goal of gaining new scientific or technical knowledge are recognized in the statement of income when incurred. |
|   |              |   |   |
|   |              | Development activities are activities relating to a plan for the creation of new products or processes or the significant improvement of existing products or processes. Expenditures in respect of development activities are recognized as an intangible asset only if all the following exist: the development costs can be reliably measured; the product or process is technically and commercially feasible; future economic benefits from the product are probable; and the Group intends to and has sufficient resources to complete the development and to use or sell the asset. The costs recognized as an intangible asset include the cost of the materials, direct labor and overhead costs that can be directly attributed to preparation of the asset for its intended use. Other development expenditures are recognized in the statement of income as incurred. |
|   |              |   |   |
|   |              | Amortization of the asset begins when development is complete and the asset is available for use. The asset is amortized on a straight-line basis. As for the testing of impairment, see Note M.4 below. |
|   |              |   |   |
|   |              | Development costs recognized as an intangible asset are measured at cost less accumulated amortization and less accumulated impairment losses, if any. |
|   |              |   |   |
|   | 2.                | Other intangible assets |
|   |              |   |   |
|   |              | a. | Intangible assets acquired in a business combination are included at the fair value at the acquisition date. After initial recognition, intangible assets are carried at their cost less any accumulated amortization (other than intangible assets having an indefinite useful life) and any accumulated impairment losses. |
|   |              |   |   |
|   |              | b. | Separately acquired intangible assets are measured on initial recognition at cost with the addition of costs directly attributable to the acquisition. |
|   |              |   |   |
|   |              | c. | Subsequent expenditures are capitalized as an intangible asset only when they increase the future economic benefits embodied in the specific asset for which they were expended. All other expenditures, including expenditures relating to goodwill and intangibles developed independently, are recognized in the statement of income as incurred (except for development costs which were capitalized). |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | d.                                                                                      | The amortization period of intangible assets having a finite useful life is determined on the basis of estimated useful life of each group of assets. As for the testing of impairment, see Note M.4 below. |
|--------|--------|-----------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                    |                                                                                                                                                                                                        |
|   |   | A summary of the policies applied to the Group’s intangible assets is as follows: |

|                             | Technology * | Agreement withRafael** | Other***       |
|----------------------------------|--------------|------------------------|----------------|
| Useful lives                     | Finite       | Indefinite             | Finite         |
| Amortization period              | One year     | Not amortized          | Mainly 3 years |
| Internally generated or acquired | Acquired     | Acquired               | Acquired       |

|   | * Mainly technology acquired in business combinations.           |
|--------|------------------------------------------------------------------|
|   | ** As a result of the agreement with Rafael - see Note 3.C.2.d). |
|   | *** Mainly software.                                             |

|   |       | The estimates regarding the amortization method and useful life of intangible assets having a finite useful life are reviewed at least at each year-end. Changes in these assessments are accounted for as prospective change in accounting estimate. The amortization charge is recognized in the statement of income.                                                                                                                                                                                                                                                                                                                                                                           |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| M.     | Impairment |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 1.         | Financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | The Company assesses at each reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 2.         | Financial assets carried at amortized cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | There is an objective evidence of impairment of debt instruments and loans and receivables measured at amortized cost as a result of one or more events that has occurred after initial recognition that has an impact on the estimated future cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including default in interest or principal payments, initiation (or the likeliness of initiation) of bankruptcy proceedings or debt rescheduling and financial reorganization proceedings, the existence of information indicating that there is a measurable decrease in the estimated future cash flows, such as changes in local or economic conditions that correlate with defaults.                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets’ original effective interest rate. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.                                                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | Losses are recognized in the statement of income and are presented as a provision for loss against receivables. Interest income on the impaired asset is recognized using the interest rate that was used to discount the future cash flows for the purpose of measuring the impairment loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | If, in a subsequent period, the amount of the impairment loss increases or decreases, and the change can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. The amount of the reversal is credited to the statement of income under financial expenses up to the amount of the previously recognized impairment loss.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.     | Available for sale financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | For equity instruments classified as available-for-sale financial assets, the objective evidence includes a significant or prolonged decline in the fair value of the asset below its cost. The examination of a significant or prolonged impairment depends on the circumstances at each reporting period. The examination considers the difference between the fair value of the asset and its acquisition cost, the duration of the decline in the fair value below its acquisition cost, changes in the fair value of the asset subsequent to the reported date, changes in the technological, economic or legal environment or in the market environment in which the issuer of the instrument operates, material events that occurred with respect to the asset and the financial results of the investee until the reported date and subsequently.                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | Where there is objective evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost (less any previous impairment losses) and the fair value is removed from comprehensive income and recognized in the statement of income. In subsequent periods, reversal of impairment loss for equity instruments classified as available-for-sale financial assets is not carried to profit or loss but recognized as other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.     | Non-financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company evaluates the need to record an impairment of the carrying amount of non-financial assets (other than inventories, deferred tax assets and employee-benefit-related assets) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the statement of income. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |                             | An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (less depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The impairment loss of an asset presented at cost is carried to profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|----------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             | The following criteria are applied in assessing impairment of these specific assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             | Associates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             | After application of the equity method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment in associates. The Company determines at each reporting period whether there is objective evidence that the value of the investment in the associate is impaired. Such evidence may include general market data, a decline in the stock market prices, recurring losses, the industry in which the investees operate, failure of research and development efforts, a significant deviation from the business plan, excess cost included in the investments, rounds of financing at an amount below the cost basis of the investment, and other parameters. The test of impairment is carried out with reference to the entire investment, including the goodwill attributed to the associate. If there is objective evidence, as above, the amount of the loss is calculated as the difference between the recoverable amount of the investment in the associate and its carrying amount. The recoverable amount is the higher of value in use and fair value based on the estimated net cash flows to be generated by the associate. Impairment loss, as above, is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases. The loss, or its reversal, is recognized in the statement of income under line item equity in losses of associates, net. |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| N.     | Non-current assets held for sale |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             | A non-current asset or disposal group (a group for which settlement is planned, including assets and liabilities) is classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the assets must be available for immediate sale in their present condition, the Company must be committed to sell, there must be a program to locate a buyer and it is highly probable that a sale will be completed within one year from the date of classification. These assets are not depreciated and are presented separately as current assets in the statement of financial position, at the lower of their carrying amount and fair value less costs to sell. If the carrying amount is higher than the fair value less costs to sell, an impairment loss recognized for the asset (or the group of assets) to the extent of the difference. Simultaneously, liabilities associated with these assets are presented separately in the statement of financial position in a similar manner. Also, the related other comprehensive income (loss) is presented separately in the statement of changes in equity.                                                                                                                                                                                                                                                                                                                                                                           |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| O.     | Employee benefits                |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 1.                               | Post-employment benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                             | The Group has a number of post-employment benefit plans. The plans are usually financed by deposits with insurance companies or with funds managed by a trustee, and they are classified as defined contribution plans and defined benefit plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Defined contribution plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Some of the subsidiaries have defined contribution plans, in accordance with Section 14 of the Israeli Severance Pay Law, whereby the subsidiaries make regular payments therein without it being legally or constructively liable to make additional payments even if sufficient amounts are not accumulated in the fund to pay all the benefits due to an employee relating to his/her service in the current and prior periods. Deposits in defined contribution plans in respect of severance pay or annuities, are recognized as an expense at the time the deposit is due to the plan concurrent with receipt of the services from the employee and no further provision is required in the consolidated financial statements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Defined benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Some of the group companies have defined benefit plans in respect of severance pay pursuant to the Israeli Severance Pay Law. According to the Law, employees are entitled to severance pay upon dismissal or retirement. The liability for termination of employee-employer relations is measured using the projected unit credit method. The actuarial assumptions include future salary increases and rates of employee turnover based on the estimated timing of payment. The amounts are presented based on discounted expected future cash flows using a discount rate on Government bonds with maturity that matches the estimated term of the benefit payments.                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         | The Group makes deposits in respect of its liabilities to pay compensation to certain of its employees in pension funds and insurance companies (“the plan assets”). Plan assets comprise assets held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the Group’s own creditors and cannot be returned directly to the Group.                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         | The liability for employee benefits presented in the statement of financial position presents the present value of the defined benefit obligation less the fair value of the plan assets, less past service costs and any unrecognized actuarial gains and losses. Actuarial gains and losses are recognized directly in comprehensive income in the period in which they occur.                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Short-term benefits                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Short-term employee benefits include salaries, paid annual leave, paid sick leave, recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus or a profit-sharing plan is recognized when the Group has a legal or constructive obligation to make such payment as a result of past service rendered by an employee and a reliable estimate of the amount can be made. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| P.     | Share-based payment transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The cost of equity-settled transactions with employees and others is measured at the fair value of the equity instruments granted at grant date.                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The fair value of share-based payments to employees on the grant date is recognized as a salary expense, with a corresponding increase in retained earnings, during the period in which the relevant employees become fully entitled to the award. The amount recognized as an expense, taking the vesting terms into account, consisting of service terms and performance terms other than market terms, is adjusted to reflect the actual number of share options that are expected to vest. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | Share-based payments that were granted before November 7, 2002 or that vested before January 1, 2007 (the date of DIC’s transition to IFRS), are not accounted for retroactively, in accordance with IFRS 2 and the relief adopted pursuant to IFRS 1.                                                                                                                                                                                                                                   |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| Q.     | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | A provision is recognized when the Group has a present obligation, legal or constructive, as a result of a past event and a reliable estimate can be made of the amount of the obligation and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. If the effect is material, provisions are measured according to the estimated future cash flows discounted using a pre-tax interest rate that reflects the market assessments of the time value of money and, where appropriate, those risks specific to the liability.                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| R.     | Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | Sale of goods                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | Revenue from the sale of goods in the ordinary course of business is measured at the fair value of the consideration received or to be received, net of returns, trade discounts and volume rebates. When the credit period is short and constitutes the accepted credit in the industry, the future consideration is not discounted. The Group recognizes revenue when all the significant risks and rewards of ownership of the goods have passed to the buyer, recovery of the consideration is probable, possible return of goods can be estimated reliably, the associated costs can be estimated reliably, the seller no longer retains continuing managerial involvement and the amount of revenue can be measured reliably. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | The delivery date is usually the date on which ownership passes. Transfers of risks and rewards vary depending on the specific terms of the contract of sale. For sales of products, transfer usually occurs upon delivery of the product to the customer or when the goods reach the customer’s warehouse.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| S.     | Cost of sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Cost of sales includes expenses for loss, storage and conveyance of inventories to the end point of sale. Cost of sales also includes impairment provisions in respect of inventories and inventory write offs, if any. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Supplier discounts - The Group deducts discounts received from its suppliers from cost of purchase. Certain of the discounts in respect of that portion of the purchases that are added to closing inventories are attributed to inventories and the balance reduces the cost of sales. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | These discounts are fixed discounts that do not depend on the volume of purchases (this discount is calculated as a fixed percentage of the purchase made from the supplier or as an annual fixed amount that does not depend on the volume of purchases) and they are included in the consolidated financial statements upon the execution of the proportionate purchases that entitle the Group to the said discounts. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| T.     | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|   | Lease agreements are classified as an operating lease if they do not transfer substantially all the risks and benefits incidental to ownership of the leased asset. Lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term, including the optional period, when on the date of the transaction it was reasonably certain that the option will be exercised.                                                                                                                                                                                                                                                                                                            |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| U.     | Financial income and expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | Financial income comprises interest income on amounts invested, gains from sale of financial assets classified as available-for-sale, increases in fair value of financial assets at fair value through profit or loss, decreases in the fair value of financial liabilities recognized at fair value through the statement of income and exchange rate gains. Interest income is recognized as it accrues in profit or loss, using the effective interest method.                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | Financial expenses comprise interest expenses and linkage differences on borrowings, decreases in the fair value of financial assets at fair value through profit or loss, increase in the fair value of financial liabilities recognized at fair value through the statement of income, changes in the time value of a liability in respect of government grants and exchange rate losses. Borrowing costs are recognized in the statement of income using the effective interest method. Exchange rate gains and losses are reported on a net basis. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
| V.     | Taxes on income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | Taxes on income in the statement of income comprise current and deferred taxes. The tax results in respect of current or deferred taxes are carried to the statement of income except to the extent that the tax arises from items which are recognized directly in equity. In such cases, the tax effect is also carried to the relevant item in equity.                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Current taxes |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reported date as well as adjustments required in connection with the tax liability in respect of previous years. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Deferred taxes |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes. Deferred taxes are carried directly to equity if the tax relates to items that are taken to equity. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Deferred tax balances are measured at the tax rates that are expected to apply to the period when the taxes are taken to the statement of income or to equity, based on tax laws that have been enacted or substantively enacted by the end of the reporting period. The amount for deferred taxes in the statement of income represents the changes in said balances during the reporting period, excluding changes attributable to items carried directly to equity. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Deferred tax assets are reviewed at each reported date and reduced to the extent that it is not probable that they will be utilized. Simultaneously, temporary differences (such as carryforward losses) for which deferred tax assets have not been recognized are reassessed and deferred tax assets are recognized to the extent that their recoverability has become probable. Any resulting reduction or reversal is recognized in line item taxes on income. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Taxes that would apply in the event of the sale of investments in investee companies have not been taken into account in computing the deferred taxes, as long as the sale of the investments in investee companies is not expected in the foreseeable future. Also, deferred taxes that would apply in the event of distribution of earnings by investee companies as dividend have not been taken into account in computing the deferred taxes, since the distribution of dividend does not involve an additional tax liability or since it is the Company’s policy not to initiate distribution of dividend that triggers an additional tax liability. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | All deferred tax assets and deferred tax liabilities are presented in the statement of financial position as non-current assets and non-current liabilities, respectively. Deferred taxes are offset in the statement of financial position if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to the same taxpayer and the same taxation authority. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| W.     | Government grants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | Government grants are recognized where there is reasonable assurance that the grant will be received and the Company will comply with the attached conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | Starting January 1, 2009, Government grants from the Office of the Chief Scientist in Israel for supporting research and development activities that contain a liability to pay royalties to the State depending on future sales from development are recognized upon receipt as a liability if future economic benefits are expected from the research activity that will result in royalties-bearing sales. When royalty payments in respect of the grant bear no market interest, the liability is measured at fair value discounted at market interest upon receipt of the grant. The difference between the amount of the grant received and the fair value of the liability will be accounted for as a Government grant with a corresponding decrease in research and development expenses. Amounts paid as royalties are recognized as settlement of the liability. When no economic benefits are probable, the receipts from the grant are deducted from the relevant research and development expenses. In such event, the royalty liability is accounted for as a contingent liability pursuant to IAS 37, until such liability is recognized upon fulfillment of the above expectation.                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | At each reporting period, the Company evaluates whether there is reasonable assurance that the liability, in whole or in part, will not be settled (since the Company will not be required to pay royalties) based on the best estimate of future sales, and if so, the appropriate liability is derecognized and a gain is recognized with a corresponding reduction of research and development expenses. If the estimate of future sales indicates that there is no such reasonable assurance, the appropriate liability reflecting the anticipated royalty payments is recognized with a corresponding charge to research and development expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | Up until December 31, 2008, Government grants from the Office of the Chief Scientist in Israel for supporting research and development activities that contain a liability to pay royalties to the State depending on future sales from development, were recognized upon receipt as a liability and a loan received from the government bearing no interest or interest lower than market interest rate as long as there were expected future economic benefits from the research activity that lead to sales entitling the State to royalties. Amounts paid as royalties were recognized as settlement of the liability. The difference between the amount of the loan received and the fair value was accounted for as a Government grant in accordance with the provisions of IAS 20 (i.e., recognized as income in direct relation to expenses attributable to the approved grant) When no economic benefits were probable, the receipts from the grant were deducted from the relevant research and development expenses in the statement of income in accordance with the provisions of IAS 20 (i.e., recognized as income in direct relation to expenses attributable to the grant). In such a case, the liability to pay royalties was accounted for as a contingent liability pursuant to IAS 37 until such liability was recognized. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| X.     | Earnings (loss) per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   | Earnings (losses) per share are calculated by dividing the net income (loss) attributable to equity holders of the Company by the weighted number of Ordinary shares outstanding during the period. Basic earnings (loss) per share only include shares that were actually outstanding during the period. Potential ordinary shares (convertible securities such as employee options) are only included in the computation of diluted earnings (loss) per share when their conversion reduces the earnings per share or increases loss per share. Further, potential ordinary shares that are converted during the period are included in diluted earnings (loss) per share only until the conversion date and from that date in basic earnings (loss) per share. The Company’s share of earnings (loss) of investee companies is included based on the earnings (loss) per share of the investee companies multiplied by the number of shares held by the Company. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Y.     | Transactions with controlling shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   | Assets and liabilities included in a transaction with a controlling shareholder are measured at fair value on the date of the transaction. As the transaction is on the equity level, the Group includes any difference between the fair value and the consideration from the transaction in its equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| Z.     | Presentation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   | The Company has elected to present comprehensive income using two statements: a statement of income and a statement of comprehensive income, in which presented net income (loss) which is brought forward from the statement of income as well as all the items recognized in other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   | The Company has elected to present the statement of income using the nature of expense method. Furthermore, the Company presents a statement of changes in equity immediately after the statement of comprehensive income instead of in the notes. The statement includes changes in equity resulting from transactions with the parent company in its capacity as a controlling shareholder (such as transactions with controlling shareholders, share-based payment plans, etc.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| AA.    | Disclosure of new IFRSs in the period prior to their adoption                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | IFRS 7 - Financial Instruments: Disclosure |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | The amendments to IFRS 7 deal with the following issues: |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | a. | Clarification of the Standard’s disclosure requirements. In this context, emphasis is placed on the connection between the quantitative disclosures and the qualitative disclosures as well as the nature and scope of risks arising from financial instruments. The Standard also minimizes the disclosure requirements for collateral held by the company and revises the disclosure requirements for credit risk. The amendment will be adopted retrospectively starting from the financial statements for periods commencing on January 1, 2011. Early adoption is permitted. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | b. | New and extensive disclosure requirements for derecognizing financial assets and disclosure requirements regarding irregular transfers made near the reported date. The objective of the amendment is to assist the users of the financial statements assess the risk exposures arising from transfers of financial assets and the effect of these risks on the Company’s financial position. The amendment is designed to enhance the reporting transparency of transactions involving transfers, specifically transactions for the securitization of financial assets. The amendment will be adopted prospectively starting from the financial statements for periods commencing on January 1, 2012. Early adoption is permitted. |

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| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | The necessary disclosures will be included in the Company’s financial statements, once applicable. |
|--------|--------|----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                     |   |   |
|   | 2.     | IFRS 9 - Financial Instruments                                                                           |
|   |   |                                                                                                     |   |   |
|   |   | a.                                                                                                       | In November 2009, the IASB issued the first part of Phase I of IFRS 9, “Financial Instruments”, as part of a project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | According to IFRS 9, upon initial recognition, all the financial assets (including hybrid contracts with financial asset hosts) will be measured at fair value. In subsequent periods, debt instruments can be measured at amortized cost if both of the following conditions are met: |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | – | the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | – | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     |   | Notwithstanding the aforesaid, upon initial recognition, the Company may designate a debt instrument that meets both of the abovementioned conditions as measured at fair value through profit or loss if this designation eliminates or significantly reduces a measurement or recognition inconsistency (“accounting mismatch”) that would have otherwise arisen. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | Subsequent measurement of all other debt instruments and financial assets will be at fair value. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | Financial assets that are equity instruments will be measured in subsequent periods at fair value and the changes will be recognized in the statement of income or in other comprehensive income (loss), in accordance with the election of the accounting policy on an instrument-by-instrument basis (amounts recognized in other comprehensive income cannot be subsequently transferred to profit or loss). Nevertheless, if the equity instruments are held for trading, they must be measured at fair value through profit or loss. This election is final and irrevocable. However, when an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. In all other circumstances, reclassification of financial instruments is not permitted. |
|   |   |                                                                                                     |   |   |
|   |   |                                                                                                     | The Standard will be effective starting January 1, 2013. Earlier application is permitted. Early adoption will be done with a retrospective restatement of comparative figures, subject to the reliefs set out in the Standard. |
|   |   |                                                                                                     |   |   |
|   |   | b.                                                                                                       | In October 2010, the IASB issued certain amendments to IFRS 9 regarding derecognition and financial liabilities. According to those amendments, the provisions of IAS 39 will continue to apply to derecognition and financial liabilities which are not measured at fair value through profit or loss (designated at fair value through profit or loss). Namely the classification and measurement provisions of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at amortized cost. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | The adjustments arising from these amendments affect the measurement of a liability for which the fair value option had been chosen. Pursuant to the amendments, the amount of the adjustment to the liability’s fair value - attributed to changes in credit risk - will be carried to other comprehensive income. All other fair value adjustments will be carried to the statement of income. If carrying the fair value adjustment of the liability arising from changes in the credit risk to other comprehensive income creates an accounting mismatch in the income statement, then that adjustment also will be carried to the income statement rather than to other comprehensive income. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Furthermore, according to the amendments, derivative liabilities in respect of certain unquoted equity instrument can no longer be measured at cost but rather only at fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | The amendments are effective commencing January 1, 2013. Earlier application is permitted provided that the Company also adopts the provisions of IFRS 9 regarding the classification and measurement of financial assets (the asset stage). First-time adoption of these amendments will be done retrospectively by restating comparative data, subject to the exemptions provided by the amendments.                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | The Group is evaluating the possibility of early adoption of IFRS 9 and its adoption’s expected effects on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 3.     | IAS 24 - Related Party Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The amendment to IAS 24 clarifies the definition of a related party in order to simplify the identification of the relations with a related party and avoid inconsistent adoption of this definition. In addition, Government related companies are awarded partial alleviations by the amendment in providing disclosure for transactions with the Government and other Government related companies. The amendment will be adopted retrospectively starting from the financial statements for annual periods commencing on January 1, 2011. Early adoption is permitted. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The necessary disclosures will be included in the Company’s financial statements, once applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 4.     | IAS 32 - Financial Instruments: Presentation - Classification of Rights Issues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The amendment to IAS 32 determines that rights, options or warrants to acquire a fixed number of the Company’s equity instruments, for a fixed amount of any currency, are classified as equity instruments if the Company offers the rights, options or warrants pro rata to all of its existing owners of the same class of its non-derivative equity instruments.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The amendment will be adopted retrospectively starting from the financial statements for annual periods commencing on January 1, 2011. Early adoption is permitted.                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The Company estimates that the amendments are not expected to have a material effect on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| A.     | Investments in associates accounted for using the equity method of accounting: |
|--------|--------------------------------------------------------------------------------|
|   |                                                                           |   |
|   | 1.                                                                             | Composition |

|                                                                               |   | December 31 |    |   | December 31 |   |
|------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                                                               |   | 2010        |    |   | 2009        |   |
|                                                                               |   | $ thousands |    |
|                                                                               |   |        |    |   |        |   |   |   |
| Carrying amount of the shares and loans in the statement of financial position (1) |   |        | 110,412 |   |        |   | 114,691 |   |
|                                                                               |   |        |    |   |        |   |   |   |
| Less - provision for impairment                                                    |   |        | 1,043   |   |        |   | 1,454 |   |
|                                                                               |   |        |    |   |        |   |   |   |
| Total                                                                              |   |        | 109,369 |   |        |   | 113,237 |   |
|                                                                               |   |        |    |   |        |   |   |   |
| (1) The carrying amount of the shares and loans includes:                          |   |        |    |   |        |   |   |   |
|                                                                               |   |        |    |   |        |   |   |   |
| Allocated excess of cost                                                           |   |        | 43,039  |   |        |   | 47,080 |   |
|                                                                               |   |        |    |   |        |   |   |   |
| Goodwill                                                                           |   |        | 20,996  |   |        |   | 21,424 |   |
|                                                                               |   |        | 64,035  |   |        |   | 68,504 |   |

|   |   | As mentioned in Note 2 above, when the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any other long-term investments) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Company has an obligation to support the investee or has made payments on behalf of the investee, or has committed to grant it loans or guarantees. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The aggregate equity in losses not recognized by the Company as a result of the circumstances described above, amounted to a total of $9,000 from the date of acquisition until December 31, 2010 and a total of $5,300 for the year ended December 31, 2010  ($3,650 from the date of acquisition until December 31, 2009).                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | See Note 20.G for further details with respect to losses in respect of associates for the years ended December 31, 2010, 2009 and 2008.                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 2.     | Summarized data of the financial statements of the associates, unadjusted to the Group’s rate of holdings (*)                                                                                                                                                                                                                                                                                                                                                      |

|               |   | Currentassets |   | Non-current assets |   | Total assets |   | Current liabilities |   | Non-current liabilities |   | Totalliabilities |   | Equity attributable to shareholdersof the company |   | Equityattributable to non-controlling interests |
|--------------------|--------|---------------|--------|--------------------|--------|--------------|--------|---------------------|--------|-------------------------|--------|------------------|--------|---------------------------------------------------|--------|-------------------------------------------------|
|               |   | $ thousands   |
|               |   |          |   |               |   |         |   |                |   |                    |   |             |   |                                              |   |                                            |   |   |   |   |   |   |   |   |
| 2010               |   |          |   |               |   |         |   |                |   |                    |   |             |   |                                              |   |                                            |   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   | 139,847       |   |               | 86,701 |         |   | 226,548             |   |                    | 36,146 |             |   | 8,046                                             |   |                                            | 44,192 |   |   | 182,256 |   |   | 100 |   |
| Pocared Ltd.       |   | 2,052         |   |               | 517    |         |   | 2,569               |   |                    | 9,469  |             |   | –                                           |   |                                            | 9,469 |   |   | (6,900 | ) |   | – |   |
| NuLens Ltd.        |   | 3,085         |   |               | 1,232  |         |   | 4,317               |   |                    | 1,164  |             |   | 364                                               |   |                                            | 1,528 |   |   | 2,789 |   |   | – |   |
| Other              |   | 21,558        |   |               | 2,664  |         |   | 24,222              |   |                    | 12,367 |             |   | 14,445                                            |   |                                            | 26,812 |   |   | (2,590 | ) |   | – |   |
|               |   |          |   |               |   |         |   |                |   |                    |   |             |   |                                              |   |                                            |   |   |   |   |   |   |   |   |
| 2009               |   |          |   |               |   |         |   |                |   |                    |   |             |   |                                              |   |                                            |   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   | 125,607       |   |               | 62,529 |         |   | 188,136             |   |                    | 27,228 |             |   | 1,607                                             |   |                                            | 28,835 |   |   | 159,301 |   |   | – |   |
| Pocared Ltd.       |   | 3,346         |   |               | 48     |         |   | 3,384               |   |                    | 6,789  |             |   | –                                           |   |                                            | 6,789 |   |   | (3,395 | ) |   | – |   |
| NuLens Ltd.        |   | 2,924         |   |               | 1,060  |         |   | 3,984               |   |                    | 1,068  |             |   | 241                                               |   |                                            | 1,309 |   |   | 2,675 |   |   | – |   |
| Other              |   | 60,004        |   |               | 13,540 |         |   | 73,544              |   |                    | 53,061 |             |   | 85,894                                            |   |                                            | 138,955 |   |   | (65,411 | ) |   | – |   |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|               |   | Revenues    |   | Gross profit |    | Operatingprofit (loss) |   | Profit (loss)from continuingoperations |   | Profit (loss)for the year |    | Profit (loss) attributable to shareholders of the company |   | Profit (loss) attributable to non-controllinginterests |
|--------------------|--------|-------------|--------|--------------|---------|------------------------|--------|----------------------------------------|--------|---------------------------|---------|-----------------------------------------------------------|--------|--------------------------------------------------------|
|               |   | $ thousands |
|               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| 2010               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   | 157,809     |   |         | 120,149 |                   |   | 7,718                                  |   |                      | 12,789  |                                                      |   | 12,789                                                 |   |   | 13,079 |   |   | (290 | ) |
| Pocared Ltd.       |   | –     |   |         | – |                   |   | (3,929                                 | )      |                      | (3,679  | )                                                         |   | (3,679                                                 | ) |   | (3,679 | ) |   | – |   |
| NuLens Ltd.        |   | –     |   |         | – |                   |   | (5,256                                 | )      |                      | (5,247  | )                                                         |   | (5,247                                                 | ) |   | (5,247 | ) |   | – |   |
| Other              |   | 43,386      |   |         | 19,580  |                   |   | (34,915                                | )      |                      | (36,494 | )                                                         |   | (36,494                                                | ) |   | (36,494 | ) |   | – |   |
|               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| 2009               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   | 141,763     |   |         | 108,448 |                   |   | 10,688                                 |   |                      | 16,559  |                                                      |   | 16,559                                                 |   |   | 17,450 |   |   | (891 | ) |
| Pocared Ltd.       |   | –     |   |         | – |                   |   | (10,446                                | )      |                      | (10,446 | )                                                         |   | (13,533                                                | ) |   | (13,533 | ) |   | – |   |
| NuLens Ltd.        |   | –     |   |         | – |                   |   | (4,035                                 | )      |                      | (3,996  | )                                                         |   | (3,996                                                 | ) |   | (3,996 | ) |   | – |   |
| Other              |   | 85,708      |   |         | 45,057  |                   |   | (38,504                                | )      |                      | (40,248 | )                                                         |   | (34,748                                                | ) |   | (34,748 | ) |   | – |   |
|               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| 2008               |   |        |   |         |    |                   |   |                                   |   |                      |    |                                                      |   |                                                   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   | 125,108     |   |         | 92,107  |                   |   | 257                                    |   |                      | 4,011   |                                                      |   | 4,011                                                  |   |   | 6,098 |   |   | (2,087 | ) |
| Pocared Ltd.       |   | –     |   |         | – |                   |   | (17,710                                | )      |                      | (17,710 | )                                                         |   | (18,070                                                | ) |   | (18,070 | ) |   | – |   |
| NuLens Ltd.        |   | –     |   |         | – |                   |   | (4,700                                 | )      |                      | (4,448  | )                                                         |   | (4,448                                                 | ) |   | (4,448 | ) |   | – |   |
| Other              |   | 458,348     |   |         | 121,156 |                   |   | 97,495                                 |   |                      | 101,702 |                                                      |   | 101,481                                                | ) |   | (101,481 | ) |   | – |   |

|   | (*)    | Condensed financial-statement data of associates having a functional currency other than the dollar were translated based on the relevant exchange rates (assets and liabilities at each reported date are translated at the closing rate at each reported date, income and expenses for all periods presented in the statement of income are translated at average exchange rates for all the presented periods). The information presented does not include excess cost and goodwill. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 3.     | Information about goodwill in respect of the acquisition of investments in associates and information about the total impairment loss recorded in respect of investments in conformity with the Israeli Securities Regulations (Annual Financial Statements), 2010                                                                                                                                                                                                                      |

|                   |   | December 31,                    |   |
|------------------------|--------|---------------------------------|--------|
|                   |   | 2010                            |   | 2009 |   |
|                   |   | $ thousands                     |   |
|                   |   | Goodwill included in investment |   |   |   | Goodwill included in investment |   |   |   |
|                   |   |                            |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd. (*) |   |                            | 20,996 |   |   |   |   | 21,324 |   |   |   |

|   | (*)    | No impairments were recorded in respect of this investment.                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
|   | 4.     | Additional information about associates that are held directly by the Company in conformity with the Israeli Securities Regulations (Annual Financial Statements), 2010 |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | a) | General information |
|--------|--------|----|---------------------|

|                             |   | Country ofincorporation |   | Equity interestand votingrights (1) |   | Amounts made availableto the associate |       |    | Total amount invested in associate(4) |   |   | Stockexchange |   |   | Fairvalue |    |
|----------------------------------|--------|-------------------------|--------|-------------------------------------|--------|----------------------------------------|------------|---------|---------------------------------------|--------|--------|---------------|--------|--------|-----------|---------|
|                             |   |                    |   | Loans                               |   |                                   | Guarantees |    |                                  |   |   |          |   |   |
|                             |   |                    |   | %                                   |   | $ thousands                            |       |
|                             |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |
| As of December 31, 2010:         |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |
| Given Imaging Ltd. (2)           |   | Israel                  |   | 22.81                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 104,121 |   |   |   |   | (5) |   |   | 138,565 | (6) |
| Aqwise Ltd.                      |   | Israel                  |   | 34.03                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 2,837   |   |   | unquoted |   |   | unquoted |   |
| NuLens Ltd.                      |   | Israel                  |   | 34.74                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 680     |   |   | unquoted |   |   | unquoted |   |
| BrainsGate Ltd.                  |   | Israel                  |   | 23.28                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 477     |   |   | unquoted |   |   | unquoted |   |
| Safend Ltd.                      |   | Israel                  |   | 25.61                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | – |   |   | unquoted |   |   | unquoted |   |
| Pocared Ltd. (7)                 |   | Israel                  |   | 31.51                               |   |                                   |       | 4,100   |                                  |   |   | –       |   |   |      | 651     |   |   | unquoted |   |   | unquoted |   |
| PLYmedia Inc.                    |   | United States           |   | 27.55                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | – |   |   | not listed |   |   | unquoted |   |
| Kyma Medical Technologies Ltd.   |   | Israel                  |   | 27.32                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 603     |   |   | unquoted |   |   | unquoted |   |
| Atlantium Technologies Inc.      |   | United States           |   | 23.44                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | – |   |   | unquoted |   |   | unquoted |   |
|                             |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |   |   |   |   |
|                             |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |   |   |   |   |
|                             |   |                    |   |                                |   |                                   |       | 4,100   |                                  |   |   | –       |   |   |      | 109,369 |   |   |   |   |   |   |   | 138,565 |   |
| As of December 31, 2009:         |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |   |   |   |   |
| Impliant Inc. (see Note 3.C.1.E) |   | United States           |   | 47.64                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 2,803   |   |   | not listed |   |   | unquoted |   |
| Given Imaging Ltd. (2)           |   | Israel                  |   | 23.16                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 104,547 |   |   |   |   | (5) |   |   | 165,256 | (6) |
| Galil Medical Ltd. (3)           |   | Israel                  |   | 11.90                               |   |                                   |       | 266     | (*)                                   |   |   | –       |   |   |      | 154     |   |   | unquoted |   |   | unquoted |   |
| Notal Vision Inc.                |   | United States           |   | 27.09                               |   |                                   |       | 817     |                                  |   |   | –       |   |   |      | 998     |   |   | unquoted |   |   | unquoted |   |
| Aqwise Ltd.                      |   | Israel                  |   | 34.03                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 3,154   |   |   | unquoted |   |   | unquoted |   |
| NuLens Ltd.                      |   | Israel                  |   | 33.71                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 1,160   |   |   | unquoted |   |   | unquoted |   |
| BrainsGate Ltd.                  |   | Israel                  |   | 23.28                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | 2,741   |   |   | unquoted |   |   | unquoted |   |
| Safend Ltd.                      |   | Israel                  |   | 26.97                               |   |                                   |       | 161     |                                  |   |   | –       |   |   |      | (325    | ) |   | unquoted |   |   | unquoted |   |
| Pocared Ltd.                     |   | Israel                  |   | 31.51                               |   |                                   |       | 2,598   |                                  |   |   | –       |   |   |      | 705     |   |   | unquoted |   |   | unquoted |   |
| PLYmedia Inc.                    |   | United States           |   | 27.55                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | – |   |   | unquoted |   |   | unquoted |   |
| Atlantium Technologies Inc.      |   | United States           |   | 23.44                               |   |                                   |       | – |                                  |   |   | –       |   |   |      | – |   |   | unquoted |   |   | unquoted |   |
| Teledata Network Ltd. (3)        |   | Israel                  |   | 21.05                               |   |                                   |       | – |                                  |   |   | 1,200         |   |   |      | (2,700  | ) |   | unquoted |   |   | unquoted |   |
|                             |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |   |   |   |   |
|                             |   |                    |   |                                |   |                                   |       |    |                                  |   |   |          |   |   |      |    |   |   |   |   |   |   |   |   |   |
|                             |   |                    |   |                                |   |                                   |       | 3,842   |                                  |   |   | 1,200         |   |   |      | 113,237 |   |   |   |   |   |   |   | 165,256 |   |

|   | (1)    | Reflects the Company’s ownership interests in the ordinary shares and the preferred shares of the investee companies on an as-converted-basis, and does not take full dilution into account.                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)    | Elron’s direct holding. As of December 31, 2010, Elron additionally holds 8.92% of Given Imaging Ltd. (“Given”) through RDC, such that Elron’s effective holding including RDC’s holding is 27.28% (as of December 31, 2009, 27.70%).   |
|   | (3)    | Sold during 2010. See Note 3.C.1.B and 3.C.1.C below.                                                                                                                                                                                                                 |
|   | (4)    | The Company’s investment is calculated based on the consolidated financial statements as the net aggregate amount attributable to the Company’s shareholders of total assets less total liabilities, including goodwill, excess cost allocated and loans. |
|   | (5)    | Publicly traded in Israel and the United States.                                                                                                                                                                                                                      |
|   | (6)    | Represents the consolidated value of Elron and RDC’s investment in Given.                                                                                                                                                                                       |
|   | (7)    | Subsequent to the reported date, the loan balance was converted into shares and a finance round was completed. As a result Elron’s holding in Pocared increased to approximately 37%. For further details, see Note 3.C.1.A.                                    |
|   |   |                                                                                                                                                                                                                                                                  |
|   | (*)    | Elron’s share in addition to RDC’s share.                                                                                                                                                                                                                 |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | b)     | Information about the convertible securities of associates that are held directly by the Company (*)                                                                                                                                                                       |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                       |
|   |   |   | Certain of the Company’s associates have issued warrants and/or share options to employees and others. The following is data about the warrants’ and share options’ possible impact on Elron’s holdings in these companies as of December 31, 2010 |

|                           |   | Vesting period |   | Before exercise in share capital |   | After exercise in share capital (1) |
|--------------------------------|--------|----------------|--------|----------------------------------|--------|-------------------------------------|
|                           |   |           |   | %                                |   | %                                   |
|                           |   |           |   |                             |   |                                |   |   |
| Given Imaging Ltd. (1)         |   | 2011-2015      |   | 22.81                            |   |                                | 18.76 |   |
| Aqwise Ltd.                    |   | 2011-2020      |   | 34.03                            |   |                                | 29.95 |   |
| NuLens Ltd.                    |   | 2011-2020      |   | 34.74                            |   |                                | 30.10 |   |
| BrainsGate Ltd.                |   | 2011-2020      |   | 23.28                            |   |                                | 20.83 |   |
| Safend Ltd.                    |   | 2011-2020      |   | 25.61                            |   |                                | 20.25 |   |
| Pocared Ltd. (2)               |   | 2011-2017      |   | 61.51                            |   |                                | 30.32 |   |
| PLYmedia Inc.                  |   | 2011-2020      |   | 27.55                            |   |                                | 21.84 |   |
| Kyma Medical Technologies Ltd. |   | 2011-2018      |   | 27.32                            |   |                                | 20.00 |   |
| Atlantium Technologies Inc.    |   | 2011-2019      |   | 23.44                            |   |                                | 20.22 |   |

|   | (1)    | Elron’s direct holding. Elron’s effective holding including RDC’s holding after exercise is 22.43%.                                                                                                                                                                                                                                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)    | Pocared has convertible loans which may be repaid or converted into shares if certain conditions are met. Since the amount of the shares issuable upon conversion is determined only at the time of actual conversion, these convertible loans were not taken into account in determining the holding rate after exercise. After the reporting date these loans were converted into shares, see Note 3.C.1.A. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   | (*)    | Not including companies under liquidation proceedings.                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   |   | c)                                                                                                                                                                                                                                                                                                                                                                                                            | Dividend received or receivable from associates |

|               |   | Year ended December 31, |
|--------------------|--------|-------------------------|
|               |   | 2010                    |   |   | 2009 |   |   | 2008 |
|               |   | $ thousands             |
|               |   |                    |   |   |   |   |   |   |   |   |   |   |
| NetVision Ltd.     |   |                    | – |   |   |   | 4,442 | (1) |   |   | – |   |
| Given Imaging Ltd. |   |                    | – |   |   |   | 3,675 | (2) |   |   | – |   |
|               |   |                    |   |   |   |   |   |   |   |   |   |   |
|               |   |                    |   |   |   |   |   |   |   |   |   |   |
|               |   |                    | – |   |   |   | 8,117 |   |   |   | – |   |

|   | (1)    | For further information about the dividend received from NetVision Ltd, see NoteC.1.j) below.                                                                                                                                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)    | Amounts received by Elron only. For further information about the dividend distributed by Given and RDC’s share in the dividend received, see Note C.1.i) below.                                                                              |
|   |   |                                                                                                                                                                                                                                                |
|   | 5.     | Inclusion of the financial statements of associates accounted for under the equity method of accounting                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                |
|   |   | The Company did not include the financial statements of Given, a material associate, to the financial reports submitted in Israel, as it reports in accordance with the reporting obligations under Chapter E3 of the Israel Securities Law (1968). |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| B.     | Subsidiaries |
|--------|--------------|
|   |         |   |   |
|   | 1.           | Additional information about subsidiaries that are held directly by the Company |
|   |         |   |   |
|   |         | a) | Directly held subsidiaries (including through corporate headquarters) |

|                                        |   | Country of    |   | Equity interestof Group |   |  Direct equity interest of Company |    | Amounts made available to the subsidiary |   | Total amount invested insubsidiary |   | Stock  |    | Fair     |
|---------------------------------------------|--------|---------------|--------|-------------------------|--------|-----------------------------------------|---------|------------------------------------------|--------|------------------------------------|--------|--------|---------|----------|
|                                        |   | incorporation |   | (1) (2)                 |   | (1)                                     |    | Loans (6)                                |   | Guarantees                         |   | (6)    |    | exchange |   | Value (6) |
|                                        |   |          |   | %                       |   | $ thousands                             |    |                                     |   |                               |   |
|                                        |   |          |   |                    |   |                                    |    |                                     |   |                               |   |   |    |     |   |   |   |   |   |   |   |   |
| As of December 31, 2010:                    |   |          |   |                    |   |                                    |    |                                     |   |                               |   |   |    |     |   |   |   |   |   |   |   |   |
| RDC Rafael Development Corporation Ltd. (3) |   | Israel        |   | 50.1                    |   |                                    | – |                                     |   | –                            |   |   | – |     |   | 21,136 |   |   | unquoted |   | – |   |
| Starling Advanced Communications Ltd.       |   | Israel        |   | 68.05                   |   |                                    | 31.61   |                                     |   | 25,573                             |   |   | – |     |   | (2,339 | ) |   | Tel Aviv Stock Exchange |   | 2,884 |   |
| Wavion Inc. (5)                             |   | United States |   | 66.96                   |   |                                    | 66.96   |                                     |   | 2,000                              |   |   | – |     |   | (2,353 | ) |   | unquoted |   | – |   |
|                                        |   |          |   |                    |   |                                    |    |                                     |   |                               |   |   |    |     |   |   |   |   |   |   |   |   |
| As of December 31, 2009:                    |   |          |   |                    |   |                                    |    |                                     |   |                               |   |   |    |     |   |   |   |   |   |   |   |   |
| RDC Rafael Development Corporation Ltd. (3) |   | Israel        |   | 50.1                    |   |                                    | – |                                     |   | 12,904                             |   |   | – |     |   | (10,494 | ) |   | unquoted |   | – |   |
| Medingo Ltd. (4)                            |   | Israel        |   | 92.04                   |   |                                    | 8.44    |                                     |   | 13,021                             |   |   | – |     |   | (1,471 | ) |   | unquoted |   | – |   |
| Starling Advanced Communications Ltd.       |   | Israel        |   | 68.05                   |   |                                    | 31.61   |                                     |   | 5,924                              |   |   | – |     |   | (6,282 | ) |   | Tel Aviv Stock Exchange |   | 3,013 |   |
| Wavion Inc. (5)                             |   | United States |   | 66.96                   |   |                                    | 66.96   |                                     |   | 960                                |   |   | – |     |   | (26 | ) |   | unquoted |   | – |   |

|   | (1)    | Reflects the Company’s ownership interests in the ordinary shares and the preferred shares of the investee companies on an as-converted-basis, and does not take into account full dilution.                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)    | Includes holding through RDC, unadjusted to account for Elron’s holding in RDC (see also Annex to the Financial Statements - Details relating to investments as of December 31, 2010).                             |
|   |   |                                                                                                                                                                                                                     |
|   | (3)    | Held through corporate headquarter, DEP Holding Technology Ltd.                                                                                                                                                          |
|   | (4)    | Sold during 2010, see section C.2.b) of this note.                                                                                                                                                                       |
|   | (5)    | Wavion Inc. holds a 100% equity interest in Wavion Ltd., a private company established according to the laws of the State of Israel.                                                                                     |
|   | (6)    | Elron’s share in addition to RDC’s share in Starling’s equity. Not include Elron’s and RDC’s share in the convertible debentures issued by Starling, for further details see note 3.C.2.A. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | b) | Fully-owned companies (corporate headquarters) |
|--------|--------|----|------------------------------------------------|

|                                  |   | Country of    |   | Equityinterest |   | Direct equity interest |   | Total amount invested in |   | Stock    |
|---------------------------------------|--------|---------------|--------|----------------|--------|------------------------|--------|--------------------------|--------|----------|
|                                  |   | incorporation |   | of Group       |   | of Company             |   | subsidiary               |   | exchange |
|                                  |   |          |   | %              |   | $ thousands            |   |                     |
|                                  |   |          |   |           |   |                   |   |                     |   |     |   |   |   |
| As of December 31, 2010               |   |          |   |           |   |                   |   |                     |   |     |   |   |   |
| DEP Technology Holdings Ltd.          |   | Israel        |   | 100            |   |                   | 100    |                     |   | 23,839   |   |   | unquoted |
| Elbit Ltd.                            |   | Israel        |   | 100            |   |                   | 100    |                     |   | 81,683   |   |   | unquoted |
| Israel Commerce Community I.C.C. Ltd. |   | Israel        |   | 100            |   |                   | 100    |                     |   | (391     | ) |   | unquoted |
| Dealigence Technologies Ltd.          |   | Israel        |   | 100            |   |                   | 100    |                     |   | (16      | ) |   | unquoted |
| Mediagate Ltd. (in liquidation)       |   | Israel        |   | 100            |   |                   | 100    |                     |   | (860     | ) |   | unquoted |
|                                  |   |          |   |           |   |                   |   |                     |   |     |   |   |   |
| As of December 31, 2009               |   |          |   |           |   |                   |   |                     |   |     |   |   |   |
| DEP Technology Holdings Ltd.          |   | Israel        |   | 100            |   |                   | 100    |                     |   | (24,066  | ) |   | unquoted |
| Elbit Ltd.                            |   | Israel        |   | 100            |   |                   | 100    |                     |   | 76,677   |   |   | unquoted |
| Israel Commerce Community I.C.C. Ltd. |   | Israel        |   | 100            |   |                   | 100    |                     |   | (391     | ) |   | unquoted |
| Dealigence Technologies Ltd.          |   | Israel        |   | 100            |   |                   | 100    |                     |   | (16      | ) |   | unquoted |
| Mediagate Ltd. (in liquidation)       |   | Israel        |   | 100            |   |                   | 100    |                     |   | (860     | ) |   | unquoted |

|   |   | c)     | Information about convertible securities of subsidiaries that are held directly by the Company                                                                                                   |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                             |
|   |   |   | Following is the data about the warrants’, share options’ and convertible debentures’ possible impact on Elron’s holdings in these subsidiaries as of December 31, 2010: |

|                                      |   | Vesting period |   | Before exercise in share capital |   | After exercise in share capital (1) |
|-------------------------------------------|--------|----------------|--------|----------------------------------|--------|-------------------------------------|
|                                      |   |           |   | %                                |   | %                                   |
|                                      |   |           |   |                             |   |                                |   |   |
| Starling Advanced Communications Ltd. (2) |   | 2011-2020      |   | 49.86                            | (*)    |                                | 44.62 | (*) |
| Wavion Inc. (1)                           |   | 2011-2020      |   | 66.96                            |   |                                | 54.91 |   |

|   | (1)    | Wavion Inc. has convertible loans which may be repaid or converted into shares if certain conditions are met. Since the amount of the shares issuable upon conversion is determined only at the time of actual conversion, these convertible loans were not taken into account in determining the percentage holding after exercise. As such the percentage holdings may change if and when the loans are converted into shares. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)    | Starling’s convertible debentures are traded on the Tel Aviv Stock Exchange. For further information, see section C.2.a) to this note.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   |   | (*)                                                                                                                                                                                                                                                                                                                                                                                                                              | The holding rate includes Elron’s holding plus 50.1% of RDC’s holding. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | c) | Dividend received or receivable from subsidiaries (including through corporate headquarters): |
|--------|--------|----|-----------------------------------------------------------------------------------------------|

|           |   | Year ended December 31, |
|----------------|--------|-------------------------|
|           |   | 2010                    |   |   | 2009 |   |   | 2008 |
|           |   | $ thousands             |
|           |   |                    |   |   |   |   |   |   |   |   |   |   |
| RDC (1)        |   |                    | 15,003 |   |   |   | – |   |   |   | – |   |
| Elbit Ltd. (2) |   |                    | 278 |   |   |   | 14,819 |   |   |   | – |   |
|           |   |                    |   |   |   |   |   |   |   |   |   |   |
|           |   |                    |   |   |   |   |   |   |   |   |   |   |
|           |   |                    | 15,281 |   |   |   | 14,819 |   |   |   | – |   |

|   | (1) | For further information about the dividend received from RDC, see Note 3.C.2.d below.                                                                                                                                                                                                                                                                                 |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | On December 31, 2009, Elbit distributed a dividend to Elron in the amount of approximately $14,819, which part of it used to repay one of the capital notes issued by Elron to Elbit Ltd. in the amount of approximately $12,000. On December 22, 2010, Elbit distributed an additional dividend to Elron in the amount of approximately $278 against a debt balance. |

| C.     | Significant changes in investments during the reporting period |
|--------|----------------------------------------------------------------|
|   |                                                           |   |   |
|   | 1.                                                             | Associates |
|   |                                                           |   |   |
|   |                                                           | a) | Pocared |
|   |                                                           |   |   |
|   |                                                           |   | Pocared Diagnostics Ltd. (“Pocared”) is developing a platform for real-time and automatic diagnosis of pathogens suspended in liquids that is based on optical technology. As of the reported date, Elron holds approximately 32% of Pocared’s outstanding shares and Pocared is accounted for under the equity method of accounting. |
|   |                                                           |   |   |
|   |                                                           |   | In April 2009, Pocared completed a financing round of approximately $6,600 in consideration for 10,413,052 Preferred E shares. Elron’s share in this amount was approximately $2,400. The financing round was completed in two installments during April 2009. |
|   |                                                           |   |   |
|   |                                                           |   | In September 2009, the shareholders of Pocared, including Elron, invested an aggregate amount of $2,200 in Pocared. Elron’s share in this amount was approximately $1,093. |
|   |                                                           |   |   |
|   |                                                           |   | In December 2009, the shareholders of Pocared, including Elron, invested an aggregate amount of approximately $3,600 in Pocared. Elron’s share in this amount was approximately $1,500. |
|   |                                                           |   |   |
|   |                                                           |   | In June 2010, the shareholders of Pocared, including Elron, invested an aggregate amount of approximately $3,200 in Pocared. Elron’s share in this amount was approximately $1,400. |
|   |                                                           |   |   |
|   |                                                           |   | In January 2011, subsequent to the reported date, Pocared completed a financing round of approximately $5,800 in consideration for 9,586,777 Preferred F shares. Elron’s share in this amount was approximately $2,600. In addition, convertible loans in the amount of approximately $9,200 were converted into 15,244,457 Preferred F shares. Elron’s share in these loans was approximately $4,100 (see above). Pursuant to the loan agreement, the shareholders of Pocared, including Elron, have the option at their discretion to invest up to an additional approximately $11,200  in three additional financing rounds, pro rata to their holdings of Pocared. Following this investment, Elron’s holding in Pocared increased to approximately 37%. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | b)     | Teledata                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | Teledata Networks Ltd. (“Teledata”) provides access products and solutions for both traditional and Next Generation Networks, or NGN, to telecom operators and service providers. Elron held approximately 21% of Teledata’s outstanding shares prior to its sale (see below). Teledata was accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | In January 2010, Teledata received a guarantee from certain of its shareholders in the aggregate amount of $3,000. Elron’s share in the guarantee was approximately $1,500.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | In April 2010, Teledata received a commitment to provide a guarantee from certain of its shareholders in the aggregate amount of $3,000. Elron’s share in this guarantee was approximately $1,500.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | Elron’s share in Teledata’s losses included its share in the aforementioned guarantees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | In April 2010, a definitive merger agreement was executed between Teledata, its principal shareholders, including the Company ("major shareholders") and Enablence Technologies Inc. (the "Acquirer" or "Enablence"), a foreign company publicly traded on the TSX Venture Exchange, who designs, manufactures and sells optical components and systems to a global customer base, for the sale, by way of merger, of all of the outstanding shares of Teledata to the Acquirer, the principal terms of which include, inter alia, the following terms: (i) upon completion of the transaction, consideration was received in the aggregate amount of $50,000, including $10,000 in cash, $10,000 payable in non-tradable bonds of the Acquirer and $30,000 payable in publicly tradable shares of the Acquirer, based on their price on the TSX Venture Exchange on the closing date of the transaction. Of this consideration, shares of the Acquirer equivalent to $5,000 (based on their price on the TSX Venture Exchange on the closing date of the transaction) were deposited in escrow for a period of up to 12 months to cover, mainly, possible indemnification which may become due to the Acquirer in connection with breaches, if any, of the merger agreement by any of the other parties thereto and possible future claims relating to Teledata, if any, (ii) upon completion of the transaction all outstanding shareholders' loans granted to Teledata by Elron (in the aggregate amount of approximately $800, and which are convertible into Teledata shares) were assigned to the Acquirer. The abovementioned consideration includes the consideration for such assignment, (iii) each of the major shareholders shall only be liable for part of the indemnification amounts that may become due to the Acquirer, each according to its share of the consideration, and will not be liable for any breaches of the merger agreement by any other major shareholders. The liability of each major shareholder's liability for its representations and obligations towards the Acquirer will be limited to its share of the aggregate consideration, while its liability for representations and obligations relating to Teledata shall be limited (except in certain matters) to each such shareholder's share of the consideration held in escrow described above, (iv) any shares of the Acquirer received as part of the consideration are subject to a lock-up period of 6 to 12 months commencing from the closing date of the transaction, (v) on the closing date of the transaction, all shareholders' guarantees granted by the major shareholders to Teledata, and all obligations of the major shareholders to grant shareholders guarantees or collaterals for loans to Teledata were cancelled. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | On June 23, 2010 the conditions were met and the transaction was completed. As a result, in respect of the transaction:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | In accordance with Teledata’s capital structure and the shareholders’ rights to Teledata’s capital, Elron received aggregate proceeds of approximately $23,200, including approximately $3,000 payable in cash, approximately $3,800 payable in bonds of the Acquirer and approximately $16,400 payable in shares of the Acquirer based on their price on the TSX Venture Exchange on the closing date of the sale (of which shares of the Acquirer in an amount equivalent to approximately $2,300 are held in escrow, based on their share price on the TSX Venture Exchange on the closing date of the sale). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Pursuant to the terms of the transaction, guarantees and obligations to grant guarantees which were granted in the past by Elron to Teledata in the aggregate amount of approximately $4,200 were cancelled. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Elron recorded a net gain in the second quarter of 2010 in the amount of approximately $22,364. The said gain is included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | In accordance with the aforementioned, the consideration held in escrow was recognized as a financial asset. The consideration held in escrow is included under assets held for sale in the statement of financial position (for additional information see Note 8.B). Accordingly, the aforementioned net gain includes recognition of the gain in respect of this element of the consideration. In addition, the net gain amount was calculated after the deduction of the discount element (the “Discount”) in respect of the lock-up period on the Acquirer’s shares. The Discount’s fair value was estimated by the Company on the closing date of the transaction at approximately $5,000. The Discount was estimated based on the Option Pricing Model method and was determined on the closing date of the transaction at a rate of 30% for the shares not held in escrow, and 35% for the shares held in escrow. The difference between the Discount rate of shares held and not held in escrow derives from the difference in their respective lock-up periods. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | The main parameters used in the said valuation at the closing date of the transaction are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   |   |   | The Valuation Model - PUT Option Analysis based on the Black and Scholes Option Pricing Model.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

|                        |   | Closing Date of Transaction |
|-----------------------------|--------|-----------------------------|
|                        |   |                        |
| Exercise price              |   | CAD 0.55                    |
| Share price                 |   | CAD 0.55                    |
| Expected life               |   | 6-12 months                 |
| Volatility                  |   | 59%-97%                     |
| Risk free rate              |   | 0.73%-1.01%                 |
| Dividend rate               |   | 0%                          |
| Discount’s fair value |   | Approximately $5,000        |

|   |   |   | For additional information about the shares received in the transaction and their value as of December 31, 2010, see Note 8. |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------|

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | c)     | Galil                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | Galil Medical Ltd. (“Galil”) develops, manufactures and markets a cryotherapy platform of minimally invasive treatments for various clinical applications. Elron directly held approximately 12% of Galil’s outstanding shares, and approximately 17% indirectly through RDC (prior to its sale, see below). Galil was accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | In March 2010, the Company’s Audit Committee and Board of Directors approved the transaction in which the Company, together with RDC and DIC (who together held approximately 42% in Galil) and certain other shareholders of Galil (the “Sellers”) entered into an agreement to sell all their respective holdings in Galil to certain other Galil shareholders (the “Acquirers”) for an immediate payment in the aggregate amount of approximately $1,300 and for an additional contingent future payment, conditional upon certain future events occurring within 24 months from the consummation of the above transaction. The consideration was allocated between the Sellers proportionally to the number of Galil shares sold by each of them from among the total shares sold, irrespective of their class and liquidation preference. Accordingly, Elron’s and RDC’s portion in the immediate payment was approximately $400 and approximately $500, respectively. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | In April 2010, subsequent to the receipt of all required approvals, the transaction was completed. As a result of the sale, in the second quarter of 2010, Elron recorded a gain (attributable to the Company's shareholders), included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net, in the amount of approximately $500 (a consolidated net gain of approximately $773).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | d)     | NuLens                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | NuLens Ltd. (“NuLens”) is developing intra-ocular accommodating lenses, or IOLs, mainly for the treatment of cataracts, presbyopia and low vision. Elron holds approximately 35% of NuLens’s outstanding shares. NuLens is accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | In January 2010, NuLens completed a financing round of approximately $4,600 in consideration for 512,049 Preferred C1 shares. Elron’s share in this amount was $2,000. The investment did not result in any material change to the proportion of Elron’s holdings of NuLens’s outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | e)     | Impliant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | Impliant Inc. ("Impliant") developed spinal implants for motion preservation. Impliant was consolidated in Elron's consolidated financial statements from March 2008. In September 2009, completed Impliant a financing round. As a result from this round Elron's share decreased to 48% of Impliant's outstanding shares. Due to the said above and loss of control over Impliant, Elron recognized during the fourth quarter of 2009 a gain from changes in holdings in an amount of approximately $459. This gain was included in gain from disposal of investee companies and changes in holdings, net in the statement of income. From the fourth quarter the investment in Impliant was accounted for under the equity method of accounting, until the cessation of its operations and the transfer of its shares to a liquidator (see below).                                                                                                                                                                 |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | During the second quarter of 2010, an impairment provision was made in respect of the investment in Impliant in the amount of approximately $1,600 due to the decision of Impliant’s Board of Directors to cease its operations. Expenses in respect of the said impairment were included under other expenses (income), net, in the statement of income. In November 2011, Elron and the other major shareholders of Impliant transferred their respective shares in Impliant to a liquidator.                                                                                                                                                              |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | For further information regarding initial consolidation in 2008 and de-consolidation in 2009, see section 2.F to this note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | f)     | Kyma                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | Kyma Medical Technologies Ltd. (“Kyma”) is developing an innovative remote patient monitoring (RPM) solution for Congestive Heart Failure (CHF) patients in order to enable early treatment of pulmonary edema and reduce the need for unnecessary hospitalizations.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | In September 2010, Elron and Kyma signed an investment agreement according to which Elron invested $1,000 in Kyma in consideration for 65,738 Preferred B shares. Following this transaction, Elron held, as of the reported date, approximately 27% of Kyma’s outstanding shares, and accordingly, Kyma is accounted for under the equity method of accounting. Pursuant to the said investment agreement, Elron had the right, as of January 1, 2011, to invest an additional $4,000 in consideration for 262,953 Preferred B shares which would entitle Elron, among other things, to an additional approximately 38% of Kyma’s outstanding shares. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | In January 2011, subsequent to the reported date, Elron exercised this right, and invested an additional $4,000 in Kyma. Following this investment, Elron’s holding in Kyma’s outstanding shares increased to approximately 65%, and Kyma became a consolidated company. The Company is expected to recognize an immaterial gain resulting from the consolidation of Kyma.                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | Up to 2009 Elron invested in Kyma and in 2009 decided Elron to cease the investment. Following a change in Kyma’s capital structure in 2009, Elron’s rights in respect of past investments in Kyma were cancelled (see also Note 20.H).                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | g)     | BrainsGate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | BrainsGate Ltd. (“BrainsGate) is developing a minimally invasive treatment platform for patients suffering from Central Nervous System diseases. Elron holds approximately 23% of BrainsGate’s outstanding shares. BrainsGate is accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | In February 2008, BrainsGate completed a financing round of approximately $27,500 in consideration for 5,133,709 Preferred C shares. Elron’s share in this amount was approximately $6,600. The investment was granted in four installments, the last of which was advanced in February 2009.                                                                                                                                                                                                                                                                                                                                                                |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | h)     | Notal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | Notal Vision Inc. (“Notal”) provides a system and services for remote monitoring from home of AMD patients at risk of vision loss, for the early detection of important visual changes. Elron holds approximately 22.63% of Notal’s outstanding shares. Notal was accounted for under the equity method of accounting prior to the investment round that took place in the fourth quarter of 2010 (see below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In October 2010, Notal signed an investment agreement with its major shareholders, including Elron, and new investors, whereby approximately $8,000 is to be advanced in two installments in consideration for Preferred C shares and warrants. In November 2010, the first installment in the amount of $5,000 was advanced in consideration for 3,952,832 preferred C shares and 988,209 warrants to Preferred C. Elron’s share in this amount was approximately $400. The second installment will be advanced conditionally upon Notal achieving certain cumulative conditions as stipulated in the agreement. The second installment, if and when advanced, will amount to $3,000, in consideration for 3,558,822 Preferred C shares and 889,703 warrants to Preferred C. Elron’s share in the second installment is expected to amount to approximately $300. In addition, convertible loans in the amount of approximately $710 were converted into 236,457 Preferred B shares. Elron’s share in these loans was approximately $700. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | Following the first installment and the loans conversion, as aforementioned, Elron's holding in Notal's outstanding sharesis 22.63%. Notwithstanding, Elron's holding including voting rights which are immediately exercisable or convertible is approximately 17.8%. As a result of the above, Elron no longer retains significant influence over Notal. Accordingly, in the fourth quarter of 2010, a gain from the decrease in the Company's interest in Notal in the amount of approximately $1,610 was recognized and included  in gain from disposal of investee companies and changes in holdings, net in the statement of income. Notal began to be accounted for as an available-for-sale investment.                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | i)     | Given                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | Given provides non-invasive diagnostic products for visualization and detection of disorders of the gastrointestinal tract, and is traded on Nasdaq and the Tel-Aviv Stock Exchange (symbol: GIVN). Given is accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In May 2007 and June 2008 Elron purchased, in a series of open market transactions and by way of tender offer, 717,366 and 1,462,640 ordinary shares of Given, respectively, for an aggregate purchase consideration of approximately $18,700 and $24,500, respectively. As a result of these transactions, Elron’s direct and indirect ownership interest in Given’s outstanding ordinary shares on the transaction dates increased to approximately 23% and 28%, respectively. As of December 31, 2010, Elron directly holds approximately 23% of Given (DIC and RDC hold approximately 16% and 9% of Given, respectively). Therefore, the Company together with DIC and RDC hold approximately 48% of the issued and outstanding shares of Given as of December 31, 2010.                                                                                                                                                                                                                                                                     |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | The total excess of the said purchase prices over the Company's share in Given's total equity acquired amounted to approximately $16,100 and $18,500, respectively, and was allocated in aggregate as follows: approximately $9,700 and $13,500, respectively, to intangible assets other than goodwill such as technology, customer relationships, and in process research and development ("IPR&D") and as a residual approximately $6,400 and $5,000, respectively, to goodwill.  The amounts allocated to intangible assets are amortized on a straight-line basis over their weighted average expected useful life of 10 and 15 years, respectively. Goodwill is not amortized and is subject to impairment assessment and IPR&D will be amortized when the respective technology will be available for sale. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | On February 10, 2009, Given declared a special cash dividend of approximately $0.54 per share ($16,000 in the aggregate), of which Elron’s and RDC’s share was approximately $3,700 and $1,400, respectively. Payment of the dividend was made on March 11, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | As for apledge placed on Given shares in favor of banks, which was subsequently removed during 2010, see Note 15 (1) and (3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | j)     | NetVision                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | NetVision Ltd. (“NetVision”) is an Israeli communications company, traded on the Tel Aviv Stock Exchange (symbol: NTSN). NetVision provides internet and international long distance telephony services. Elron held approximately 15% of NetVision’s outstanding shares prior to its sale (see below). NetVision was accounted for under the equity method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | On March 10, 2009 and on August 12, 2009, NetVision declared a special cash dividend of approximately NIS 3.08 and NIS 0.86 per share, respectively (for the date of declaration- approximately $0.73 and $0.23 per share, respectively), or NIS 90 million and NIS 26 million, respectively (as of the date of declaration- approximately $21,200 and $7,000, respectively), in the aggregate. Elron’s share in these dividends was approximately NIS 14.2 million and NIS 4 million, respectively (as of the date of payment- approximately $3,400 and $1,050, respectively). Payments of these dividends took place in April and September 2009, respectively.                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | On August 19, 2009, Elron signed an agreement with DIC and Clal Industries and Investments Ltd. (“CII”), according to which DIC and CII agreed to acquire from Elron its holdings in NetVision, in consideration of NIS 228.7 million (approximately $60,700 according to the exchange rate on October 29, 2009, the closing date of the transaction, see below).                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | DIC and CII are both controlled by the IDB group and are related parties of Elron (as defined in IAS 24). Prior to the sale, DIC and CII held 31% and 25%, respectively, of NetVision’s ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | The selling price was determined by negotiations between the parties based on a valuation received from an independent appraiser jointly appointed by the parties, and further supported by a fairness opinion by an independent party, which was retained by Elron for such purpose, which concluded that the purchase price is fair and reasonable, from a financial point of view, to Elron’s public shareholders.                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   | On October 29, 2009, following the approval of the shareholders of each of Elron, DIC and CII,the abovementioned sale was completed. As a result, in the fourth quarter of 2009, Elron recorded a gain of approximately $21,900, which was included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   | k)     | 3DV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   | 3DV Systems Ltd. (“3DV”) was an Israeli company that developed a video camera technology capable of capturing the depth dimension of objects in real time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   | On June 2, 2009, 3DV completed the sale of substantially all of its assets to a third party and declared voluntary liquidation. During June-July 2009, 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds, in the aggregate amount of approximately $21,800, of which an amount of approximately $3,000 was deposited in escrow. Elron's and RDC'sshare in these payments (not including the amount in escrow) was approximately $3,100 and $3,700, respectively. As a result of the sale of 3DV's assets, the Company recorded a consolidated gain of approximately $6,090 on the sale date (in 2009)under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. During the third quarter of 2010, 3DV advanced the proceeds held in escrow to its shareholders, in the aggregate amount of approximately $3,000. Elron's and RDC's share in this payment amounted to approximately $400 and $600, respectively. Upon receipt of the proceeds held in escrow, the Company recorded a consolidated gain of approximately $1,034under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | l)     | ChipX                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   | On November 9, 2009, ChipX Inc. ("ChipX") completed a merger with GigOptix Inc. ("the merged company" or "GigOptix"), a U.S. company traded over-the-counter in the United States, pursuant to which the former shareholders of ChipX, including Elron, received 40% of the shares of the merged company.Elron's share in the issued and outstanding shares of the merged company is approximately 8.7%. As a result of the merger, in the fourth quarter of 2009, Elron recorded a gain of approximately $1,548in the statement of income under line item gain from disposal of investee companies and changes in holdings, net. The Company accounts for its investment in the merged company as an available-for-sale investmentunder other investments, as itdoes not have significant influence over the merged company. The investment in GigOptix is included in assets held for sale in the statement of financial position, for further information see note 9.                                                                                                                                                                                                                                                                       |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   | 2.     | Subsidiaries |
|--------|--------|--------------|
|   |   |         |   |   |
|   |   | a)           | Starling |
|   |   |         |   |   |
|   |   |         | Starling, a subsidiary, provides mobile SATCOM broadband connectivity solutions for aircraft and ground vehicles. Elron directly holds approximately 32% of Starling’s outstanding shares, and approximately 36% indirectly through RDC. |
|   |   |         |   |   |
|   |   |         | On June 13, 2007, Starling, then a 72.5% subsidiary of Elron, completed an initial public offering on the Tel Aviv Stock Exchange of shares, convertible debentures (bearing a 6% annual interest and CPI-linked) (“Convertible Debentures”) and options to purchase the Convertible Debentures (“Convertible Debentures Options”). Payment of the Convertible Debentures principal is made in four equal annual payments starting June 10 of each of 2010-2013, and payment of the Convertible Debentures interest is made once a year on June 10 of each of the years 2008-2013. The gross IPO consideration amounted to approximately NIS 57,000 in the aggregate (approximately $14,000 in the aggregate based on the exchange rate prevailing on the IPO date). An NIS-denominated amount equivalent to approximately $12,100 of the proceeds received from the Convertible Debentures and from the exercise of some of the Convertible Debentures Options (“Debentures Proceeds”) were restricted and were to be released from the restrictions and used by Starling upon achieving certain milestones, no later than November 30, 2008. In December 2008 the Convertible Debentures Proceeds were released. Elron invested approximately $4,000 as part of the offering in consideration for 619,700 ordinary shares, 8,675,800 Convertible Debentures and 86,758 Convertible Debentures Options, which later expired. In addition, immediately prior to the offering, existing shareholders of Starling, including Elron and RDC, converted shareholder loans in the amount of approximately $6,500 into 6,488,783 ordinary shares and 393,126 Convertible Debentures Options, which later expired. Immediately following the offering, Elron’s consolidated holdings (directly and through RDC) in Starling’s outstanding shares decreased from 72.5% to approximately 68%. Following the offering, Elron retains control over Starling, and therefore continues to account for Starling as a consolidated subsidiary. |
|   |   |         |   |   |
|   |   |         | During October 2008 Elron purchased 7,638,323 Convertible Debentures in private transactions and an additional 10,139,455 Convertible Debentures by way of a partial tender offer in consideration for an aggregate amount of approximately $2,000 and $2,400, respectively. Subsequent to these purchases, Elron and RDC beneficially owned 26,453,578 out of a total of 42,364,000 outstanding Convertible Debentures which represent approximately 62% of Starling’s outstanding Convertible Debentures. |
|   |   |         |   |   |
|   |   |         | In June 2010, Starling made its first payment in respect of the Convertible Debentures principal and interest in the amount of approximately $3,100. Elron’s and RDC’s share in the principal and interest payment was approximately $1,500 and approximately $850, respectively. |
|   |   |         |   |   |
|   |   |         | As of the reported date, Elron and RDC held 12,700,088 and 7,140,066 Convertible Debentures, respectively, out of a total of 31,773,000 Convertible Debentures. The Convertible Debentures held by Elron and RDC represent approximately 62.4% of the outstanding par value as of December 31, 2010. For additional information about the Convertible Debentures held by Elron and RDC see Note 15. |
|   |   |         |   |
|   |   |         | Following are the loan agreements signed between Starling and Elron and RDC: |
|   |   |         |   |   |
|   |   |         | In May 2009, Elron and RDC signed a loan agreement in the amount of $2,600. Elron’s share in this amount was approximately $1,200. The loan amount was advanced to Starling by July 2009. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | In July 2009, Elron and RDC signed a loan agreement in the amount of $3,200. Elron’s share in this amount was approximately $1,500. The loan amount was advanced in five installments during August through December 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | In December 2009, Elron andRDC signed aloan agreement in the amount of $3,900.Elron's share in this amount was approximately $1,800. The loan amount was advanced to Starling in a single installment during January 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | In March 2010, Elron and RDC signed a loan agreement in the aggregate amount of $7,800. Elron's share in this amount was approximately $3,600. The loan amount was advanced to Starling during the second and third quarters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | In August 2010, Elron and RDC signed a loan agreement in the aggregate amount of $7,000. Elron's share in this amount was approximately $3,300.The loan amount was advanced to Starling during August through November 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | In January 2011, subsequent to the reported date, Elron and RDC signed an additional loan agreement to provide Starling with a loan in the aggregate amount of up to $1,500. Elron's share in this amount was approximately $700. The amount was advanced to Starling in February 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | b)     | Medingo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | Medingo Ltd. (“Medingo”) is engaged in the development of an insulin micro-pump for people with diabetes (“the insulin micro-pump”). In July 2009, Medingo received FDA clearance to market the insulin micro-pump in the U.S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | Prior to its sale (see below) Elron held approximately 92% of Medingo’s outstanding shares, including approximately 84% held by RDC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | In January 2010, the shareholders of Medingo, including Elron and RDC, extended an investment in the aggregate amount of $5,500 to Medingo, of which Elron’s and RDC’s share was approximately $500 and $4,600, respectively. During the first quarter of 2010, a payment in respect of the investment in the amount of $3,500 was advanced, of which Elron’s and RDC’s share was approximately $300 and $2,900, respectively. During the second quarter of 2010, an additional payment in the amount of $1,500 was advanced, of which Elron’s and RDC’s share was approximately $130 and $1,300, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |   | On April 13, 2010, a definitive sale agreement was executed for the acquisition of all of Medingo’s shares by F. Hoffman-La Roche Ltd. (the “Acquirer”), the principal terms of which include, inter alia, the following terms: (i) upon completion of the transaction, the selling shareholders received consideration in the aggregate amount of $160,000, subject to certain adjustments, of which an amount of $29,000 is held in escrow for a period of up to 24 months to cover mainly potential indemnification payments which may be due from the selling shareholders in connection with breaches, if any, of the sale agreement and certain potential future claims relating to Medingo, if any, (ii) the selling shareholders will receive gradual payments of additional contingent consideration of up to $40,000 conditional upon Medingo achieving, gradually, over a certain period, certain operational milestones (“Contingent Consideration”), (iii) Elron’s and RDC’s maximum potential indemnification obligations under the sale agreement are limited to approximately 110% of their respective parts of the total consideration amount, except - with respect to each of them separately - in case of fraud or willful misconduct by it. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | On May 28, 2010, the sale was completed. As a result, in respect of the aforementioned sale: |
|--------|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |   |                                                                                         |   |
|   |   |   | 1.                                                                                           | In accordance with Medingo’s capital structure and the shareholders’ rights to Medingo’s capital, Elron and RDC received approximately $13,700 and approximately $93,500, respectively, upon completion of the transaction. During the third quarter of 2010, Elron and RDC additionally received, in  respect of adjustments to the initial consideration, approximately $200 and approximately $1,500, respectively, from a short-term deposit held in escrow, and may receive in the future additional amounts of up to approximately $2,700 and up to approximately $20,000, respectively, from the amount held in escrow in connection with the transaction for a period of 24 months, and up to approximately $3,000 and up to approximately $29,200, respectively, out of the Contingent Consideration. |
|   |   |   |                                                                                         |   |
|   |   |   | 2.                                                                                           | Elron recorded a net gain (attributable to the Company’s shareholders) in the second quarter of 2010 of approximately $70,800 (a consolidated net gain of approximately $124,700). An additional net gain (attributable to the Company’s shareholders), currently estimated at an aggregate amount of up to approximately $13,900 (a consolidated net gain of approximately $24,900) may be recorded at later stages, taking into consideration certain future events which affect the amounts Elron and RDC may receive from the Contingent Consideration. The net gain amounts include Elron’s share of the net gain recorded by RDC in respect of the aforementioned sale. |
|   |   |   |                                                                                         |   |
|   |   |   |                                                                                         | In accordance with the aforementioned, the consideration held in escrow was recognized as a financial asset, and accordingly, the aforementioned net gain includes recognition of the gain in respect of this element of the consideration. The consideration held in escrow is included under other long-term receivables in the statement of financial position (see also Note 10). The said net gain amount does not include recognition of the contingent consideration element, as in management's estimation, in light of the significant uncertainty as to the achievement of the aforementioned milestones and the timing thereof, the fair value measurement of this element cannot be reliably estimated, for the reason, among others, that the Company does not have control over Medingo's success in meeting the aforementioned milestones, which is under the control of the Acquirer and is dependent upon additional factors, and also for the reason that pursuant to the sale agreement, the Company does not at this stage have access to information which would enable it to establish a reliable range of reasonable fair value estimates. The Company examines and shall examine at every financial report date whether there is any change in the circumstances or in the information to which Elron has access, which would enable the Company to reliably measure the cash receivables' value in respect of the Contingent Consideration. The gain recognized as aforementioned is presented under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   |   | Presented below is a breakdown of the consideration and cash flows due to the sale: |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------|

|   |   |   | Sale consideration: |
|--------|--------|--------|---------------------|

|                                                                |   | $ thousands |    |
|---------------------------------------------------------------------|--------|-------------|---------|
|                                                                |   |        |    |
| Cash received                                                       |   |        | 108,834 |   |
| Long-term escrow deposit                                            |   |        | 22,639  |   |
| Less: transaction costs paid in cash                                |   |        | 1,210   |   |
|                                                                |   |        |    |   |
|                                                                |   |        | 130,263 |   |
|                                                                |   |        |    |   |
| Aggregate cash flows received by the Group as a result of the sale: |   |        |    |   |
|                                                                |   |        |    |   |
| Cash received less transaction costs paid in cash                   |   |        | 107,624 |   |
| Less: cash and cash equivalents in subsidiary as of sale date       |   |        | 229     |   |
|                                                                |   |        |    |   |
| Net cash                                                            |   |        | 107,395 |   |

|   |   |   |   |                                                                               |
|--------|--------|--------|--------|------------------------------------------------------------------------------------|
|   |   |   |   | For further regarding de-consolidation information, see section 2.f) to this note. |

|   |   | c)     | Wavion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   | Wavion Inc. (“Wavion”), a subsidiary, provides outdoor Wi-Fi base station solutions which provide increased coverage and capacity, enhanced penetration, and immunity to interference as compared with conventional Wi-Fi access points. Elron directly holds approximately 67% of Wavion’s outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   | During the third quarter of 2007, Elron together with certain other stockholders (“Participating Stockholders”) signed a stock purchase agreement  with Wavion relating to an aggregate investment of up to $10,000, in consideration for issuance of Series A preferred shares by Wavion. The first installment in an aggregate amount of $3,600 was invested immediately, of which Elron invested approximately $1,700. The second and third installments were invested during March and June 2008, each in the amount of $3,200 of which Elron invested in each installment approximately $2,000. In addition, concurrently with the second installment, Elron together with another shareholder purchased all the shares then held by a former stockholder in Wavion, of which Elron purchased 75% of such Purchased Shares. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   | Following the above transactions, Elron held approximately 57% of the outstanding and as converted share capital of Wavion. Since Elron owns more than half of the voting power of Wavion, Elron initially consolidated Wavion, commencing the end of the first quarter of 2008. For further information regarding initial consolidation in 2008, see section 2.F to this note                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   | According to IFRS 3, “Business Combinations” and IAS 38, “Intangible Assets” a PPA was performed by Elron’s management. According to the PPA an amount of $6,723 was allocated to technology. The excess of Elron’s portion in the fair value of its interests in Wavion’s equity held prior to consolidation over their reported amounts amounted to approximately $3,000 and was recorded to shareholders’ equity as a revaluation reserve. The revaluation reserve was amortized over a period of 5 years against retained earnings (the estimated useful life of the assets acquired).                                                                                                                                                                                                             |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | During 2010, a provision was made in respect of the impairment of such technology in the amount of approximately $2,421, as a result of a decline in its fair value. In addition, as a result of the obsolescence of this technology, its estimated useful life was shortened from 3 years to 1.5 years. Concurrently, a pro-rata portion of the revaluation reserve from consolidation of a subsidiary was amortized against accumulated deficit and the amortization period was shortened as well. The expense in respect of this impairment was included under other expenses (income), net, in the statement of income. In calculating the impairment, the amount of the recoverable value of the technology is its value in use, which was calculated at a 26% discount rate. Intangible assets, net, includes an amount of approximately $341 in respect of the technology of Wavion as a result of the initial consolidation of Wavion (see also Note 12).                                                                                                                                                                                            |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In January 2010, Elron together with another shareholder of Wavion, invested an aggregate amount of $1,600 in Wavion, of which Elron’s share was approximately $1,400.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In April 2010, Elron alone invested an additional amount of $2,000 in Wavion. The investment did not result in any material change to the proportion of Elron’s holdings of Wavion’s outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | d)     | RDC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | RDC is a holding company consolidated by Elron. Elron holds 50.1% of RDC’s outstanding shares, through DEP Technology Holdings Ltd. (“DEP”), a subsidiary fully owned by Elron.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | RDC establishes and develops projects and companies that commercially exploit technologies which were developed by Rafael Advanced Defense Systems Ltd. (“Rafael”) for military uses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In December 2007, Elron, DEP, RDC and Rafael signed an agreement (the “Addendum”) effective as of January 1, 2008, which was subsequently approved by the court. The Addendum amended the existing agreement between the parties pertaining to the rights granted to RDC to commercialize certain technologies of Rafael, and settled a claim filed by Rafael in September 2006 against RDC and DEP. Pursuant to the Addendum, RDC’s rights to commercialize certain technologies of Rafael will continue without time restrictions. Pursuant to the terms of the Addendum, Elron made a one-time investment in RDC of $4,000 and is committed to make further investments of $750 in RDC for each company established by RDC based on Rafael’s technologies. The Addendum settles all claims between Rafael and RDC and DEP as well as resolves other issues which will facilitate cooperation between the parties. In 2008, RDC established two new companies, each of which is based on Rafael’s technologies following which and in accordance with the terms of the Addendum, Elron invested an additional $1,500 in RDC. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | The excess of the $5,500 invested in RDC over the increase in Elron’s portion of RDC’s equity, in the amount of approximately $2,700 was allocated to the agreement with Rafael as an intangible asset with indefinite useful life, and accordingly is not subject to amortization, but rather is reviewed for impairment at least annually or more frequently if indicators of impairment exist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | Intangible assets, net, include an amount of approximately $3,053 in respect of the agreement described above (see Note 12).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | In December 2009, RDC signed a loan agreement with Elron and Rafael in the aggregate amount of $15,000, of which Elron’s share was approximately $7,500. In January 2010, a payment in respect of the loan in the amount of $7,500 was advanced to RDC, of which Elron’s share was approximately $3,750. During the second quarter of 2010, payments in the amount of $4,500 were advanced to RDC, of which Elron’s share was approximately $2,250.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | In June 2010, RDC’s entire debt in respect of loans granted to it by Bank Mizrahi Tefahot Ltd. and by its shareholders (Elron and Rafael) was prepaid. For additional information, see Note 15 (1) and (2) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | On August 10, 2010, RDC declared a special cash dividend in the aggregate amount of approximately $30,000. On August 16, 2010, payment of the said dividend by RDC was made. Elron’s share in such dividend amounted to approximately $15,000. The balance of the dividend amount was distributed to Rafael. Rafael’s share in the said dividend in the amount of $14,997 was recorded in the statement of changes in equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | e)     | Sela                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | Sela Semiconductor Engineering Laboratories Ltd. (“Sela”) is an Israeli company engaged in the development and manufacture of equipment for increasing automated production for the semiconductor industry and optical components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   | On September 24, 2009, Camtek Ltd. ("Camtek", an Israeli company, publicly traded on Nasdaqand the Tel-Aviv Stock Exchange), acquired the entire share capital of Sela from Elron, RDC and Sela's other shareholders. As consideration for the shares, Camtek will pay Sela'sselling shareholders contingent future payments in the aggregate amount of up to $9,500, depending on Sela's future revenues, of which Elron's and RDC's portions are estimated to be up to $1,750 and $4,500, respectively.On the date of the sale, the Company recognized a consolidated gain of approximately $1,115. During 2010, Elron and RDC received approximately $65 and $170, respectively, on account of such future payments. During 2010, Elron and RDC recognized a gain in the amount of approximately $276and $712, respectively, under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | f)     | Financial position data of subsidiaries that were disposed of at the date of disposition, and financial position  data of subsidiaries consolidated  at the date of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

|                                                |   | Sale of investments of previously consolidated subsidiaries |
|-----------------------------------------------------|--------|-------------------------------------------------------------|
|                                                |   | 2010                                                        |   | 2009 |
|                                                |   | $ thousand                                                  |
|                                                |   |                                                        |   |   |   |   |
| Cash and cash equivalents                           |   | 229                                                         |   |   | 982 |   |
| Current assets(excluding cash and cash equivalents) |   | 501                                                         |   |   | 2,667 |   |
| Non-current assets                                  |   | 1,504                                                       |   |   | 1,747 |   |
| Current liabilities                                 |   | (2,641                                                      | ) |   | (5,755 | ) |
| Non-current liabilities                             |   | –                                                     |   |   | (2,138 | ) |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|                                                |   | Companies initially consolidated |
|-----------------------------------------------------|--------|----------------------------------|
|                                                |   | 2008                             |
|                                                |   | $ thousand                       |
|                                                |   |                             |   |
| Cash and cash equivalents                           |   | 4,906                            |   |
| Current assets(excluding cash and cash equivalents) |   | 2,685                            |   |
| Non-current assets                                  |   | 2,228                            |   |
| Current liabilities                                 |   | (10,631                          | ) |
| Non-current liabilities                             |   | (114                             | ) |

|                                       |   | December 31 |   |   | December 31 |   |
|--------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                       |   | 2010        |   |   | 2009        |   |
|                                       |   | $ thousands |   |
|                                       |   |        |   |   |        |   |   |   |
| Cash                                       |   |        | 4,102  |   |        |   | 5,512 |   |
| Cash equivalents - short-term deposits (*) |   |        | 52,437 |   |        |   | 59,235 |   |
|                                       |   |        |   |   |        |   |   |   |
|                                       |   |        | 56,539 |   |        |   | 64,747 |   |

|   | (*) | The deposits bear variable interest rate, which is determined upon the period of deposit. The interest rate for deposits as of December 31, 2010, is 1%-1.9%. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                  |   | December 31 |   |   | December 31 |   |
|---------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                  |   | 2010        |   |   | 2009        |   |
|                                  |   | $ thousands |   |
|                                  |   |        |   |   |        |   |   |   |
| Open accounts                         |   |        | 3,082  |   |        |   | 2,105 |   |
| Less: allowance for doubtful accounts |   |        | 21     |   |        |   | 21 |   |
|                                  |   |        |   |   |        |   |   |   |
| Trade receivables, net                |   |        | 3,061  |   |        |   | 2,084 |   |

|                    |   | December 31 |   |   | December 31 |   |
|-------------------------|--------|-------------|--------|--------|-------------|--------|
|                    |   | 2010        |   |   | 2009        |   |
|                    |   | $ thousands |   |
|                    |   |        |   |   |        |   |   |   |
| Associates              |   |        | 28     |   |        |   | 13 |   |
| Government institutions |   |        | 672    |   |        |   | 1,169 |   |
| Prepaid expenses        |   |        | 1,845  |   |        |   | 1,129 |   |
| Government grants       |   |        | 477    |   |        |   | 319 |   |
| Advances to suppliers   |   |        | 512    |   |        |   | 454 |   |
| Other current assets    |   |        | 790    |   |        |   | 307 |   |
|                    |   |        |   |   |        |   |   |   |
|                    |   |        | 4,324  |   |        |   | 3,391 |   |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|             |   | December 31 |   |   | December 31 |   |
|------------------|--------|-------------|--------|--------|-------------|--------|
|             |   | 2010        |   |   | 2009        |   |
|             |   | $ thousands |   |
|             |   |        |   |   |        |   |   |   |
| Raw materials    |   |        | 4,073  |   |        |   | 2,589 |   |
| Work in progress |   |        | 436    |   |        |   | 251 |   |
| Finished goods   |   |        | 847    |   |        |   | 742 |   |
|             |   |        |   |   |        |   |   |   |
|             |   |        | 5,356  |   |        |   | 3,582 |   |

|                 |   | December 31, 2010 |   |   | December 31, 2009 |   |
|----------------------|--------|-------------------|--------|--------|-------------------|--------|
|                 |   | Quoted            |   |   | Unquoted          |   |   | Total |   |   | Quoted |   |   | Unquoted |   |   | Total |   |
|                 |   | $ thousands       |   |
|                 |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in shares |   |              | 219    |   |              |   | 20,002 |   |   |   | 20,221 |   |   |   | 2,013 |   |   |   | 12,514 |   |   |   | 14,527 |   |

| A.     | Available for sale financial assets - unquoted shares                                                                                                                                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                               |   |
|   | The Company holds non-controlling interests (up to 20% of voting rights) in several private companies. The fair value of these companies’ unquoted ordinary shares has been estimated using: |
|   |                                                                                                                                                                                               |   |
|   | 1.                                                                                                                                                                                                 | Discounted Future Earnings Method - This methodology is used when the investee undergoing evaluation are able to provide projections for their future cash flows. In addition, it was deemed not unreasonable that market participants or other investors would use this methodology to determine the fair value of their rights in these companies. |
|   |                                                                                                                                                                                               |   |
|   | 2.                                                                                                                                                                                                 | Company Security Transaction Method (“CSTM”) - according to the CSTM method value of each investee is estimated based upon recent transaction prices in the investee’s securities. For these transactions to be relied upon to develop an estimate of fair value, they must be arm’s length transactions. Additional factors considered in this analysis include: size, amount and type of shares sold; the timing of the transaction relative to the estimation date; differences in the rights, preferences, marketability, control of the transaction securities, participation of new investors and the subject securities; volatility in the investee’s projections and the volatility of comparable firms. |
|   |                                                                                                                                                                                               |   |
|   | 3.                                                                                                                                                                                                 | Option Pricing Model (“OPM”) - After deriving the investee’s fair value, it is generally accepted for market participants to allocate the value of the investee to the different classes of equity.  OPM is an option pricing model based on the Black and Scholes formula or based on the Binomial (lattice) model. This model is based upon the concept that the securities of a firm’s capital structure can be considered as call options on the value of the firm. The model uses a Black and Scholes option model or a Binomial (lattice) model to estimate the value of the investee between value ranges. |
|   |                                                                                                                                                                                               |   |
|   | The valuations require management to make certain assumptions about certain parameters, including projections, credit risk and volatility.                                                         |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

| B.     | Available for sale financial assets - quoted shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | The Company has investments in listed equity securities. The fair value of equity shares which are quoted on a stock exchange is usually determined by reference to the quoted market price in an active market, unless such trading price is not considered to represent fair value due to low trading volume or due to a lock-up period in which the shares cannot be traded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | As described in Note 3.C.1.b), the Company holds shares of Enablence, a foreign company publicly traded on the TSX Venture Exchange, which shares are subject to a lock-up period of 6 to 12 months commencing June 23, 2010 (the date such shares were received pursuant to the sale of Teledata). These shares are included under assets held for sale in the statement of financial position, and are measured as available for sale financial assets. Their fair value is determined by reference to their quoted market price less the discount element (the "Discount") in respect of the lock-up period. The Discount is estimated based on the Option Pricing Model method and was determined on December 31, 2010 at a rate of 10% for the shares not held in escrow and 13% for the shares held in escrow (For information about the Discount determined on June 23, 2010, see Note 3.C.1.b) above.) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | The difference between the Discount rate of shares held and not held in escrow derives from the difference in their respective lock-up periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | The main parameters used in the said valuation as of December 31, 2010 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | The Valuation Model - PUT Option Analysis based on the Black and Scholes Option Pricing Model.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|                        |   | December 31, 2010    |
|-----------------------------|--------|----------------------|
|                        |   |                 |
| Exercise price              |   | CAD 0.54             |
| Share price                 |   | CAD 0.54             |
| Expected life               |   | 1-6 months           |
| Volatility                  |   | 47%-50%              |
| Risk free rate              |   | 0.92%-1.13%          |
| Dividend rate               |   | 0%                   |
| Discount’s fair value |   | Approximately $1,600 |

|   | In December 2010, the Company decided to sell its holdings in Enablence’s shares, and accordingly this investment is presented as assets held for sale. For details see Note 9. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C.     | Impairment of available for sale assets                                                                                                                                                                                                                                                                                                                           |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                              |
|   | Based on the criteria detailed in Note 2 above, the Company recognized an impairment in respect of an available for sale investment in quoted sharesin the amount of approximately $133($345 and $494 for the year ended December 31, 2009 and 2008, respectively), under line item other expenses (income), net, in the statement of income (see also Note20.H). |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| D.     | Details about valuations, pursuant to the requirements of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970:                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                |
|   | The Company presented its investment in Jordan Valley Semiconductors Ltd. based on the value determined in a valuation carried out by an independent appraiser, Empire Valuation Consultants, LLC (“Empire” or the “Appraiser”). The value of this investment was estimated at approximately $13,510. The significant information included in this valuation is as follows: |

|   | 1.     | The identity of the subject of the valuation: Elron’s investment in Jordan Valley Semiconductors Ltd (“Jordan Valley”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2.     | The timing of the valuation: As of December 31, 2010. The engagement date between Empire and Elron was December 7, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3.     | The carrying amount of the investment in Jordan Valley in the Company’s financial statements was as of December 31, 2009 - $8,071 and as of June 30, 2010 - $9,749.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 4.     | The value of Jordan Valley that was determined in accordance with the valuation is $52,747, and accordingly, the value of Elron’s interest was determined to be $13,510. As a result, in 2010 the Company recognized a gain of $5,439 in other comprehensive income in respect of available for sale financial assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 5.     | The identity of the Appraiser and his characteristics - Empire Valuation Consultants, LLC. The valuation was performed by a team led by Mr. Mark Shayne, a Managing Director with Empire. Mr. Shayne has an M.B.A. from the Stern Graduate School of Business at New York University, and is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers, and Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants. Mr. Shayne has experience providing financial consulting, appraisal, due diligence, and expert witness testimony on valuation matters. His areas of expertise include valuation of common and preferred stock, employee and incentive stock options, partnership interests, and intangible assets, among others. There is no dependency between the Appraiser and the Company, the party who ordered the valuation. The Appraiser is indemnified by the Company for expenses which may be incurred to the Appraiser in carrying out this valuation. |
|   | 6.     | The valuation model in accordance with which the Appraiser worked:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The DCF Method for determining Jordan Valley’s value (enterprise value). |
|   |   | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The Black and Scholes model for allocating Jordan Valley’s value to different types of shares and for determining the value of Elron’s interest accordingly. |
|   | 7.     | The assumptions according to which the Appraiser carried out the valuation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The capitalization rate (WACC): 23%. |
|   |   | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The long term growth rate: 3% per year. |
|   |   | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The terminal value as a percentage of the value determined in the valuation: 33.5%. |
|   |   | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The standard deviation: The volatility used in the Black and Scholes model was 55%. |
|   |   | e.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The prices used as the basis for a comparison:- As a comparison for the volatility, six companies were measured and their equity price volatility history was used as a basis for comparison. |
|   |   | i.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | The number of items that served as the basis for a comparison: Six companies, as said at e. above, and up to six metrics were sampled, for each of these companies were used as a basis for comparison of Jordan Valley’s overall value to the value of comparable publicly listed companies. |

----

| Notes to the Consolidated Financial Statements                      |
|---------------------------------------------------------------------|
| (USD in thousands, except for price per share and number of shares) |

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

|                              |   | December 31, 2010 |   |
|-----------------------------------|--------|-------------------|--------|
|                              |   |              |   |   |
| Investment in shares of Enablence |   |              | 15,082 |   |
| Investment in shares of GigOptix  |   |              | 2,129  |   |
| Total:                            |   |              | 17,211 |   |

| B.     | In December 2010, the Company’s Board of Directors decided to sell its holdings in GigOptix’s and Enablence’s shares. In December 2010, the Company engaged with Oppenheimer Inc. in order to sell these shares. As of December 31, 2010, according to the Company’s management’s opinion, the investments in these shares are in compliance with the terms set in IFRS 5 for classification as non- current assets held for sale. Accordingly, the investments in these shares are classified as assets held for sale in the statement of financial position as of December 31, 2010. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The investments in the shares of Enablence and GigOptix are presented as assets held for sale, but continue to be measured in conformity with the provisions of IAS 39, as available for sale investments at fair value. For details about the fair value measurement of the investment in Enablence’s shares, see Note 8 above.                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | As of the date of the approval of the financial statements, 30% of the investment in Enablence’s shares, which was received due to the sale of Teledata (see Note 3.C.1.b)) were released from lock-up.                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | Subsequent to the reported date, there was a sharp decline in Enablence's share price from a price of CAD 0.54 as of December 31, 2010 to a price of CAD 0.28 ($0.28)as of March 9, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | In January and February 2011, subsequent to the reported date, approximately 450,500 shares of GigOptix Inc. were sold, representing approximately 58% of Elron's holding in GigOptix, in consideration of approximately $1,300. The expected gain from this sale is approximately $500.                                                                                                                                                                                                                                                                                                                             |

|                       |   | December 31 |   |   | December 31 |   |
|----------------------------|--------|-------------|--------|--------|-------------|--------|
|                       |   | 2010        |   |   | 2009        |   |
|                       |   | $ thousands |   |
|                       |   |        |   |   |        |   |   |   |
| Escrow deposit (1)         |   |        | 22,639 |   |        |   | – |   |
| Convertible Debentures (2) |   |        | 3,878  |   |        |   | – |   |
| Income receivable          |   |        | 731    |   |        |   | 612 |   |
| Other                      |   |        | 970    |   |        |   | 328 |   |
|                       |   |        |   |   |        |   |   |   |
|                       |   |        | 28,218 |   |        |   | 940 |   |

|   | (1) | A deposit held in escrow due to the sale of Medingo. For details see Note 3.C.2.b).                                                                                                                                                                                              |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Debentures received in the sale of Teledata (For details, see Note.3.C.1.b).). The debentures are not listed, bear an annual interest rate of 5%, their par value is approximately $3,779, and they are payable (principal and interest) two years after issued (June 23, 2012). |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|                         |   |        |   |   |     |   |    | Computers, |   |   |         |   |   |   |    |
|------------------------------|--------|-------------|--------|--------|----------|--------|---------|------------|--------|--------|--------------|--------|--------|--------|---------|
|                         |   |        |   |   |     |   |    | office     |   |   |         |   |   |   |    |
|                         |   |        |   |   |     |   |    | furniture  |   |   |         |   |   |   |    |
|                         |   | Machinery   |   |   |     |   |    | and        |   |   |         |   |   |   |    |
|                         |   | and         |   |   | Motor    |   |    | other      |   |   | Leasehold    |   |   |   |    |
|                         |   | equipment   |   |   | vehicles |   |    | equipment  |   |   | improvements |   |   | Total  |    |
|                         |   | $ thousands |   |
|                         |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |
| Cost                         |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |
| Balance at January 1, 2009   |   |        | 4,453  |   |     |   | 484     |       |   |   | 4,637        |   |   |   | 1,207   |   |   |   | 10,781 |   |
| Additions:                   |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Acquisitions                 |   |        | 922    |   |     |   | 27      |       |   |   | 287          |   |   |   | 42      |   |   |   | 1,278 |   |
| Translation differences      |   |        | 4      |   |     |   | – |       |   |   | 4            |   |   |   | – |   |   |   | 8 |   |
| Eliminations:                |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Disposals                    |   |        | (120   | )      |     |   | (206    | )          |   |   | (139         | )      |   |   | – |   |   |   | (465 | ) |
| Deconsolidation (1) (2)      |   |        | (1,946 | )      |     |   | – |       |   |   | (1,074       | )      |   |   | (113    | ) |   |   | (3,133 | ) |
| Balance at December 31, 2009 |   |        | 3,313  |   |     |   | 305     |       |   |   | 3,715        |   |   |   | 1,136   |   |   |   | 8,469 |   |
| Additions:                   |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Acquisitions                 |   |        | 759    |   |     |   | 1       |       |   |   | 513          |   |   |   | 55      |   |   |   | 1,328 |   |
| Translation differences      |   |        | 64     |   |     |   | 2       |       |   |   | 39           |   |   |   | 6       |   |   |   | 111 |   |
| Eliminations:                |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Disposals                    |   |        | (6     | )      |     |   | (188    | )          |   |   | (304         | )      |   |   | (51     | ) |   |   | (549 | ) |
| Deconsolidation (3)          |   |        | (1,323 | )      |     |   | – |       |   |   | (446         | )      |   |   | (112    | ) |   |   | (1,881 | ) |
| Balance at December 31, 2010 |   |        | 2,807  |   |     |   | 120     |       |   |   | 3,517        |   |   |   | 1,034   |   |   |   | 7,478 |   |
|                         |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Depreciation                 |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Balance at January 1, 2009   |   |        | 1,661  |   |     |   | 175     |       |   |   | 3,476        |   |   |   | 1,011   |   |   |   | 6,323 |   |
| Additions:                   |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Depreciation                 |   |        | 696    |   |     |   | 63      |       |   |   | 469          |   |   |   | 91      |   |   |   | 1,319 |   |
| Translation differences      |   |        | 2      |   |     |   | – |       |   |   | 3            |   |   |   | – |   |   |   | 5 |   |
| Eliminations:                |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Disposals                    |   |        | (118   | )      |     |   | (77     | )          |   |   | (100         | )      |   |   | – |   |   |   | (295 | ) |
| Deconsolidation (1) (2)      |   |        | (833   | )      |     |   | – |       |   |   | (933         | )      |   |   | (108    | ) |   |   | (1,874 | ) |
| Balance at December 31, 2009 |   |        | 1,408  |   |     |   | 161     |       |   |   | 2,915        |   |   |   | 994     |   |   |   | 5,478 |   |
| Additions:                   |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Depreciation                 |   |        | 392    |   |     |   | 28      |       |   |   | 364          |   |   |   | 47      |   |   |   | 831 |   |
| Translation differences      |   |        | 40     |   |     |   | – |       |   |   | 33           |   |   |   | 3       |   |   |   | 76 |   |
| Eliminations:                |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Disposals                    |   |        | (6     | )      |     |   | (132    | )          |   |   | (231         | )      |   |   | (36     | ) |   |   | (405 | ) |
| Deconsolidation (3)          |   |        | (250   | )      |     |   | – |       |   |   | (266         | )      |   |   | (65     | ) |   |   | (581 | ) |
| Balance at December 31, 2010 |   |        | 1,584  |   |     |   | 57      |       |   |   | 2,815        |   |   |   | 943     |   |   |   | 5,399 |   |
|                         |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Depreciated cost             |   |        |   |   |     |   |    |       |   |   |         |   |   |   |    |   |   |   |   |   |
| Balance at January 1, 2009   |   |        | 2,792  |   |     |   | 309     |       |   |   | 1,161        |   |   |   | 196     |   |   |   | 4,458 |   |
| Balance at December 31, 2009 |   |        | 1,905  |   |     |   | 144     |       |   |   | 800          |   |   |   | 142     |   |   |   | 2,991 |   |
| Balance at December 31, 2010 |   |        | 1,223  |   |     |   | 63      |       |   |   | 702          |   |   |   | 91      |   |   |   | 2,079 |   |

| (1) | Deconsolidation of Impliant in 2009. For details see Note 3.C.1.e). |
|-----|---------------------------------------------------------------------|
| (2) | Sale of Sela in 2009. For details see Note 3.C.2.e).                |
| (3) | Sale of Medingo in 2010. For details see Note 3.C.2.b).             |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|                                                                   |   | Technology and developmentin progress |    |   | Agreement with Rafael (1) |   |    | Other  |   |   | Total   |   |
|------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|---------------------------|--------|---------|--------|--------|--------|---------|--------|
|                                                                   |   | $ thousands                           |    |
|                                                                   |   |                                  |    |   |                      |   |    |   |   |   |    |   |
| Cost                                                                   |   |                                  |    |   |                      |   |    |   |   |   |    |   |
| Balance at January 1, 2009                                             |   |                                  | 10,950  |   |                      |   | 3,053   |   |   |   | 314     |   |   |   | 14,317 |   |
| Acquisitions                                                           |   |                                  | – |   |                      |   | – |   |   |   | 172     |   |   |   | 172 |   |
| Decrease resulting from sale and deconsolidation of subsidiary (2) (3) |   |                                  | (3,846  | )      |                      |   | – |   |   |   | – |   |   |   | (3,846 | ) |
| Translation differences                                                |   |                                  | – |   |                      |   | – |   |   |   | 2       |   |   |   | 2 |   |
| Balance at December 31, 2009                                           |   |                                  | 7,104   |   |                      |   | 3,053   |   |   |   | 488     |   |   |   | 10,645 |   |
| Acquisitions                                                           |   |                                  | – |   |                      |   | – |   |   |   | 276     |   |   |   | 276 |   |
| Decrease resulting from sale of subsidiary (4)                         |   |                                  | – |   |                      |   | – |   |   |   | (431    | )      |   |   | (431 | ) |
| Translation differences                                                |   |                                  | – |   |                      |   | – |   |   |   | 24      |   |   |   | 24 |   |
| Balance at December 31, 2010                                           |   |                                  | 7,104   |   |                      |   | 3,053   |   |   |   | 357     |   |   |   | 10,514 |   |
|                                                                   |   |                                  |    |   |                      |   |    |   |   |   |    |   |   |   |   |   |
| Amortization and impairment losses arising from decline in value       |   |                                  |    |   |                      |   |    |   |   |   |    |   |   |   |   |   |
| Balance at January 1, 2009                                             |   |                                  | 1,415   |   |                      |   | – |   |   |   | 104     |   |   |   | 1,519 |   |
| Amortization for the year (5)                                          |   |                                  | 1,480   |   |                      |   | – |   |   |   | 160     |   |   |   | 1,640 |   |
| Decrease resulting from sale and deconsolidation of subsidiary (2) (3) |   |                                  | (36     | )      |                      |   | – |   |   |   | – |   |   |   | (36 | ) |
| Translation differences                                                |   |                                  | – |   |                      |   | – |   |   |   | 1       |   |   |   | 1 |   |
| Balance at December 31, 2009                                           |   |                                  | 2,859   |   |                      |   | – |   |   |   | 265     |   |   |   | 3,124 |   |
| Amortization for the year (5)                                          |   |                                  | 1,483   |   |                      |   | – |   |   |   | 98      |   |   |   | 1,581 |   |
| Decrease resulting from sale of subsidiary (4)                         |   |                                  | – |   |                      |   | – |   |   |   | (227    | )      |   |   | (227 | ) |
| Impairment (6)                                                         |   |                                  | 2,421   |   |                      |   | – |   |   |   | – |   |   |   | 2,421 |   |
| Translation differences                                                |   |                                  | – |   |                      |   | – |   |   |   | 20      |   |   |   | 20 |   |
| Balance at December 31, 2010                                           |   |                                  | 6,763   |   |                      |   | – |   |   |   | 156     |   |   |   | 6,919 |   |
|                                                                   |   |                                  |    |   |                      |   |    |   |   |   |    |   |   |   |   |   |
| Amortized cost                                                         |   |                                  |    |   |                      |   |    |   |   |   |    |   |   |   |   |   |
| Balance at January 1, 2009                                             |   |                                  | 9,535   |   |                      |   | 3,053   |   |   |   | 210     |   |   |   | 12,798 |   |
| Balance at December 31, 2009                                           |   |                                  | 4,245   |   |                      |   | 3,053   |   |   |   | 223     |   |   |   | 7,521 |   |
| Balance at December 31, 2010                                           |   |                                  | 341     |   |                      |   | 3,053   |   |   |   | 201     |   |   |   | 3,595 |   |

|   | (1) | Not amortized – indefinite useful life (for details see Note 3.C.2.d)).                                                                                                    |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Deconsolidation of Impliant in 2009 (for details see Note 3.C.1.e)).                                                                                                             |
|   | (3) | Sale of Sela in 2009 (for details see Note 3.C.2.e)).                                                                                                                            |
|   | (4) | Sale of Medingo in 2010 (for details see Note 3.C.2.b)).                                                                                                                         |
|   | (5) | Assets are amortized on a straight-line basis, amortization is included under line item amortization of intangible assets in the statement of income (for details see Note 2.K). |
|   | (6) | Impairment of technology attributed to Wavion resulting from the initial consolidation of Wavion (for details see Note 3.C.2.c)).                                                |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

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

|           |   | December 31 |   |   | December 31 |   |
|----------------|--------|-------------|--------|--------|-------------|--------|
|           |   | 2010        |   |   | 2009        |   |
|           |   | $ thousands |   |
|           |   |        |   |   |        |   |
| Open accounts  |   |        | 3,620  |   |        |   | 3,909 |   |
| Checks payable |   |        | 236    |   |        |   | 364 |   |
|           |   |        |   |   |        |   |   |   |
|           |   |        | 3,856  |   |        |   | 4,273 |   |

| B. | Trade payables are non-interest bearing and are normally settled on 30-90 day terms. For details on the Company’s credit risk management, see Note 24 below. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                  |   | December 31 |   |   | December 31 |   |
|-------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                  |   | 2010        |   |   | 2009        |   |
|                                                  |   | $ thousands |   |
|                                                  |   |        |   |   |        |   |
| Accrued expenses                                      |   |        | 1,534  |   |        |   | 1,828 |   |
| Liabilities to employees                              |   |        | 3,196  |   |        |   | 4,153 |   |
| Government institutions                               |   |        | 1,031  |   |        |   | 681 |   |
| Employees call options                                |   |        | 38     |   |        |   | 1,069 |   |
| Current maturity of royalty bearing government grants |   |        | 771    |   |        |   | 431 |   |
| Advance from customers                                |   |        | 732    |   |        |   | 1,071 |   |
| Other payables                                        |   |        | 1,499  |   |        |   | 394 |   |
|                                                  |   |        | 8,801  |   |        |   | 9,627 |   |

|   | Composition |
|--------|-------------|

|                                             |   | December 31 |    |   | December 31 |   |
|--------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                             |   | 2010        |    |   | 2009        |   |
|                                             |   | $ thousands |    |   | $ thousands |   |
|                                             |   |        |    |   |        |   |
| Current liabilities:                             |   |        |    |   |        |   |
| Loans from banks (1) (6)                         |   |        | 601     |   |        |   | 10,000 |   |
| Loans from others                                |   |        | – |   |        |   | 865 |   |
|                                             |   |        | 601     |   |        |   | 10,865 |   |
| Current maturities of loans from banks (6)       |   |        | 249     |   |        |   | – |   |
| Current maturities of convertible debentures (5) |   |        | 1,275   |   |        |   | 1,172 |   |
|                                             |   |        | 2,125   |   |        |   | 12,037 |   |
| Long–term liabilities:                     |   |        |    |   |        |   |   |   |
| Loans from banks (3) (6)                         |   |        | 535     |   |        |   | 30,000 |   |
| Loans from others (2)                            |   |        | – |   |        |   | 6,981 |   |
| Loans from shareholders (4)                      |   |        | – |   |        |   | 16,737 |   |
| Convertible debentures (5)                       |   |        | 2,110   |   |        |   | 2,211 |   |
|                                             |   |        |    |   |        |   |   |   |
|                                             |   |        | 2,645   |   |        |   | 55,929 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | (1)    | In 2008, RDC signed an agreement with Bank Mizrahi Tefahot Ltd. (“Bank Mizrahi”), whereby Bank Mizrahi provided RDC a credit line in the total amount of up to $10,000 (“the Credit Line Agreement”), to be utilized no later than August 30, 2009. The interest on each loan pursuant to the Credit Line Agreement was Libor + 4%, and was payable quarterly. Repayment of the principal of each loan was after 24 months from the first withdrawal. With respect to every amount not utilized during the period of the Credit Line Agreement, RDC will pay a non-utilization fee at a rate of 0.5% per annum.                                                                                                                                                                                                                                                                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | The loans provided in accordance with the Credit Line Agreement (“the RDC Loans”) were secured by a fixed, first priority lien on shares of Given held by RDC at the rate of 200% of the actual balance of the loans, as will be adjusted pursuant to the Credit Line Agreement. In addition, the RDC Loans were secured by a first priority floating charge on all its assets in favor of Bank Mizrahi.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | Up until December 31, 2009, RDC utilized the entire credit line and pledged 2,461,334 shares of Given held by it in favor of Bank Mizrahi.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | In June 2010, RDC’s entire debt to Bank Mizrahi was prepaid (without incurring a prepayment commission). As a result, the pledge on 2,461,334 Given shares held by RDC in favor of Bank Mizrahi, then representing approximately 8% of Given’s outstanding shares, was removed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | (2)    | Up until December 2009, Elron and Rafael granted RDC several loans in the aggregate amount of approximately $18,000 (Elron’s and Rafael’s share in this amount was approximately $11,500 and $6,500, respectively). In December 2009, RDC signed an additional loan agreement with Elron and Rafael in the aggregate amount of approximately $15,000, of which approximately $12,000 was advanced during 2010. Elron’s share in this amount was approximately $6,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | In June 2010, RDC's entire debt in respect of these loans in the aggregate amount of approximately $32,000 (including interest) was prepaid (without incurring a prepayment commission), in the course of which, RDC's debt to Rafael in the amount of approximately $13,000 was repaid (Concurrently, RDC's debt to the Company in the amount of approximately $19,000 was repaid). The repayment of RDC's loan to the Company has no impact on the cash and liabilities balance in the consolidated statement of financial position as of  December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | (3)    | On May 15, 2008, the Company signed an agreement (“the Agreement”) with Israel Discount Bank Ltd. (“Discount Bank”) whereby Discount Bank provided the Company a credit line in the aggregate amount of $30,000. During the credit period, the Company was permitted to receive loans for periods of up to three years bearing an interest rate of Libor + 1.3% per annum for each loan, payable every three months. The Company was permitted to prepay its debt at every interest payment date, without incurring a prepayment commission. As of December 31, 2009, the Company had utilized the entire credit line in the aggregate amount of $30,000. As part of the Agreement, the Company committed to comply with certain financial covenants. In November 2009, the Company replaced its commitment to comply with financial convenents with a pledge on its holding in 3,359,676 Given shares in favor of Discount Bank. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | In June 2010, the Company’s Audit Committee and Board of Directors approved the prepayment of Elron’s entire debt to Discount Bank in respect of loans in the aggregate amount of $30,000, on the nearest interest payment dates in respect of the debt (without incurring a prepayment commission), the last of which was in September 2010. Upon repayment of the Company’s entire debt to Discount Bank, the pledge on 3,359,676 Given shares held by Elron in favor of Discount Bank, then representing approximately 11% of Given’s outstanding shares, was removed. Upon repayment of the Company’s entire debt to Discount Bank, the Company’s entire debt in respect of the loans granted to it by DIC was repaid as well (see section 6 below).                                                                                                                                                              |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | (4)    | On October 30, 2008, a loan agreement was signed between the Company and DIC whereby DIC provided the Company a NIS-denominated loan, in an amount then equivalent to approximately $6,000, CPI-linked and bearing CPI-linked interest at a rate of 5.95% per annum.                                                                                                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | On January 15, 2009, a second loan agreement was signed between the Company and DIC, whereby DIC provided the Company a NIS-denominated loan in an amount then equivalent to approximately $2,000, CPI-linked and bearing CPI-linked interest at a rate of 5.5% per annum.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | On June 15, 2009, a third loan agreement was signed between the Company and DIC whereby DIC provided the Company a NIS-denominated loan in an amount then equivalent to approximately $7,000, CPI-linked and bearing CPI-linked interest at a rate of 3.23% per annum.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | The loans from DIC were subordinated to the loan from Discount Bank and extended for the same period through September 24, 2011. Pursuant to the terms of the loan agreements with DIC, if the loan from Discount Bank is repaid earlier, then the loan from DIC will be repaid at the same time. If repayment of the loan from Discount Bank in extended, then the repayment of the loan from DIC will be extended for the same period. With Discount Bank's prior written consent, the Company may prepay the loans from  DIC in whole or in part. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Pursuant to these terms, upon repayment of the Company’s entire debt to Discount Bank in September 2010, as mentioned above, the Company’s entire debt in respect of the loans granted to it by DIC in the amount of approximately $17,500 (including interest) was repaid as well (without incurring a prepayment commission). Approval by the Company’s Audit Committee and Board of Directors was given in compliance with Regulation 1 of the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760-2000.             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (5)    | For details on convertible debentures issued by Starling, see Note 3.C.2.a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (6)    | Short term credit and long term loan in subsidiary bear an annual interest rate of Libor+ 6%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|   | Government grants |
|--------|-------------------|

|                                                        |   | 2010        |    |   | 2009   |   |
|-------------------------------------------------------------|--------|-------------|---------|--------|--------|--------|
|                                                        |   | $ thousands |    |
|                                                        |   |        |    |   |   |   |
| Balance as of January 1                                     |   |        | 9,116   |   |   |   | 9,097 |   |
| Grants received during the year                             |   |        | 1,499   |   |   |   | 3,250 |   |
| Royalties paid during the year                              |   |        | (314    | )      |   |   | (266 | ) |
| Deconsolidation of a subsidiary                             |   |        | – |   |   |   | (2,376 | ) |
| Amounts charged to the statement of income                  |   |        | (1,312  | )      |   |   | (589 | ) |
| Translation differences                                     |   |        | 167     |   |   |   | – |   |
| Balance as of December 31                                   |   |        | 9,156   |   |   |   | 9,116 |   |
|                                                        |   |        |    |   |   |   |   |   |
| Presented in the statement of financial position under:     |   |        |    |   |   |   |   |   |
| Current liabilities- other current liabilities              |   |        | 771     |   |   |   | 431 |   |
| Non- current liabilities- royalty bearing government grants |   |        | 8,385   |   |   |   | 8,685 |   |
|                                                        |   |        | 9,156   |   |   |   | 9,116 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | Some of the Company’s subsidiaries that received grants are required to pay royalties to the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade and other institutions at a rate of approximately 3%-5% from revenues generated as a result of research and development funded by the Israeli Government or other institutions, in an amount of up to 100% of the grants received by each company. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| A. | Composition of share capital: |
|----|-------------------------------|

|                                        |   | December 31,     |       |
|---------------------------------------------|--------|------------------|------------|
|                                        |   | 2010             |       |   | 2009 |   |
|                                        |   | Authorized       |       |   | Issued and outstanding |   |   | Authorized |   |   | Issued and outstanding |   |
|                                        |   | number of shares |       |
|                                        |   |             |       |   |   |   |   |   |   |   |   |   |
| Ordinary shares of NIS 0.003 par value each |   |             | 35,000,000 |   |   |   | 29,660,017 |   |   |   | 35,000,000 |   |   |   | 29,650,017 |   |

| B.     | Rights attached to shares                        |
|--------|--------------------------------------------------|
|   |                                             |
|   | 1.                                               | Voting rights at the general meeting, right to dividend, rights upon liquidation of the Company and right to nominate the directors in the Company. |
|   | 2.                                               | Quoted on the Tel Aviv Stock Exchange and the over-the-counter market in the United States (see also Note 1). |
|   |                                             |   |
| C.     | Movement in issued and outstanding share capital |

|                                             |   | Number ofshares |       |   | $ thousandspar value |   |
|--------------------------------------------------|--------|-----------------|------------|--------|----------------------|--------|
|                                             |   |            |       |   |                 |   |
| Balance at January 1 and December 31, 2009       |   |            | 29,650,017 |   |                 |   | 9,573 |   |
|                                             |   |            |       |   |                 |   |   |   |
| Exercise of employees’ options into shares |   |            | 10,000     |   |                 |   | – | (*) |
|                                             |   |            |       |   |                 |   |   |   |
| Balance at December 31, 2010                     |   |            | 29,660,017 |   |                 |   | 9,573 |   |

|   | (*) | Less than $1. |
|--------|-----|---------------|

| D.     | Capital management in the Company                                                                                                                                                                                                                                                                                                                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                             |
|   | The Company’s and its subsidiaries’ capital management policy is to maintain a strong equity base in order to preserve their ability to ensure business continuity thereby creating a return for the shareholders, to uphold their commitments to other interested parties such as credit givers and employees, and in order to support future development activity. |
|   |                                                                                                                                                                                                                                                                                                                                                                             |
|   | The Company is not under any minimal equity requirements nor is it required to attain a certain level of capital return.                                                                                                                                                                                                                                                         |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| E.     | Capital reserve of transaction with controlling shareholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | Assets and liabilities involved in a transaction between the Company and the controlling shareholder or between companies under common control are recognized at fair value at the date of the transaction. The difference between the fair value and the consideration determined in the transaction is recorded in equity. In March 2010, the Company’s Audit Committee and Board of Directors approved a payment of a special bonus in the amount of approximately NIS 492,000 (approximately $134) to the Company’s Chief Executive Officer, Mr. Ari Bronshtein. Since Mr. Bronshtein also serves as an officer (Vice President) of DIC, in the third quarter of 2010, DIC decided to bear the full payment of the amount of the bonus to Mr. Bronshtein. Therefore, Elron recorded the entire bonus amount against a capital reserve in respect of transaction with a controlling shareholder in the statement of changes in equity. For additional information, see also Note 23. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| F.     | Comprehensive income (loss)  |
|--------|------------------------------|
|   |                         |
|   | Year ended December 31, 2010 |

|                                                                                     |   | Attributable to the Company’s shareholders |    |   |                                            |   |    |                                                                            |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------|-------------------------------------------------|--------|---------|---------------------------------------------------------------------------------|--------|
|                                                                                     |   | Retained earnings                                |    |   | Reserve for available-for-sale financial assets |   |    | Adjustments arising from translating financial statements of foreign operations |   |   | Total |   |   | Non-controlling interests |   |   | Total |   |
|                                                                                     |   | $ thousands                                      |    |
|                                                                                     |   |                                             |    |
| Net income                                                                               |   |                                             | 60,678  |   |                                            |   | – |                                                                            |   |   | – |   |   |   | 60,678 |   |   |   | 44,768 |   |   |   | 105,446 |   |
| Gain from available-for-sale financial assets                                            |   |                                             | – |   |                                            |   | 9,585   |                                                                            |   |   | – |   |   |   | 9,585 |   |   |   | – |   |   |   | 9,585 |   |
| Adjustments arising from translating financial statements of foreign operations          |   |                                             | – |   |                                            |   | – |                                                                            |   |   | (951 | ) |   |   | (951 | ) |   |   | (318 | ) |   |   | (1,269 | ) |
| Actuarial loss from defined benefit plans                                                |   |                                             | (38     | )      |                                            |   | – |                                                                            |   |   | – |   |   |   | (38 | ) |   |   | (19 | ) |   |   | (57 | ) |
| Group’s share of net other comprehensive loss of companies accounted for at equity |   |                                             | (91     | )      |                                            |   | (83     | )                                                                               |   |   | – |   |   |   | (174 | ) |   |   | (30 | ) |   |   | (204 | ) |
|                                                                                     |   |                                             |    |   |                                            |   |    |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss)                                                  |   |                                             | (129    | )      |                                            |   | 9,502   |                                                                            |   |   | (951 | ) |   |   | 8,422 |   |   |   | (367 | ) |   |   | 8,055 |   |
|                                                                                     |   |                                             |    |   |                                            |   |    |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                        |   |                                             | 60,549  |   |                                            |   | 9,502   |                                                                            |   |   | (951 | ) |   |   | 69,100 |   |   |   | 44,401 |   |   |   | 113,501 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| F.     | Comprehensive income (loss) (Cont.) |
|--------|-------------------------------------|
|   |                                |
|   | Year ended December 31, 2009        |

|                                                                                       |   | Attributable to the Company’s shareholders |    |   |                                            |   |    |                                                                            |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------|-------------------------------------------------|--------|---------|---------------------------------------------------------------------------------|--------|
|                                                                                       |   | Accumulated deficit                              |    |   | Reserve for available-for-sale financial assets |   |    | Adjustments arising from translating financial statements of foreign operations |   |   | Total |   |   | Non-controlling interests |   |   | Total |   |
|                                                                                       |   | $ thousands                                      |    |
|                                                                                       |   |                                             |    |   |                                            |   |    |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                   |   |                                             | (14,304 | )      |                                            |   | – |                                                                            |   |   | – |   |   |   | (14,304 | ) |   |   | (15,091 | ) |   |   | (29,395 | ) |
| Gain from available-for-sale financial assets                                              |   |                                             | – |   |                                            |   | 5,001   |                                                                            |   |   | – |   |   |   | 5,001 |   |   |   | – |   |   |   | 5,001 |   |
| Transfer to the statement of income for available-for-sale financial assets                |   |                                             | – |   |                                            |   | (84     | )                                                                               |   |   | – |   |   |   | (84 | ) |   |   | – |   |   |   | (84 | ) |
| Adjustments arising from translating financial statements of foreign operations            |   |                                             | – |   |                                            |   | – |                                                                            |   |   | (64 | ) |   |   | (64 | ) |   |   | 19 |   |   |   | (45 | ) |
| Transfer to the statement of income for sale of foreign operation                          |   |                                             | – |   |                                            |   | – |                                                                            |   |   | (4,330 | ) |   |   | (4,330 | ) |   |   | – |   |   |   | (4,330 | ) |
| Actuarial gain from defined benefit plans                                                  |   |                                             | 10      |   |                                            |   | – |                                                                            |   |   | – |   |   |   | 10 |   |   |   | 5 |   |   |   | 15 |   |
| Group’s share of net other comprehensive income of companies accounted for at equity |   |                                             | 96      |   |                                            |   | 294     |                                                                            |   |   | – |   |   |   | 390 |   |   |   | 65 |   |   |   | 455 |   |
|                                                                                       |   |                                             |    |   |                                            |   |    |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss)                                                    |   |                                             | 106     |   |                                            |   | 5,211   |                                                                            |   |   | (4,394 | ) |   |   | 923 |   |   |   | 89 |   |   |   | 1,012 |   |
|                                                                                       |   |                                             |    |   |                                            |   |    |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                          |   |                                             | (14,198 | )      |                                            |   | 5,211   |                                                                            |   |   | (4,394 | ) |   |   | (13,381 | ) |   |   | (15,002 | ) |   |   | (28,383 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| F.     | Comprehensive income (loss) (Cont.) |
|--------|-------------------------------------|
|   |                                |
|   | Year ended December 31, 2008        |

|                                                                                     |   | Attributable to the Company’s shareholders |    |   |                |   |    |                                            |   |
|------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|--------|---------------------|--------|---------|-------------------------------------------------|--------|
|                                                                                     |   | Accumulated deficit                              |    |   | Revaluation reserve |   |    | Reserve for available-for-sale financial assets |   |   | Adjustments arising from translating financial statements of foreign operations |   |   | Total |   |   | Non-controlling interests |   |   | Total |   |
|                                                                                     |   | $ thousands                                      |    |
|                                                                                     |   |                                             |    |   |                |   |    |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                 |   |                                             | (71,834 | )      |                |   | – |                                            |   |   | – |   |   |   | – |   |   |   | (71,834 | ) |   |   | (20,820 | ) |   |   | (92,654 | ) |
| Loss from available-for-sale financial assets                                            |   |                                             | – |   |                |   | – |                                            |   |   | (1,990 | ) |   |   | – |   |   |   | (1,990 | ) |   |   | – |   |   |   | (1,990 | ) |
| Transfer to the statement of income for available-for-sale financial assets              |   |                                             | – |   |                |   | – |                                            |   |   | (2,266 | ) |   |   | – |   |   |   | (2,266 | ) |   |   | – |   |   |   | (2,266 | ) |
| Revaluation reserve for consolidation of subsidiaries                                    |   |                                             | – |   |                |   | 5,219   |                                            |   |   | – |   |   |   | – |   |   |   | 5,219 |   |   |   | – |   |   |   | 5,219 |   |
| Adjustments arising from translating financial statements of foreign operations          |   |                                             | – |   |                |   | – |                                            |   |   | – |   |   |   | 900 |   |   |   | 900 |   |   |   | 2 |   |   |   | 902 |   |
| Actuarial gain from defined benefit plans                                                |   |                                             | 69      |   |                |   | – |                                            |   |   | – |   |   |   | – |   |   |   | 69 |   |   |   | – |   |   |   | 69 |   |
| Group’s share of net other comprehensive loss of companies accounted for at equity |   |                                             | (408    | )      |                |   | – |                                            |   |   | (175 | ) |   |   | – |   |   |   | (583 | ) |   |   | (26 | ) |   |   | (609 | ) |
|                                                                                     |   |                                             |    |   |                |   |    |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss)                                                  |   |                                             | (339    | )      |                |   | 5,219   |                                            |   |   | (4,431 | ) |   |   | 900 |   |   |   | 1,349 |   |   |   | (24 | ) |   |   | 1,325 |   |
|                                                                                     |   |                                             |    |   |                |   |    |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                        |   |                                             | (72,173 | )      |                |   | 5,219   |                                            |   |   | (4,431 | ) |   |   | 900 |   |   |   | (70,485 | ) |   |   | (20,844 | ) |   |   | (91,329 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| G.     | Share-based payments |
|--------|----------------------|
|   |                 |   |
|   | 1.                   | Company option plans |
|   |                 |   |
|   |                 | The Company has various stock option plans under which the Company may grant options to purchase the Company’s shares or subsidiaries’ shares to officers, directors and employees of the Company. Such options have been granted mainly with exercise prices below market price at the date of grant. Generally, the options vest over a four-year period from the date of grant in four equal annual portions. The options expire after 5 to 7 years from the date of grant. |
|   |                 |   |
|   |                 | During May 2003, the Company’s Board of Directors adopted an option plan under which an aggregate of up to 500,000 ordinary shares may be granted to officers and employees (the “2003 Option Plan”). In March 2007, the 2003 Option Plan was increased by an additional 500,000 options to purchase 500,000 ordinary shares of the Company. The 2003 Option Plan provides that the exercise price shall be reduced by an amount equal to the amount of any dividend per share distributed. |
|   |                 |   |
|   |                 | Generally under the 2003 Option Plan, upon termination of employment, options then vested are exercisable within 90 days of termination, failing which the options expire. In circumstances where the optionee transfers his/her employment to one of the Company’s associates, the optionee’s options will generally continue in accordance with the terms of the plan. |
|   |                 |   |
|   |                 | The Board of Directors has the discretion to extend vesting and the period within which to exercise options following termination of employment. In granting the options, the Board of Directors selected the capital gains tax track pursuant to the Israeli legislation which came into effect on January 1, 2003. |
|   |                 |   |
|   |                 | In May 2007, the Company's shareholders approved a plan whereby the Company's current Chairman was granted 120,000 options to purchase ordinary shares of the Company under the 2003 Option Plan. The options vest over a period of four years from the date of grant, in four equal annual portions. The options are exercisable at a price per share of $15.53. As of the grant date, the average fair value was $695. The fair value was calculated using the Black & Scholes option pricing model. |
|   |                 |   |
|   |                 | In accordance with the Company's Audit Committee and Board of Directors resolutions in March 2008, with respect to grants of 113,750 option which would otherwise expire in accordance with their terms in 2008 and 2009, the term of each of such grants was extended for an additional 3 year period from its original expiry date. |
|   |                 |   |
|   |                 | In 2009 and 2010, the Company’s Board of Directors determined that with respect to prior grants of 80,000, 22,500 and 30,000 options, which would otherwise expire in accordance with their respective terms in 2009 and 2010 as a result of termination of employment, the term of each such grant was extended for an additional 3.5, 3 and 0.25 years respectively, from the date of termination. |
|   |                 |   |
|   |                 | The abovementioned extensions did not have a material effect on the Company’s financial statements. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   | As of December 31, 2010, 567,000 options were granted under the 2003 Option Plan at an average exercise price of $10.20 per share. The exercise price is adjusted to reflect a dividend distributed following the option grant. The options vest over a period of four years in four equal annual portions and expire after 5 years from date of grant (except for the abovementioned options whose exercise term was extended for an additional 3 year period). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 2.     | Movements during 2010, 2009 and 2008                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | The following table lists the number of share options, the weighted average exercise prices of share options and modification in employee option plans during 2010, 2009 and 2008:                                                                                                                                                                                                                                                                               |

|                                               |   | 2010              |    |   | 2009                            |   |    | 2008              |   |
|----------------------------------------------------|--------|-------------------|---------|--------|---------------------------------|--------|---------|-------------------|--------|
|                                               |   | Number of options |    |   | Weighted average exercise price |   |    | Number of options |   |   | Weighted average exercise price |   |   | Number of options |   |   | Weighted average exercise price |   |
|                                               |   | $                 |    |   |                            |   |    | $                 |   |   |   |   |   | $ |   |   |   |   |
|                                               |   |              |    |   |                            |   |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share options outstanding at beginning of the year |   |              | 267,500 |   |                            |   | 10.63   |              |   |   | 358,750 |   |   |   | 10.24 |   |   |   | 352,750 |   |   |   | 10.74 |   |
| Share options granted during the year              |   |              | – |   |                            |   | – |              |   |   | – |   |   |   | – |   |   |   | 55,000 |   |   |   | 10.30 |   |
| Share options forfeited during the year            |   |              | (20,000 | )      |                            |   | 9.41    |              |   |   | (91,250 | ) |   |   | 9.11 |   |   |   | (49,000 | ) |   |   | 13.90 |   |
| Share options exercised during the year (1)        |   |              | (10,000 | )      |                            |   | 5       |              |   |   | – |   |   |   | – |   |   |   | – |   |   |   | – |   |
|                                               |   |              |    |   |                            |   |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share options outstanding at end of the year       |   |              | 237,500 |   |                            |   | 10.96   |              |   |   | 267,500 |   |   |   | 10.63 |   |   |   | 358,750 |   |   |   | 10.24 |   |
|                                               |   |              |    |   |                            |   |    |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share options exercisable at end of the year       |   |              | 207,500 |   |                            |   | 10.3    |              |   |   | 206,250 |   |   |   | 9.21 |   |   |   | 195,000 |   |   |   | 7.96 |   |

|   | (1)    | The weighted average price per share of shares exercised at the date of exercise is approximately $6.       |
|--------|--------|-------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                        |
|   |   | The expense recognized in respect of share-based payment in 2010 amounts to $88 (2009 - $127, 2008 - $378). |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   | The weighted average remaining contractual life for the share options outstanding as of December 31, 2010 was 1.6 years (2009 - 2.4 years).                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                        |
|   |   | The range of exercise prices for share options outstanding as of December 31, 2010 and 2009 was $5-$15.53.                                                                                                  |
|   |   |                                                                                                                                                                                                        |
|   | 3.     | Measurement of the fair value of equity-settled share options                                                                                                                                               |
|   |   |                                                                                                                                                                                                        |
|   |   | The Company uses the Black & Scholes option pricing model when estimating the grant date fair value of share options, based on the following inputs in 2008 (no options were granted in 2010 and 2009). |

|                                            |   | 2008   |
|-------------------------------------------------|--------|--------|
|                                            |   |   |   |
| Risk-free interest rate (%)                     |   | 2.4    |   |
| Dividend yield (%) (1)                          |   | 0      |   |
| Expected volatility of the share prices (%) (2) |   | 31.1   |   |
| Expected life of share options (years)          |   | 3.69   |   |
| Weighted average share price ($)                |   | 10.30  |   |

|   | Based on the above inputs, the fair value of the options was determined at $131 at the grant date. |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |   |
|   | (1)                                                                                                | The 2003 Option Plan provides that the exercise price shall be reduced by an amount equal to the amount of any dividend per share distributed. In using the Black & Scholes option pricing model when estimating the fair value of options, the Company assumes a dividend yield of 0%. |
|   | (2)                                                                                                | The Company used its historical volatility over the expected life period of share options. |

| A.     | The Company operates in one segment, namely the “Holdings and Corporate Operations”. This segment includes corporate headquarters and reflects the operations of the investments in investee companies and its sale. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                             |
| B.     | Revenues based on the location of customers, are as follows:                                                                                                                                                                     |

|                    |   | December 31, |   |
|-------------------------|--------|--------------|--------|
|                    |   | 2010         |   |   | 2009 |   |   | 2008 |   |
|                    |   | $ thousands  |   |
|                    |   |         |   |   |   |   |   |   |   |
| Israel                  |   |         | 855    |   |   |   | 490 |   |   |   | 333 |   |
| USA & North America |   |         | 1,570  |   |   |   | 1,416 |   |   |   | 1,606 |   |
| Europe                  |   |         | 698    |   |   |   | 947 |   |   |   | 1,062 |   |
| Asia                    |   |         | 3,220  |   |   |   | 3,821 |   |   |   | 1,669 |   |
| South America           |   |         | 1,625  |   |   |   | 1,653 |   |   |   | 1,369 |   |
| Other                   |   |         | 1,640  |   |   |   | 1,577 |   |   |   | 198 |   |
|                    |   |         |   |   |   |   |   |   |   |   |   |   |
|                    |   |         | 9,608  |   |   |   | 9,904 |   |   |   | 6,237 |   |

| C.     | The Group had no major customers for the years ended December 31, 2010, 2009 and 2008. |
|--------|----------------------------------------------------------------------------------------|
|   |                                                                                   |
| D.     | The majority of the Company’s non-current assets are located in Israel.          |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| A.     | Legal claims                                                                                                                                                                                                                                                                                                                      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                              |   |
|   | The amounts of the claims described below are true for the dates on which they were filed, unless otherwise indicated. Details on claims against the Company and its investee companies are included hereunder to the extent that the possible impact of each one of them on the financial results of the Company is significant. |
|   |                                                                                                                                                                                                                                                                                                                              |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                | In September 1999, a shareholder of Elscint Ltd. (“Elscint”), a subsidiary of Elbit Medical Imaging Ltd. (“Elbit Imaging”), which was an investee company of Elron up to May 1999, filed a claim with the District Court of Tel-Aviv Jaffa, along with a request to approve such claim as a class action on behalf of the public shareholders of Elscint, against various defendants, including Elscint, Elbit Imaging, Elron and former directors of Elscint. The claim alleges, primarily, that in the sale of Elscint’s assets, which was finalized in 1998, Elscint’s minority shareholders were prejudiced, and it requests that the court order the defendants to pay monetary compensation based on the claim that the value of the Elscint share was $27. In October 1999, the plaintiff amended his claim and according to the amended claim the total amount of the class action (if certified) was estimated by the plaintiff to be about $158,000 or alternatively about $123,000. On March 31, 2009, the court approved the defendants application to dismiss certain claims while others still remain. |
|   |                                                                                                                                                                                                                                                                                                                              |   |
|   |                                                                                                                                                                                                                                                                                                                              | On August 23, 2010, a settlement agreement was signed in relation to these legal proceedings, in which the plaintiff agreed to withdraw from the proceedings, and some of the defendants, including the Company, agreed to pay the plaintiff a certain sum, of which the Company’s part is immaterial. On September 1, 2010, the court gave the said settlement agreement the effect of a judgment, and accordingly, the Company paid its part of the said sum. |
|   |                                                                                                                                                                                                                                                                                                                              |   |
|   | 2.                                                                                                                                                                                                                                                                                                                                | In November 1999, a number of institutional shareholders of Elscint filed a claim in the District Court of Haifa, together with a request to approve certain causes of action set out in the claim, as a class action on behalf of the public shareholders of Elscint, and a request for certain causes of action to be treated as a derivative action against various defendants, including Elscint, Elbit Imaging, Elron, companies to which Elron sold its holdings in Elbit Imaging in May 1999, and certain officers in the defendant companies. The claim alleges, mainly, that Elbit Imaging is duty bound to make a tender offer for the shares of Elscint held by the public and that it unlawfully refuses to do so and, in addition, it raises allegations of preference of the interests of the defendants over those of Elscint and its public shareholders with respect to a number of transactions involving Elscint that the plaintiffs allege discriminated against Elscint’s public shareholders. The relief requested in the claim, is the ordering of Elbit Imaging to make a tender offer for the publicly held shares of Elscint at a price of $14 per share or, alternatively, to require the defendants to compensate Elscint’s public shareholders or Elscint itself for the damage the plaintiffs allege were caused to them by the defendants’ actions, without actually indicating any amount of damages in the said claim. In February 2001, the plaintiffs filed an amended statement of claim with the court that is similar to the previous one but is designated as a personal claim and partly as a derivative action rather than as a purported class action. In June 2007 the plaintiffs submitted to the Haifa District Court an updated statement of claim and request to approve the claim as a class action. The updated claim claims compensation for damages sustained due to the alledged failure to effect the ender offer, but no longer seeks an order compelling the tender offer. The updated statement of claim does not specify the monetary amount claimed, but does include various allegations relating to the manner of determining the damages claimed, which depends, amongst other things, upon verification of the specific circumstances with regard to each shareholder of Elscint separately and the substance of the each damage claimed. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   | In January 2009, the Haifa District Court dismissed the plaintiffs’ request to approve the claim as a class action. In March 2009, the plaintiffs appealed against the Haifa District Court’s decision. The hearing on the appeal took place on December 8, 2010 and the Company is awaiting the Supreme Court’s decision. At this stage, the personal claims of the plaintiffs for monetary damages and their request to treat certain of it as a derivative action remain pending. The Company has instituted execution office proceedings against the plaintiffs in connection with the expenses awarded to the Company up to the present time in the class action.                                                                                                                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 3.     | With respect to the the claim detailed in section 2 above,with respect to Elscint detailed in Paragraphs 1 and 2 above against Elron and various other defendants, in September 2006 two additional claims were filed in the Haifa District Court against the same defendants and based substantially on the same facts of the claim detailed in section 2 above, along with requests to recognize the claims as class actions. The claims are for an undisclosed amount. The court has determined that at this stage the defendants do not yet have to file statements of defense.                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 4.     | The Company rejects all the allegations described above in Paragraphs 1, 2 and 3 above, and management is of the opinion, based on the legal advice received, that it has good defense arguments against these claims, to the extent they are directed against it, which, more likely than not, will cause dismissal of the claims. Therefore, no provision in connection with the claims described above has been included in Elron’s financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 5.     | On April 11, 2010, a settlement agreement (“the Settlement Agreement”) was signed between RDC, the former CEO of RDC (“Former CEO”) and Medingo (which was held by RDC and Elron) (the “Settlement Agreement”). The Former CEO’s position was terminated by RDC at its instance on January 12, 2010. The Former CEO raised a series of allegations and demands against RDC and Medingo relating to his terms of employment and the terms of his termination from RDC, and in addition from Medingo. According to the Settlement Agreement, the Former CEO is to be paid by RDC a total amount of up to approximately $3,750 and, subject to additional future condition precedent, an additional amount of $125, all in exchange for an absolute, irrevocable waiver of any claims and reciprocal rights, including the Former CEO’s rights in Medingo which is a party to the Settlement Agreement as well as other companies held by RDC. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | As a result of the Settlement Agreement, a liability in the amount of approximately $2,100 was recorded in the interim consolidated financial statements as of June 30, 2010, in addition to a liability in the amount of approximately $1,000 that was recorded in the consolidated statement of financial position as of December 31, 2009. In July and August 2010, the Former CEO was paid the entire amount to which he is entitled under the Settlement Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 6.     | Various additional legal claims filed by various parties raising various allegations against the Company and its subsidiaries are pending in courts. The aggregate amount of these additional claims, if accepted, is estimated by the plaintiffs at an immaterial amount. No provision was included in the financial statements in respect of these claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| B.     | Commitments |
|--------|-------------|
|   |        |   |   |
|   | 1.          | Operating lease commitments |
|   |        |   |   |
|   |        | a) | The Company and the subsidiaries have operating leasesin respect of their premises and vans with an average useful life of 3-5 years. The future minimum non-cancellable rental payments under these agreements as of December 31, 2010, are as follows: |

|                      |   | $ thousands |   |
|---------------------------|--------|-------------|--------|
|                      |   |        |   |   |
| First year                |   |        | 1,008  |   |
| Second through fifth year |   |        | 828    |   |
| After the fifth year      |   |        | 1,033  |   |
|                      |   |        |   |   |
| Total                     |   |        | 2,869  |   |

|   |   |                                                                     | The Company and the subsidiaries have an operting lease contract for the rental of vehicles for a period of 36 months. The rental payments are CPI-linked. The Company and the subsidiaries have deposited approimxately $150 covering rental payment for the last three months in respect of these contracts. The deposit is CPI-linked and bears no interest. |
|--------|--------|--------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                     |                                                                                                                                                                                                                                                                                                                                                            |
|   | 2.     | For details about the Services Agreement with DIC, see Note 23.B.        |
|   |   |                                                                     |                                                                                                                                                                                                                                                                                                                                                            |
|   | 3.     | For details about other commitments with related parties, see Note 23.B. |

| A. | Gain from disposal of investee companies and changes in holdings, net |
|----|-----------------------------------------------------------------------|

|                              |   | For the     |    |   | For the     |   |    | For the     |   |
|-----------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                              |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                              |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                              |   | 2010        |    |   | 2009        |   |    | 2008        |   |
|                              |   | $ thousands |    |
|                              |   |        |    |   |        |   |    |        |   |   |   |   |
| Medingo (see Note 3.C.2.b))       |   |        | 133,467 |   |        |   | – |        |   |   | – |   |
| Teledata (see Note 3.C.1.b))      |   |        | 22,364  |   |        |   | – |        |   |   | – |   |
| Galil Medical (see Note 3.C.1.c)) |   |        | 773     |   |        |   | – |        |   |   | – |   |
| NetVision (See Note 3.C.1.j))     |   |        | – |   |        |   | 21,900  |        |   |   | 595 |   |
| 3DV (See Note 3.C.1.k))           |   |        | 1,034   |   |        |   | 6,090   |        |   |   | – |   |
| ChipX (See Note 3.C.1.l))         |   |        | – |   |        |   | 1,548   |        |   |   | – |   |
| Sela (See Note 3.C.2.e))          |   |        | 988     |   |        |   | 1,115   |        |   |   | – |   |
| Notal (See Note 3.C.1.h))         |   |        | 1,610   |   |        |   | – |        |   |   | – |   |
| Other                             |   |        | (226    | )      |        |   | 1,149   |        |   |   | 188 |   |
|                              |   |        | 160,010 |   |        |   | 31,802  |        |   |   | 783 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| B. | Cost of sales |
|----|---------------|

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2010        |   |   | 2009        |   |   | 2008        |   |
|                                 |   | $ thousands |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
| Materials                            |   |        | 3,724  |   |        |   | 4,023  |        |   |   | 1,527 |   |
| Depreciation and amortization        |   |        | 57     |   |        |   | 74     |        |   |   | 22 |   |
| Salaries, wages and related expenses |   |        | 276    |   |        |   | 507    |        |   |   | 656 |   |
| Changes in inventories and other     |   |        | (109   | )      |        |   | 220    |        |   |   | 995 |   |
|                                 |   |        | 3,948  |   |        |   | 4,824  |        |   |   | 3,200 |   |

| C. | Research and development expenses, net |
|----|----------------------------------------|

|                             |   | For the     |   |   | For the     |   |   | For the     |   |
|----------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                             |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                             |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                             |   | 2010        |   |   | 2009        |   |   | 2008        |   |
|                             |   | $ thousands |   |
|                             |   |        |   |   |        |   |   |        |   |   |   |   |
| Cost of research and development |   |        | 20,203 |   |        |   | 26,163 |        |   |   | 31,216 |   |
| Less: government grants          |   |        | 1,994  |   |        |   | 464    |        |   |   | 1,305 |   |
|                             |   |        |   |   |        |   |   |        |   |   |   |   |
|                             |   |        | 18,209 |   |        |   | 25,699 |        |   |   | 29,911 |   |

| D. | Sales and marketing expenses |
|----|------------------------------|

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2010        |   |   | 2009        |   |   | 2008        |   |
|                                 |   | $ thousands |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
| Salaries, wages and related expenses |   |        | 3,445  |   |        |   | 4,228  |        |   |   | 3,970 |   |
| Depreciation                         |   |        | 12     |   |        |   | 21     |        |   |   | 13 |   |
| Rent and building maintenance        |   |        | 111    |   |        |   | 143    |        |   |   | 40 |   |
| Advertising and public relations     |   |        | 523    |   |        |   | 1,636  |        |   |   | 1,570 |   |
| Commissions and royalties            |   |        | 1,427  |   |        |   | 981    |        |   |   | 225 |   |
| Other                                |   |        | 1,033  |   |        |   | 1,976  |        |   |   | 1,707 |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
|                                 |   |        | 6,551  |   |        |   | 8,985  |        |   |   | 7,525 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| E. | General and administrative expenses |
|----|-------------------------------------|

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2010        |   |   | 2009        |   |   | 2008        |   |
|                                 |   | $ thousands |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
| Salaries, wages and related expenses |   |        | 6,999  |   |        |   | 8,943  |        |   |   | 12,144 |   |
| Services agreement with DIC (*)      |   |        | 1,312  |   |        |   | 848    |        |   |   | – |   |
| Depreciation and amortization        |   |        | 80     |   |        |   | 141    |        |   |   | 99 |   |
| Rent and building maintenance        |   |        | 1,132  |   |        |   | 1,658  |        |   |   | 902 |   |
| Professional services                |   |        | 2,312  |   |        |   | 2,182  |        |   |   | 2,572 |   |
| Other                                |   |        | 1,742  |   |        |   | 2,093  |        |   |   | 3,348 |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
|                                 |   |        | 13,577 |   |        |   | 15,865 |        |   |   | 19,065 |   |

|   | (*) | For further information, see Note 23.B |
|--------|-----|----------------------------------------|

| F.     | Financial income and expenses |
|--------|-------------------------------|
|   |                          |   |
|   | 1.                            | Financial income |

|                                                                                       |   | For the     |    |   | For the     |   |    | For the     |   |
|--------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                                                                                       |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                                                                                       |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                                                                                       |   | 2010        |    |   | 2009        |   |    | 2008        |   |
|                                                                                       |   | $ thousands |    |
|                                                                                       |   |        |    |   |        |   |    |        |   |
| Interest income from loans, deposits and other receivables                                 |   |        | 436     |   |        |   | 782     |        |   |   | 333 |   |
| Interest income from bank deposits                                                         |   |        | 784     |   |        |   | 111     |        |   |   | 1,114 |   |
| Interest income from financial assets available-for-sale                                   |   |        | – |   |        |   | – |        |   |   | 515 |   |
| Income from change in fair value of financial liabilities measured through profit and loss |   |        | – |   |        |   | – |        |   |   | 3,607 |   |
| Income from exchange rate differences, net                                                 |   |        | 1,294   |   |        |   | – |        |   |   | 349 |   |
| Other                                                                                      |   |        | 225     |   |        |   | 520     |        |   |   | 341 |   |
| Total financial income                                                                     |   |        | 2,739   |   |        |   | 1,413   |        |   |   | 6,259 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | 2. | Financial expenses |
|--------|----|--------------------|

|                                                                                    |   | For the     |    |   | For the     |   |    | For the     |   |
|-----------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                                                                                    |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                                                                                    |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                                                                                    |   | 2010        |    |   | 2009        |   |    | 2008        |   |
|                                                                                    |   | $ thousands |    |
|                                                                                    |   |        |    |   |        |   |    |        |   |
| Interest expenses on financial liabilities measured at amortized cost                   |   |        | 1,541   |   |        |   | 2,806   |        |   |   | 1,427 |   |
| Interest expenses on financial liabilities measured at fair value                       |   |        | – |   |        |   | 316     |        |   |   | 534 |   |
| Negative change in fair value of financial assets measured through profit and loss, net |   |        | 1,331   |   |        |   | 901     |        |   |   | 1,555 |   |
| Loss from change in exchange rate of foreign currency, net                              |   |        | – |   |        |   | 818     |        |   |   | – |   |
| Financing expenses in respect of assets available for sale charged to profit and loss   |   |        | – |   |        |   | – |        |   |   | 250 |   |
| Commissions                                                                             |   |        | 109     |   |        |   | 94      |        |   |   | 232 |   |
| Other financial expenses                                                                |   |        | 50      |   |        |   | 499     |        |   |   | 802 |   |
| Total financial expenses                                                                |   |        | 3,031   |   |        |   | 5,434   |        |   |   | 4,800 |   |

|   | 3. | Financial income (expenses), net, by components |
|--------|----|-------------------------------------------------|

|                                   |   | For the     |    |   | For the     |   |    | For the     |   |
|----------------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                                   |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                                   |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                                   |   | 2010        |    |   | 2009        |   |    | 2008        |   |
|                                   |   | $ thousands |    |
|                                   |   |        |    |   |        |   |    |        |   |
| Deposits and receivables               |   |        |    |   |        |   |    |        |   |
| Bank deposits                          |   |        | 842     |   |        |   | 111     |        |   |   | 1,114 |   |
| Other deposits and other receivables   |   |        | 1,897   |   |        |   | 782     |        |   |   | 333 |   |
| Available for sale assets              |   |        | – |   |        |   | – |        |   |   | 265 |   |
|                                   |   |        |    |   |        |   |    |        |   |   |   |   |
| Financial liabilities                  |   |        |    |   |        |   |    |        |   |   |   |   |
| Convertible debentures                 |   |        | (1,331  | )      |        |   | (1,217  | )           |   |   | 1,518 |   |
| Loans - current                        |   |        | – |   |        |   | (891    | )           |   |   | (344 | ) |
| Loans - non-current                    |   |        | (1,700  | )      |        |   | (2,806  | )           |   |   | (1,427 | ) |
|                                   |   |        |    |   |        |   |    |        |   |   |   |   |
| Total financial income (expenses), net |   |        | (292    | )      |        |   | (4,021  | )           |   |   | 1,459 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| G. | Equity in losses of associates, net |
|----|-------------------------------------|

|                                                      |   | For the     |   |   | For the     |   |   | For the     |   |
|-----------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                      |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                                      |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                                      |   | 2010        |   |   | 2009        |   |   | 2008        |   |
|                                                      |   | $ thousands |   |
|                                                      |   |        |   |
| Company’s share in net losses of associates (1) (2) |   |        | 6,227  |   |        |   | 4,614  |        |   |   | 35,142 |   |
| Amortization of excess cost in respect of associates      |   |        | 4,636  |   |        |   | 5,900  |        |   |   | 5,004 |   |
| Total loss on equity basis, net                           |   |        | 10,863 |   |        |   | 10,514 |        |   |   | 40,146 |   |

|   | (1) | Including the Company’s share in the losses of consolidated companies through the dates of their initial consolidation and of previously consolidated companies from the date of their deconsolidation and initial treatment under the equity method of accounting. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (B) | See also Note 3.A above.                                                                                                                                                                                                                                                  |

| H. | Other expenses (income), net |
|----|------------------------------|

|                                                                    |   | For the     |   |   | For the     |   |    | For the     |   |
|-------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|---------|-------------|--------|
|                                                                    |   | year ended  |   |   | year ended  |   |    | year ended  |   |
|                                                                    |   | December 31 |   |   | December 31 |   |    | December 31 |   |
|                                                                    |   | 2010        |   |   | 2009        |   |    | 2008        |   |
|                                                                    |   | $ thousands |   |
|                                                                    |   |        |   |
| Impairment losses from investments and intangible assets (1)            |   |        | (4,194 | )      |        |   | (1,853  | )           |   |   | (909 | ) |
| Equity in losses of partnerships - Innomed                              |   |        | 118    |   |        |   | (234    | )           |   |   | (818 | ) |
| Gain from sale of KIT (2)                                               |   |        | 1,993  |   |        |   | – |        |   |   | 1,393 |   |
| Gain (loss) from sale of property, plant and equipment                  |   |        | (66    | )      |        |   | (64     | )           |   |   | (8 | ) |
| Impairment charge in respect of inventory of Starling (see also Note 7) |   |        | (1,011 | )      |        |   | – |        |   |   | – |   |
| Other                                                                   |   |        | 24     |   |        |   | (79     | )           |   |   | 85 |   |
|                                                                    |   |        | (3,136 | )      |        |   | (2,230  | )           |   |   | (257 | ) |

|   | (1) | Impairment losses in 2010 were primarily due to an impairment charge in respect of Impliant which resulted from the decision of Impliant’s Board of Directors to cease its operations (see Note 3.C.1.e) and an impairment charge in respect of technology of Wavion (see Note 3.C.1.c). Impairment losses in 2009 were primarily due to impairment charges of approximately $900 and $400 in respect of Radlive Ltd. and Kyma, respectively. Impairment losses in 2008 were primarily due to impairment charges of approximately $494 and $415 in respect of EVS and Domoteck, respectively . |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | (2) | In March 2004, Elron together with other shareholders of KIT eLearning B.V ("KIT"), including DIC ("the Sellers"), completed the sale of KIT to Online Higher Education B.V ("OHE"). In addition to an immediate consideration received as part of the transaction, the Sellers were entitled to an additional consideration of up to $10,000 (from which Elron's share amounted up to approximately $5,700) based on earnings of KIT in the years 2006 and 2007 ("the Additional Consideration"). In 2008, OHE paid the Sellers a portion of the Additional Consideration in the amount of approximately $2,100 (of which Elron's portion was approximately $1,600 and DIC's portion was approximately $500). As a result, Elron recorded in 2008 a gain of approximately $1,400. Following a dispute between the Sellers and OHE over payment of the Additional Consideration balance and after the parties commenced arbitration proceedings, the parties signed a settlement agreement during July 2010. Pursuant to the settlement agreement, a final Additional Consideration was paid to the Sellers in the amount of approximately $2,900 (from which Elron's portion is approximately $2,100 and DIC's portion is approximately $800). As a result of the execution of this settlement agreement, a gain was recorded in 2010 in the amount of approximately $2,000. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| A.     | Tax laws applicable to the Group companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Income Tax (Inflationary Adjustments) Law, 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | According to the law, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | In February 2008, the “Knesset” (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. Adjustments relating to capital gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | The Law for the Encouragement of Capital Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | The subsidiaries have requested to be entitled to various tax benefits by virtue of the “approved enterprise” and/or “beneficiary enterprise” status granted to part of their enterprises, as implied by this Law. The principal benefits by virtue of the Law are:                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Alternative track:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | Under this track, a company is tax exempt in the first ten years of the benefit period (dependent on the development area).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | In respect of expansion programs pursuant to Amendment No. 60 to the Law, the benefit period starts at the later of the year elected and the first year the Company earns taxable income provided that 12 years have not passed since the beginning of the year of election and for companies in development area A - 14 years since the beginning of the year of election. Subsidiaries have additional investment programs that are in various stages of implementation or for which the respective benefit period has not yet begun. Also, the benefit period for part of the enterprises of the subsidiaries will end in 2019.                                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | Another condition for receiving the benefits under the alternative track is a minimum qualifying investment. This condition requires an investment in the acquisition of productive assets such as machinery and equipment (and for hotels, buildings as well), which must be carried out within three years. The minimum qualifying investment required for setting up a plant is NIS 300 thousand. As for plant expansion, the minimum qualifying investment is the higher of NIS 300 thousand and an amount equivalent to the “qualifying percentage” of the value of the productive assets. Productive assets that are used by the plant but not owned by it will also be viewed as productive assets. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | The qualifying percentage of the value of the productive assets is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

| The value of productiveassets before the expansion(NIS in millions) |   | The new proportion that therequired investment bears to thevalue of productive assets |
|---------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|
|                                                                |   |                                                                                  |   |
| Up to 140                                                           |   |                                                                                  | 12 | % |
| 140 - 500                                                           |   |                                                                                  | 7 | % |
| More than 500                                                       |   |                                                                                  | 5 | % |

|   | The income qualifying for tax benefits under the alternative track is the taxable income of a company that has met certain conditions as determined by the Law (“a beneficiary company”), and which is derived from an industrial enterprise or a hotel. The Law specifies the types of qualifying income that is entitled to tax benefits under the alternative track both in respect of an industrial enterprise and of a hotel, whereby income from an industrial enterprise includes, among others, revenues from the production and development of software products and revenues from industrial research and development activities performed for a foreign resident (and approved by the Head of the Administration of Industrial Research and Development). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | As for industrial enterprises, in each tax year during the benefit period, one of the following conditions must be met:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Its main field of activity is biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research and Development, prior to the approval of the aforementioned plan. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Its sales revenues during the tax year of the facility from a specific country do not exceed 75% of its total revenues of the facility for that tax year. A “market” is defined as a separate country or customs duty territory. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | At least 25% of its revenues during the tax year were generated by sales of the facility in a specific market with a population of at least 12 million. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | Amendments to the Law for the Encouragement of Capital Investments, 1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | In December 2010, the “Knesset” (Israeli Parliament) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among others, amendments in the Law for the Encouragement of Capital Investments, 1959 (“the Law”). The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the Company’s entire preferred income. The Company will be able to opt to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates that are: 2011 and 2011 - 15% (in development area A - 10%), 2013 and 2014 - 12.5% (in development area A - 7%) and in 2015 and thereafter - 12% (in development area A - 6%). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | At this time the subsidiaries have not yet decided whether to opt to apply the amendment. The Company estimates that the Amended Legislation, should it be applied, is not expected to have any material influence over the deferred tax balance in its financial statements as of December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | The above benefits are conditional upon the fulfillment of the conditions stipulated by the Law, regulations published thereunder and the letters of approval for the investments in the approved enterprises, as above. Non-compliance with the conditions may cancel all or part of the benefits and refund of the amount of the benefits, including interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | The Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
|   | Certain of the Company's subsidiaries are "Industrial Companies", as defined by the Law for the Encouragement of Industry (Taxation), 1969, and as such, are entitled to certain benefits, mainly: (1) accelerated depreciation; (2) deduction of expenses incurred in connection with a public issuance of securities over a three-year period; (3) deduction of purchases of know-how and patents over an eight-year period for tax purposes ; and (4) an election to file a consolidated tax return with additional Israeli Industrial Companies.                                                                                                                                                                                                                                                                           |

|   | No assurance can be given that these companies will continue to qualify as an Industrial Company or that the benefits described above will be available in the future. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| B.     | Tax rates applicable to the Group                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The rate of the Israeli corporate tax is as follows: 2008 - 27%, 2009 - 26%, 2010 - 25%. Tax at a reduced rate of 25% applies on capital gains arising after January 1, 2003, instead of the regular tax rate. In July 2009, the “Knesset” (Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among others, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%. This change does not have a material effect on the Company’s financial statements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The principal tax rates applicable to the subsidiaries whose place of incorporation is in the U.S. are 40%. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| C.     | The Company received final tax assessments through 2004. The subsidiaries received final tax assessments through 2004-2006.                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| D.     | Carryforward operating tax losses and capital losses of the Group total approximately $300,000 as of December 31, 2010. Carryforward tax losses in Israel may be set against future taxable income. Deferred tax assets relating to carryforward operating losses and to other temporary differences of approximately $50,500 were not recognized because their utilization in the foreseeable future is not probable. In addition, the Company does not have tax results carried to other comprehensive income. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| E.     | Taxes on income included in the statements of income                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|                               |   | Year ended December 31, |   |
|------------------------------------|--------|-------------------------|--------|
|                               |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                               |   | $ thousands             |   |
|                               |   |                    |   |   |   |   |   |   |   |
| Current taxes                      |   |                    | 1,735  |   |   |   | – |   |   |   | (32 | ) |
| Deferred taxes                     |   |                    | 4,746  |   |   |   | – |   |   |   | – |   |
| Taxes in respect of previous years |   |                    | (369   | ) |   |   | (2,453 | ) |   |   | – |   |
|                               |   |                    |   |   |   |   |   |   |   |   |   |   |
|                               |   |                    | 6,112  |   |   |   | (2,453 | ) |   |   | (32 | ) |

| F.     | Deferred taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | As of December 31, 2010, the Group had deferred tax liabilities in the amount of approximately $4,746 which are presented under non-current liabilities.                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | The temporary differences associated with investments in investees for which deferred tax liabilities in the amount of approximately $15,250 (as of December 31, 2009 - approximately $21,900) have not been recognized, aggregate approximately $84,800 (December 31, 2009 - approximately $121,669) because the realization of these investments in the foreseeable future is not expected (which realization is at the Company’s discretion), and because the distribution of dividend by these companies is not liable for tax. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| G. | A reconciliation between the tax expense, assuming that all the income and expenses, gains and losses in the statement of income were taxed at the statutory tax rate and the taxes on income recorded in the statement of income is as follows: |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                      |   | Year ended December 31, |    |
|-------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                      |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
|                                                                                      |   | $ thousands             |    |
|                                                                                      |   |                    |    |   |   |   |   |   |   |
| Income (loss) before taxes on income                                                      |   |                    | 111,558 |   |   |   | (31,848 | ) |   |   | (92,686 | ) |
|                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Statutory tax rate                                                                        |   |                    | 25      | % |   |   | 26 | % |   |   | 27 | % |
|                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Tax (tax saving) computed at the statutory tax rate                                       |   |                    | 27,890  |   |   |   | (8,280 | ) |   |   | (25,025 | ) |
|                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in taxes on income resulting from the following factors:              |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Company's share of earnings (losses) of associates                                        |   |                    | 2,716   |   |   |   | 2,734 |   |   |   | 10,839 |   |
| Changes in temporary differences with respect to which deferred taxes were not recognized |   |                    | (39,490 | ) |   |   | (1,632 | ) |   |   | 6,025 |   |
| Increase in unrecognized tax losses                                                       |   |                    | 22,237  |   |   |   | 7,035 |   |   |   | 7,942 |   |
| Utilization of previously unrecognized tax losses                                         |   |                    | (7,272  | ) |   |   | - |   |   |   | - |   |
|  Non-deductible expenses for tax purposes                                            |   |                    | 400     |   |   |   | 143 |   |   |   | 187 |   |
|  Taxes in respect of previous years                                                  |   |                    | (369    | ) |   |   | (2,453 | ) |   |   | - |   |
|                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Taxes on income (tax benefit)                                                             |   |                    | 6,112   |   |   |   | (2,453 | ) |   |   | (32 | ) |

| A.     | Basic net earnings (loss) per share |
|--------|-------------------------------------|
|   |                                |   |
|   | 1.                                  | Details of the income (loss) used in the computation of basic net earnings (loss) per share |

|                                                                                              |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                              |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                                                              |   | $ thousands             |   |
|                                                                                              |   |                    |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to ordinary shareholders                                         |   |                    | 60,678 |   |   |   | (14,304 | ) |   |   | (71,834 | ) |
|                                                                                              |   |                    |   |   |   |   |   |   |   |   |   |   |
| Adjustment for Company’s share in the basic net earnings (loss) per share of associates (*) |   |                    | (1,918 | ) |   |   | 50 |   |   |   | (86 | ) |
|                                                                                              |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income (loss) used in computation of basic net earnings (loss) per share                          |   |                    | 58,760 |   |   |   | (14,254 | ) |   |   | (71,920 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | 2. | Details of the number of shares used in the computation of basic net earnings (loss) per share |
|--------|----|------------------------------------------------------------------------------------------------|

|                                                                                                      |   | Year ended December 31, |       |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                      |   | 2010                    |       |   | 2009 |   |   | 2008 |   |
|                                                                                                      |   | $ thousands             |       |
|                                                                                                      |   |                    |       |   |   |   |   |   |   |
| Balance as of January 1                                                                                   |   |                    | 29,650,017 |   |   |   | 29,650,017 |   |   |   | 29,650,017 |   |
|                                                                                                      |   |                    |       |   |   |   |   |   |   |   |   |   |
| Effect of options converted into shares                                                                   |   |                    | 4, 611     |   |   |   | – |   |   |   | – |   |
|                                                                                                      |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of ordinary shares used in the computation of basic net earnings (loss) per share |   |                    | 29,654,628 |   |   |   | 29,650,017 |   |   |   | 29,650,017 |   |

| B.     | Diluted net earnings (loss) per share |
|--------|---------------------------------------|
|   |                                  |   |
|   | 1.                                    | Details of the income (loss) used in the computation of diluted net earnings (loss) per share |

|                                                                                                |   | Year ended December 31, |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                                                                |   | $ thousands             |   |
|                                                                                                |   |                    |   |   |   |   |   |   |   |
| Income (loss) used in the computation of basic net earnings (loss) per share                        |   |                    | 58,760 |   |   |   | (14,254 | ) |   |   | (71,920 | ) |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |
| Adjustment for Company’s share in the diluted net earnings (loss) per share of associates (*) |   |                    | 38     |   |   |   | (338 | ) |   |   | (460 | ) |
|                                                                                                |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income (loss) used in computation of diluted net earnings (loss) per share                          |   |                    | 58,798 |   |   |   | (14,592 | ) |   |   | (72,380 | ) |

|   | 2. | Details of the number of shares used in the computation of diluted net earnings (loss) per share |
|--------|----|--------------------------------------------------------------------------------------------------|

|                                                                                                        |   | Year ended December 31, |       |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                        |   | 2010                    |       |   | 2009 |   |   | 2008 |   |
|                                                                                                        |   | $ thousands             |       |
|                                                                                                        |   |                    |       |   |   |   |   |   |   |
| Number of shares used in the computation of basic net earnings (loss) per share                             |   |                    | 29,654,628 |   |   |   | 29,650,017 |   |   |   | 29,650,017 |   |
|                                                                                                        |   |                    |       |   |   |   |   |   |   |   |   |   |
| Effect of options convertible into shares                                                                   |   |                    | 11,572     |   |   |   | – |   |   |   | – |   |
|                                                                                                        |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of ordinary shares used in the computation of diluted net earnings (loss) per share |   |                    | 29,666,200 |   |   |   | 29,650,017 |   |   |   | 29,650,017 |   |

|   |   | (*) | Represents adjustments for differences between the Company’s share in the income or losses of associates, and the associate’s earnings or loss per share multiplied by the number of shares held by the Company. |
|--------|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | To compute diluted net earnings (loss) per share, options to employees under share-based payment plans have not been taken into account since their conversion increases the basic earnings (decreases the loss) (anti-dilutive effect). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| A.     | Related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | The related parties of the Company are DIC, IDB, related parties of DIC and IDB, associates and subsidiaries, directors and key management personnel of the Company, DIC or IDB, and a close member of the family of any of the persons mentioned above. For details regarding holdings in investee companies - see 3.A.4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | For details in respect of Elron’s, RDC’s and DIC’s holdings in Given, see Note 3.C.1.i).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| B.     | Details of transactions with related and interested parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | Services agreement with DIC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | On March 19, 2009, the Company entered into a Services Agreement with DIC, which was approved by the Company’s Audit Committee and Board of Directors, and subsequently, in a special meeting of the Company’s shareholders. Pursuant to the agreement, effective from May 1, 2009, the Company receives managerial and administrative services from DIC, for which the Company pays DIC an annual fee equivalent to NIS 4,700,000, CPI-linked (approximately $1,300 as of December 31, 2010). As part of the agreement, other than the CEO and CFO who are to be appointed by the Company following its proposal of such officers, and approval by DIC and the Company’s Board of Directors, the services are performed by persons designated by DIC, all of whom are employed or otherwise engaged by DIC subject to the Company’s approval. The term of the agreement is three years, subject to either party having the right to terminate it on at least 120 prior notice if DIC is no longer the Company’s largest shareholder. In connection with the agreement, all the Company’s employees, except its Chairman, were terminated in May 2009, some of whom joined DIC. As of December 31, 2009, all the Company’s liabilities in respect of these employees’ termination were paid in full. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | Pursuant to the terms of the agreement, the Company has agreed to indemnify DIC for any amounts DIC will be required to pay as a result of any legal or administrative proceedings initiated by any third party (other than persons engaged in performing the services on behalf of DIC, or staff persons), seeking to impose liability on DIC arising from any act of omission in performing the services, unless such act or omission amounted to gross negligence or was done other than in good faith. Moreover, DIC will not be responsible for any act of omission of any staff person performing the services unless such act or omission was made pursuant to the express instructions of DIC. In addition, the Company provides to staff persons performing functions of officers, indemnification letters with respect to liabilities to which they will become exposed by virture of performing such functions.                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | Classification of transactions as negligible transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
|   | The Board of Directors of the Company adopted a policy determining guidelines and rules for the classification of a transaction by the Company or by a consolidated company with a related party in which the controlling shareholder in the Company has a personal interest as a negligible transaction. These rules and guidelines are used to examine the extent of disclosure in the Company’s immediate reports, annual reports and prospectus (including shelf offering reports) pursuant to the Israeli Securities Law regarding a transaction by the Company, a corporation under its control and any associate, with the controlling shareholder or in which the controlling shareholder has a personal interest in the approval thereof, as stipulated the applicable Israeli Securities Regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | In the ordinary course of their business, the Company and its subsidiaries and associates conduct or may conduct transactions with related parties, and they have or may have commitments to conduct the said transactions, including transactions of the types and with the characteristics set out below: transactions for the receipt of banking and financial services from banks and financial institutions (including management of funds contributed by employers and employees to provident funds and education funds); transactions for the purchase or sale of products and services (such as communications products and services, food products, paper products, tourism services, elementary insurances, vehicle leasing services, legal services); transactions for the lease of real estate assets. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   | In the absence of any special qualitative considerations given the specific circumstances, a transaction that is not extraordinary (in other words - it is conducted in the ordinary course of its business, under market conditions, and does not have a material impact on the Company), it will be considered a negligible transaction, if the relevant criteria calculated for the transaction (one or more, as set out below) is less than one percent (1%) of the Company’s equity according to the Company’s last consolidated financial statements.                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   | In any related party transaction involved with a personal interest of the Company’s controlling shareholder that is evaluated and classified as a transaction whether it is a negligible, the relevant criteria shall be calculated as follows: (A) In the purchase of a fixed asset (“asset that is not a current asset”) - the size of the transaction; (B) In the sale of a fixed asset (“asset that is not a current asset”) - the profit/loss from the transaction; (C) In the incurrence of a monetary liability - the size of the transaction; (D) In the purchase/sale of products (with the exception of a fixed asset) or services - the size of the transaction.                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   | In cases which, according to the Company’s discretion, all of the aforementioned quantitative criteria are irrelevant in determining whether the related party transaction is a negligible, the transaction shall be evaluated based on other relevant criteria set by the Company, provided that the relevant criterion calculated for the transaction is lower than one percent (1%).                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   | Loans to subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | a) | As for loans granted by the Company to Starling see Note 3.C.2.a). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | b) | As for loans granted by the Company to RDC and their repayment see Note 3.C.2.d). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | c) | As for the Company's and RDC's holdings in Starling convertible debentures see Note 3.C.2.a). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | d) | As for loans granted by the Company to Wavion see Note 3.B.1.a). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | e) | As for loans granted by the Company to Pocared and it's conversion subsequent to the reported date, see Note 3.A.4 and 3.C.1.a). |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | The Company’s engagement with IDB in an arrangement providing for the use of space in the Company’s offices                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
|   | On July 21, 2010, following approval by the Company’s Audit Committee and Board of Directors, the Company’s shareholders approved an agreement between the Company and IDB pursuant to which the Company would agree to make available to IDB, to the extent that it is interested, from time to time, available office space in its offices at 3 Azrieli Center, 42nd floor, Tel Aviv, Israel, which space is not used by the Company, in accordance with the terms of its lease agreement. In consideration for the use of available office rooms which IDB shall wish to use, IDB shall pay the Company an amount per square meter equal to the amount per square meter according to the rental fees (including management fees to the management company of the building in which the Company’s offices are located) and the municipality taxes which the Company pays for its offices. The calculation of the amount per such square meter shall be according to the total net area (in square meters) of the Company’s offices and office rooms which shall be used by IDB without taking into account a pro rata share of the public areas located outside the Company’s offices. As of the reported date, the consideration for such use amounts to NIS 171 ($0.048) per square meter per month, CPI-linked plus VAT according to the law. Following the approval of this arrangement, IDB notified the Company that it intended to use one of the available rooms based on the above conditions. In addition, in March 8, 2011, the Company’s audit committee approved the use of one of the available rooms by DIC. This arrangement with DIC is a negligible transaction for the Company. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | The Company’s engagement with IDB in an arrangement to receive support center services                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|   | On July 21, 2010, following approval by the Company’s Audit Committee and Board of Directors, the Company’s shareholders approved an agreement between the Company and IDB pursuant to which the Company would receive IT support services from IDB’s IT support center in consideration for the Company’s pro rata portion of the support center’s costs in connection therewith, calculated pro rata to the number of users (including those of RDC) receiving IT support from the IDB support center. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | Directors' compensation in connection with service provided by officer as a director of Given                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | The Company received directors 'remuneration of approximately $35 in 2010 in connection with the service provided by one of its officers as a director of Given.                                                                                                                                                                                                                                                                                                                                                                       |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| C.     | Composition of balances with interested and related parties |
|--------|-------------------------------------------------------------|
|   |                                                        |   |
|   | As of December 31, 2010                                     |

|                                                       |   | Controllingshareholder (parent company) |   | Other related parties and interestedparty |    | Ultimate parent company |   | Associates |   | Key management personnel |
|------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|---------|-------------------------|--------|------------|--------|--------------------------|
|                                                       |   | $ thousands                             |
|                                                       |   |                                    |   |                                      |    |                    |   |       |   |                     |   |   |   |   |   |
| Other current assets                                       |   | 12                                      |   |                                      | – |                    |   | –    |   |                     | 30 |   |   | – |   |
| Other current liabilities                                  |   | (15                                     | )      |                                      | (2      | )                       |   | (32        | )      |                     | – |   |   | (180 | ) |
| Convertible debentures                                     |   | –                                 |   |                                      | (530    | )                       |   | –    |   |                     | – |   |   | – |   |
| Highest balance during the year of loans and current debts |   | –                                 |   |                                      | – |                    |   | –    |   |                     | 30 |   |   | – |   |

|   | As of December 31, 2009 |
|--------|-------------------------|

|                                                       |   | Controllingshareholder (parent company) |   | Other related parties and interested party |    | Ultimate parent company |   | Associates |   | Key management personnel |
|------------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------------|---------|-------------------------|--------|------------|--------|--------------------------|
|                                                       |   | $ thousands                             |
|                                                       |   |                                    |   |                                       |    |                    |   |       |   |                     |   |   |   |   |   |
| Other current assets                                       |   | –                                 |   |                                       | – |                    |   | –    |   |                     | 11 |   |   | – |   |
| Other current liabilities                                  |   | (21                                     | )      |                                       | (5      | )                       |   | (30        | )      |                     | – |   |   | (80 | ) |
| Long-term loans (including current maturities)             |   | (16,737                                 | )      |                                       | – |                    |   | –    |   |                     | – |   |   | – |   |
| Convertible debentures                                     |   | –                                 |   |                                       | (534    | )                       |   | –    |   |                     | – |   |   | – |   |
| Highest balance during the year of loans and current debts |   | 12                                      |   |                                       | – |                    |   | –    |   |                     | 11 |   |   | – |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| D.     | Transactions with related and interested parties |
|--------|--------------------------------------------------|
|   |                                             |   |
|   | Year ended December 31, 2010                     |

|                                           |   | For terms |    | Controllingshareholder (parent company) |    |   | Sister companies |    | Ultimate parent company |   |    | Associatesand subsidiaries |   |    | Key management personnel |   |    | Other related parties and interested party |   |
|------------------------------------------------|--------|-----------|---------|-----------------------------------------|---------|--------|------------------|---------|-------------------------|--------|---------|----------------------------|--------|---------|--------------------------|--------|---------|--------------------------------------------|--------|
|                                           |   | see Note  |    | $ thousands                             |    |
|                                           |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
| Income                                         |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
| Interest and commission for guarantees         |   |      |    |                                    | – |   |             | – |                    |   | – |                       |   | 147     |                     |   | – |                                       |   | – |   |
| Participation in directors’ remuneration |   |      |    |                                    | – |   |             | – |                    |   | – |                       |   | 35      |                     |   | – |                                       |   | – |   |
| Participation in expenses                      |   |      |    |                                    | 38      | (*)    |             | – |                    |   | 3       |                       |   | 29      |                     |   | – |                                       |   | – |   |
|                                           |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
|                                           |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
| Expenses                                       |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
| Services agreement-related expenses            |   | 23.B      |    |                                    | (1,312  | )      |             | – |                    |   | – |                       |   | – |                     |   | – |                                       |   | – |   |
| Participation in expenses                      |   |      |    |                                    | – |   |             | – |                    |   | (78     | )                          |   | – |                     |   |    |                                       |   | – |   |
| Directors’ remuneration                  |   | 23.D.     | 4  |                                    | (70     | )      |             | – |                    |   | (25     | )                          |   | – |                     |   | (371    | )                                          |   | – |   |
| Interest expenses                              |   | 15(4      | )       |                                    | (742    | )      |             | – |                    |   | – |                       |   | – |                     |   | – |                                       |   |   |   |
| Insurance-related expenses                     |   | 23.D.     | 3  |                                    | – |   |             | – |                    |   | – |                       |   | – |                     |   |    |                                       |   | (321 | ) |
| Salaries, wages and related expenses           |   |      |    |                                    | – |   |             | – |                    |   | – |                       |   | – |                     |   | (903    | )                                          |   | – |   |
| Other                                          |   |      |    |                                    | – |   |             | (137    | )                       |   | – |                       |   | – |                     |   | – |                                       |   | (360 | ) |
|                                           |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
|                                           |   |      |    |                                    |    |   |             |    |                    |   |    |                       |   |    |                     |   |    |                                       |   |   |   |
|                                           |   |      |    |                                    | (2,086  | )      |             | (137    | )                       |   | (100    | )                          |   | 211     |                     |   | (1,274  | )                                          |   | (681 | ) |

|   | (*) | For details regardinga payment of a bonus to the Company's CEO by controlling shareholders, see Note 17.E |
|--------|-----|-----------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| D.     | Transactions with related and interested parties (Cont.) |
|--------|----------------------------------------------------------|
|   |                                                     |   |
|   |                                                     | Year ended December 31, 2009 |

|                                           |   | For terms |   |   | Controlling shareholder (parent company) |   |   | Sister companies |   |   | Ultimateparent company |   |   | Associatesand subsidiaries |   |   | Keymanagement personnel |   |   | Other related parties and interested party |   |
|------------------------------------------------|--------|-----------|--------|--------|------------------------------------------|--------|--------|------------------|--------|--------|------------------------|--------|--------|----------------------------|--------|--------|-------------------------|--------|--------|--------------------------------------------|--------|
|                                           |   | see Note  |   |   | $ thousands                              |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
| Income                                         |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
| Interest and commission for guarantees         |   |      |   |   | –                                  |   |   | –          |   |   | –                |   |   | 750                        |   |   | –                 |   |   | –                                    |   |
| Participation in directors’ remuneration |   |      |   |   | –                                  |   |   | –          |   |   | –                |   |   | 80                         |   |   | –                 |   |   | –                                    |   |
| Participation in expenses                      |   |      |   |   | 102                                      |   |   | –          |   |   | –                |   |   | –                    |   |   | –                 |   |   | –                                    |   |
| Consideration from sale of NetVision           |   | 3.C.1.j)  |   |   | 34,109                                   |   |   | –          |   |   | –                |   |   | –                    |   |   | –                 |   |   | 26,661                                     |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
| Expenses                                       |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
| Services agreement-related expenses            |   | 23.B      |   |   | (848                                     | )      |   | –          |   |   | –                |   |   | –                    |   |   | –                 |   |   | –                                    |   |
| Participation in expenses                      |   |      |   |   | –                                  |   |   | –          |   |   | (32                    | )      |   | –                    |   |   | –                 |   |   | –                                    |   |
| Directors’ remuneration                  |   | 23.D.4    |   |   | (79                                      | )      |   | –          |   |   | (23                    | )      |   | –                    |   |   | (309                    | )      |   | –                                    |   |
| Interest expenses                              |   | 15(4)     |   |   | (1,561                                   | )      |   | –          |   |   | –                |   |   | –                    |   |   | –                 |   |   | –                                    |   |
| Insurance-related expenses                     |   | 23.D.3    |   |   | –                                  |   |   | –          |   |   | –                |   |   | –                    |   |   | –                 |   |   | (321                                       | )      |
| Salaries, wages and related expenses           |   |      |   |   | –                                  |   |   | –          |   |   | –                |   |   | –                    |   |   | (802                    | )      |   |                                       |   |
| Other                                          |   |      |   |   | –                                  |   |   | (108             | )      |   | –                |   |   | –                    |   |   | –                 |   |   | (131                                       | )      |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                   |   |   |                       |   |   |                    |   |   |                                       |   |
|                                           |   |      |   |   | 31,723                                   |   |   | (108             | )      |   | (55                    | )      |   | 830                        |   |   | (1,111                  | )      |   | 26,209                                     |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| D.     | Transactions with related and interested parties (Cont.) |
|--------|----------------------------------------------------------|
|   |                                                     |   |
|   | Year ended December 31, 2008                             |

|                                           |   | For terms |   |   | Controlling shareholder (parent company) |   |   | Sister companies |   |   | Ultimate parent company |   |   | Associates and subsidiaries |   |   | Key management personnel |   |   | Other related parties and interested party |   |
|------------------------------------------------|--------|-----------|--------|--------|------------------------------------------|--------|--------|------------------|--------|--------|-------------------------|--------|--------|-----------------------------|--------|--------|--------------------------|--------|--------|--------------------------------------------|--------|
|                                           |   | see Note  |   |   | $ thousands                              |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Income                                         |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Interest and commission for guarantees         |   |      |   |   | –                                  |   |   | –          |   |   | –                 |   |   | 266                         |   |   | –                  |   |   | –                                    |   |
| Participation in directors’ remuneration |   |      |   |   | –                                  |   |   | –          |   |   | –                 |   |   | 98                          |   |   | –                  |   |   | –                                    |   |
| Participation in expenses                      |   |      |   |   | 40                                       |   |   | –          |   |   | –                 |   |   | –                     |   |   | –                  |   |   | –                                    |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Expenses                                       |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Participation in expenses                      |   |      |   |   | –                                  |   |   | –          |   |   | (28                     | )      |   | –                     |   |   | –                  |   |   | –                                    |   |
| Directors’ remuneration                  |   | 23.D.4    |   |   | (83                                      | )      |   | –          |   |   | (46                     | )      |   | –                     |   |   | (394                     | )      |   | –                                    |   |
| Interest expenses                              |   | 15(4)     |   |   | (176                                     | )      |   | –          |   |   | –                 |   |   | –                     |   |   | –                  |   |   | –                                    |   |
| Insurance-related expenses                     |   | 23.D.3    |   |   | –                                  |   |   | –          |   |   | –                 |   |   | –                     |   |   | –                  |   |   | (623                                       | )      |
| Salaries, wages and related expenses           |   |      |   |   | –                                  |   |   | –          |   |   | –                 |   |   | –                     |   |   | (1,039                   | )      |   | –                                    |   |
| Other                                          |   |      |   |   | –                                  |   |   | (73              | )      |   | –                 |   |   | –                     |   |   | –                  |   |   | (239                                       | )      |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
|                                           |   |      |   |   |                                     |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
|                                           |   |      |   |   | (219                                     | )      |   | (73              | )      |   | (74                     | )      |   | 364                         |   |   | (1,433                   | )      |   | (862                                       | )      |

|   | a. | See Note 17 above regarding options granted to the Company’s Chairman.            |
|--------|----|-----------------------------------------------------------------------------------------|
|   | b. | See Note 15(4) above regarding loans from DIC.                                          |
|   | c. | See Note 3 above regarding the sale of NetVision and Galil and the investment in Given. |
|   | d. | See Note 20.H above regarding the sale of KIT.                                          |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| D.     | Transactions with related and interested parties (Cont.) |
|--------|----------------------------------------------------------|
|   |                                                     |   |

|   | Compensation of key management personnel employed by the Company (including directors) |
|--------|----------------------------------------------------------------------------------------|

|                             |   | No. of personnel in |   |   | For the year ended December 31, 2010 |   |   | No. of personnel in |   |   | For the year ended December 31, 2009 |   |   | No. of personnel in |   |   | For the year ended December 31, 2008 |   |
|----------------------------------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|
|                             |   | 2010                |   |   | $ thousands                          |   |   | 2009                |   |   | $ thousands                          |   |   | 2008                |   |   | $ thousands                          |   |
|                             |   |                |   |   |                                 |   |   |                |   |   |                                 |   |   |                |   |   |                                 |   |   |   |   |   |   |   |
| Short-term employee benefits     |   |                | 1      |   |                                 |   | 767    |                |   |   | 1                                    |   |   |                | 617    |   |                                 |   | 1 |   |   |   | 723 |   |
| Termination benefits             |   |                | 1      |   |                                 |   | 51     |                |   |   | 1                                    |   |   |                | 49     |   |                                 |   | 1 |   |   |   | 53 |   |
| Share-based payment transactions |   |                | 1      |   |                                 |   | 85     |                |   |   | 1                                    |   |   |                | 136    |   |                                 |   | 1 |   |   |   | 263 |   |
| Total                       |   |                |   |   |                                 |   | 903    |                |   |   |                                 |   |   |                | 802    |   |                                 |   |   |   |   |   | 1,039 |   |

|   | Compensation of key management personnel not employed by the Company (including directors) |
|--------|--------------------------------------------------------------------------------------------|

|                         |   | No. of personnel in |   |   | For the year ended December 31, 2010 |   |   | No. of personnel in |   |   | For the year ended December 31, 2009 |   |   | No. of personnel in |   |   | For the year ended December 31, 2008 |   |
|------------------------------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|
|                         |   | 2010                |   |   | $ thousands                          |   |   | 2009                |   |   | $ thousands                          |   |   | 2008                |   |   | $ thousands                          |   |
|                         |   |                |   |   |                                 |   |   |                |   |   |                                 |   |   |                |   |   |                                 |   |   |   |   |   |   |   |
| Short-term employee benefits |   |                | 10     |   |                                 |   | 466    |                |   |   | 12                                   |   |   |                | 411    |   |                                 |   | 15 |   |   |   | 523 |   |

|   | The amounts disclosed in the table above are the amounts recognized as an expense during the reported period related to key management personnel.                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                             |   |   |
|   | The amounts disclosed in the table do not include compensation paid to key management personnel of the Company by DIC according to the services agreement (see Note 23.B above). |
|   |                                                                                                                                                                             |   |   |
|   |                                                                                                                                                                             | 1. | Grants: |
|   |                                                                                                                                                                             |   |   |
|   |                                                                                                                                                                             |   | In september 2009, following the approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved a consulting agreement with Prof. Gabi Barbash, pursuant to which, in addition to his director fees, he will receive $5,000 per month for his services to the Company, mainly in connection with its medical device companies. The agreement commenced in August 2009 and terminated in August 2010. |
|   |                                                                                                                                                                             |   |   |
|   |                                                                                                                                                                             |   | In March, 2010, following approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved an annual bonus in the amount of NIS 950,000 (then equivalent to $255) to the Company's Chairman, Arie Mientkavich, for 2009. The bonus is equivalent to 7.9 times Mr. Mientkavich's monthly salary during the year 2009.On July 21, 2010, the Company's shareholders approved payment of the bonus. |
|   |                                                                                                                                                                             |   |   |
|   |                                                                                                                                                                             |   | In March, 2011, the Company's Audit Committee and Board of Directors, approved an annual bonus in the amount of NIS 1,200,000 (equivalent to approximately $330) to the Company's Chairman, Arie Mientkavich, in accordence with his imployment agreement, for 2010.The payment of the bonus is subject to theCompany's shareholders approval. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | In December, 2009, following approval of the Company's Audit Committee and Board of Directors approved a special bonus to Prof. Gabi Barbash in the amount of NIS 600,000 (then approximately $160) for his contribution to the investee company 3DV Systems.On July 21, 2010, the Company's shareholders approved payment of the bonus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In March 2010, following approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved a special bonus in the amount of NIS 492,000 (then approximately $134) to the Company's CEO, Mr. Ari Bronshtein, for 2009. Since Mr. Bronshtein also serves as an officer (Vice President) of the Company's controlling shareholder, DIC, in the third quarter of 2010, DIC decided to bear the full payment of the bonus to Mr. Bronshtein. See also Note 17 E above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In March 2010, following approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved a special bonus in the amount of NIS 552,000 (then approximately $150) to the Company's then co-CEO, Dr. Zvi Slovin. The bonus was paid through DIC in accordance with the services agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In March, 2011, the Company's Audit Committee and Board of Directors, approved an annual bonus in the amount of NIS 570,000 (then approximately $160) to Dr. Zvi Slovin. The bonus was approved and granted by the Company and will be paid through DIC in accordance with the services agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | 2.     | Indemnification of directors and officers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In 2001, following the approval of the Company’s Audit Committee, Board of Directors and shareholders, the Company granted letters of indemnification to its directors and officers. The aggregate indemnification shall not exceed 25% of the Company’s shareholders’ equity according to the Company’s consolidated financial statements for the year ended December 31, 2000, amounting to approximately $70,000, for all persons and cases to be indemnified. In addition, the Company undertook to exempt its directors and officers, to the extent permitted by law, from any liability towards the Company for any damage caused or that may be caused to it by them, if caused or that may be caused following a breach of their duty of care towards it. The Company continues to grant letters of indemnification and exemption to its directors and officers in accordance with the above terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | 3.     | Directors and officers insurance policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | In April 2005, following the resolution and recommendation of the Company’s Audit Committee and Board of Directors, the Company’s shareholders approved and ratified the purchase of a directors’ and officers’ liability insurance policy (the “Policy”) for its directors and officers from Clal Insurance Company Ltd., a related party, and separately approved the application of the Policy to those of its directors, and any future director or officer of the Company who may currently be considered a controlling shareholder under the Israel Companies Law, 1999. In addition, the Company’s shareholders approved: (i) any renewal and/or extension of the Policy for all its directors and officers; and (ii) the purchase of any other directors’ and officers’ liability insurance policy for its directors and officers upon the expiration of the Policy; provided that any such renewal, extension or purchase referred to in clauses (i) and (ii) above is for the benefit of its previous and/or current and/or future directors and officers and on terms substantially similar to those of the previous year. The annual premium for 2010 was $320. On January 1, 2011, subsequent to the reported period, the policy was renewed for 2011 on the following main terms: (1) the coverage under the Policy was limited to $30,000 per claim and in the aggregate during the Policy period; (2) the annual premium to be paid with respect to the Policy was approximately $120. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   | 4.     | Directors’ compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   | Compensation to directors who are controlling persons or their family members, for their employment as directors of the Company and their participation it its meetings and committees was approved by the Company's shareholders on October 18, 2007 (following approval by the Company's Audit Committee and Board of Directors), in the maximum amount permitted under the Israel Companies Regulations (Alleviation for Public Companies whose Shares are Traded on a Stock Exchange Outside of Israel), 2002 / regulations 4 and 5 of the Israel Companies Regulations (Rules Regarding Remuneration and Expenses for an Outside Director), 2000. Directors' compensation or any other compensation shall not be paid to directors who are paid employees of the Company or of a company under its control, or who are eligible to compensation therefrom in a capacity other than director of the Company. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |   |   | Directors' fees which do not exceed the customary remuneration that was paid by the Company or that the Company is required to pay and that has not yet been paid for the year 2010 to persons who were the directors of the Company during this period, 10 directors in total as aforesaid, amounted to approximately $466 (see section D above). Of such amount, a sum of approximately $25 was paid to IDB for the service of an officer thereof as a director of the Company, a sum of approximately $70 was paid to DIC for the service of two officers and an employee thereof as directors of the Company, and a sum of approximately $26 was paid to Dori Manor, a controlling shareholder of the Company (pursuant to the Israeli Securities Law), for his office as a director of the Company, in 2010. Since September 2010, Ms. Rona Dankner, a director of the Company and the daughter of theultimate controlling shareholder of the Company, Mr. Nochi Dankner, waived the entire director's remuneration that she is entitled to receive from the Company (which amounted to immaterial amounts). |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | 5.     | Share based payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   | In November 2009, Dr. Zvi Slovin, one of our then co-CEOs, was granted options to purchase 2,551 ordinary shares of Medingo at a price per share of $106 exercisable in connection with the sale of Medingo, with a total fair value estimated in the amount of $884. The options were exercised simultaneously with the sale of Medingo. For details regarding the sale of Medingo, see Note 3.C.2.b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   | In 2001, Mr. Ami Erel, President of DIC and a director of the Company, received in his capacity then as the Company’s Chairman an option to purchase 1.5% of the Company’s holdings in Wavion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   | The Company’s Chairman, in his capacity as a director of Given, holds the following options to purchase ordinary shares of Given:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

| Type                          |   | Number of options |   | Expiry date |        | Exercise price ($) |   | Fair value of aggregate grant |
|-------------------------------|--------|-------------------|--------|-------------|-------------|--------------------|--------|-------------------------------|
|                          |   |              |   |        |        |               |   |                          |   |   |   |
| Options                       |   | 35,000            |   |        | July 2014   |               | 29.42  |                          |   | 413 |   |
| Options                       |   | 10,000            |   |        | June 2015   |               | 16.00  |                          |   | 55 |   |
| Options                       |   | 10,000            |   |        | August 2012 |               | 11.55  |                          |   | 44 |   |
| Restricted share units (RSUs) |   | 4,545             | (*)    |        |        |               |   |                          |   | 80 |   |

|   |   | (*)    | Restricted until Given’s next annual shareholders meeting.                                                  |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                              |
|   |   |   | For details regarding options to regular shares of the Compoany issued to the Company's Chairman, see Note 17.G.1 |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| A.     | Classification of financial assets and financial liabilities                                                                                                |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                        |
|   | The financial assets and financial liabilities in the statement of financial position are classified by groups of financial instruments pursuant to IAS 39: |

|                                                                                       |   | December 31, |    |
|--------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                       |   | 2010         |    |   | 2009 |   |
|                                                                                       |   | $ thousands  |    |
|                                                                                       |   |         |    |   |   |   |
| Financial assets:                                                                          |   |         |    |   |   |   |
|                                                                                       |   |         |    |   |   |   |
| Loans and other current assets:                                                            |   |         |    |   |   |   |
| Trade receivables                                                                          |   |         | 3,061   |   |   |   | 2,084 |   |
| Other current assets                                                                       |   |         | 1,853   |   |   |   | 1,501 |   |
| Other long-term receivables                                                                |   |         | 28,053  |   |   |   | – |   |
|                                                                                       |   |         |    |   |   |   |   |   |
| Other investments (accounted as available-for-sale)                                        |   |         | 20,221  |   |   |   | 14,527 |   |
| Available-for-sale financial assets classified as held for sale                            |   |         | 17,211  |   |   |   | – |   |
|                                                                                       |   |         |    |   |   |   |   |   |
| Financial liabilities:                                                                     |   |         |    |   |   |   |   |   |
|                                                                                       |   |         |    |   |   |   |   |   |
| Financial liabilities measured at amortized cost:                                          |   |         |    |   |   |   |   |   |
| Loans from bank and others                                                                 |   |         | 1,385   |   |   |   | 47,846 |   |
| Loan from shareholders                                                                     |   |         | – |   |   |   | 16,737 |   |
| Trade payables and other current liabilities                                               |   |         | 9,931   |   |   |   | 12,640 |   |
| Royalty bearing government grants                                                          |   |         | 9,156   |   |   |   | 9,116 |   |
|                                                                                       |   |         |    |   |   |   |   |   |
| Financial liabilities at fair value through profit or loss:                                |   |         |    |   |   |   |   |   |
| Convertible debentures (Financial liabilities designated as such upon initial recognition) |   |         | 3,514   |   |   |   | 3,540 |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| B.     | Management of financial risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | The Company is exposed to various risks resulting primarily from:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | · | Credit risk. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | · | Market risk (including currency risk, interest rate risk and other price risk). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | · | Liquidity risk. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | The officer responsible for management of the Company’s risks is Mr. Yaron Elad, the Company’s CFO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | The handling of financial exposures, formulation of hedging strategy, supervision over, execution and provision of an immediate response to extraordinary developments in the various markets, is under the responsibility of the officer responsible for the Company’s risk management, who acts in consultation with the Company’s CEO, Audit Committee members and Investment Committee members. A report on the implementation of the Company’s policy is presented to the members of the Audit Committee on a quarterly basis.                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | The Company’s principal financial liabilities, comprise of loans and borrowings, royalty bearing government grants, convertible debentures and trade and other payables. The main purpose of these financial liabilities is to raise finances for the Company’s and group companies operations. The Company’s financial assets include trade and other receivables (current and non-current), and cash and short-term deposits that derive directly from its operations. The Company also holds available-for-sale investments, and occasionally enters into derivative transactions (mainly with respect to foregin currency hedge). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | Market risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise four types of risk: currency risk, CPI risk, interest rate risk and other price risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments and derivative financial instruments.                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Currency risk |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Since most of the Group Companies operate in Israel, the Group’s main exposure results from changes in the exchange rate between the New Israeli Shekel (“NIS”) and the dollar. Elron’s functional currency, as well as that of most of it’s Group Companies, is the dollar. Elron’s policy is to reduce exposure to exchange rate fluctuations by having, to the extent possible, most of it’s and its Group Companies’ assets and liabilities, as well as most of the revenues and expenditures in dollars, or dollar linked. However, salaries and related expenses, as well as expenses related to the DIC Service Agreement (see Note 23) and other operating expenses are denominated in NIS. The Company used to haveloans from DIC, which were denominated in NIS (those loans were repaid during 2010, see Note 15). It is the Copany’s and its Group Companies’ policy to use derivative financial instruments, from time to time, to limit exposure to changes in the exchange rate between the NIS and the dollar or to keep a portion of the Company’s and its Group Companies’ resources in NIS against portion of its future NIS expenses and against liabilities denominated in NIS. If the NIS should strengthen against the dollar, it will harm the Company’s and its Group Companies’ results of operations. In addition, since Enablence’s share price is denominated in CAD, Elron is exposed to the effect of this currency over Enablence’s value in dollars, which is classified as available for sale investment. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   |                                                                                               | In addition, the Company is exposed to the impact of exchange rates on the activities of Group Companies whose functional currency is the NIS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                               | The Company holds a significant portion of its cash balances in dollars, although in the future the amounts of these balances, the format of the holding thereof, and the allocation of their different currencies may change, from time to time, based on the business developments and according to the Company’s decision.                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 2.                                                                                                 | CPI risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                               | As detailed in Note 15 above, the Company repaid during 2010 loans received from DIC which were linked to the CPI. In addition, the Company and the subsidiaries, have signed a services agreement with DIC (see Note 23) and a number of lease agreements that are linked to the CPI for various time periods, which are also impacted by changes in the CPI.                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 3.                                                                                                 | Other price risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                               | The Company has investments in financial instruments traded on the stock exchange that are classified as financial assets available-for-sale with respect to which the Company is exposed to risk stemming from fluctuations in the security price determined based on the stock market prices. The balance of these investments in the consolidated financial statements as of December 31, 2010 is $17,430 (December 31, 2009- $2,013).                                                                                                                                                                                                                                                                                                    |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.                                                                                                 | Interest risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                               | The Group is exposed to market risks resulting from changes in interest rates, relating primarily to Elron’s and RDC’s obligations to banks and interest bearing deposits in banks. As of the date of filing of this Annual Report, Elron and RDC do not use derivative financial instruments to limit exposure to interest rate risk. At December 31, 2010, Elron and RDC had no external debt and therefore are not exposed to changes in interest rates (as stated in Note 15, during 2010 the Company and RDC repaid all loans received from banks). However, certain of the Group Companies have variable interest loans and therefore, an increase in interest rates would result in increase in their financial expenses. |
|   |                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The analysis with respect of interest of interest bearing financial instruments is presented below |

|                       |   | December 31, |   |
|----------------------------|--------|--------------|--------|
|                       |   | 2010         |   |   | 2009 |   |
|                       |   |         |   |   |   |   |
| Fixed rate instruments:    |   |         |   |   |   |   |
|                       |   |         |   |   |   |   |
| Financial assets           |   |         | 55,744 |   |   |   | 60,298 |   |
| Financial liabilities      |   |         | (753   | ) |   |   | (17,530 | ) |
|                       |   |         |   |   |   |   |   |   |
|                       |   |         | 54,991 |   |   |   | 42,768 |   |
| Floating rate instruments: |   |         |   |   |   |   |   |   |
|                       |   |         |   |   |   |   |   |   |
| Financial assets           |   |         | 25,215 |   |   |   | 493 |   |
| Financial liabilities      |   |         | (9,788 | ) |   |   | (56,133 | ) |
|                       |   |         |   |   |   |   |   |   |
|                       |   |         | 15,427 |   |   |   | (55,640 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| C.     | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | The Group does not have significant concentrations of credit risk. The Company holds cash and cash equivalents, short-term and long-term investments and other financial instruments in various financial institutions. The Company’s policy is spreading out its cash investments among the various institutions. Pursuant to the Company’s policy, assessments are made on an ongoing basis regarding the relative credit strength of the various financial institutions. As of December 31, 2010, the cash and cash equivalents amounted to $56,539 and the long term other receivables amounted to $26,517, including cash in escrow and Enablence’s debenture (see Note 3). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | As of December 31, 2010, Trade receivables are attributed to sales by a subsidiary. The subsidiary’s credit policy is aimed at ensuring that its products are sold to customers who maintain a satisfactory credit history. Sales are executed in cash or via letters of credit, with the client receiving credit only after having proved its ability to make payments over a period of time.                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | The subsidiary regularly assesses its customers’ credit, while checking their general financial conditions. If necessary, the subsidiary recorded provisions for doubtful debts, based on factors which impact the credit risk of various customers, past experience and any other relevant information.                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| D.     | Liquidity risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | The Group’s policy for managing its liquidity is to assure, to the extent possible, that it will have sufficient liquidity to settle its liabilities on a timely manner and to ascertain the existence of the cash balances it requires to comply with its financial obligations.                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| E.     | Sensitivity tests relating to changes in market factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Sensitivity analysis of the cash flows relating to variable interest bearing instruments |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | A change in the interest rates on the reported date would increase (decrease) the equity and the anticipated annual income or loss by the theoretical amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect to 2009 was prepared under the same assumptions. |

|                                  |   | Change of 0.5% in the interest rate at |   |
|---------------------------------------|--------|----------------------------------------|--------|
|                                  |   | December 31,                           |   |
|                                  |   | 2010                                   |   |   | 2009 |   |
|                                  |   | Increase                               |   |   | Decrease |   |   | Increase |   |   | Decrease |   |
|                                  |   | of                                     |   |   | of |   |   | of |   |   | of |   |
|                                  |   | 0.5%                                   |   |   |   | 0.5% |   |   |   | 0.5% |   |   |   | 0.5% |   |
|                                  |   | $ thousands                            |   |
|                                  |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments bearing variable interest |   |                                   | 325    |   |   |   | (325 | ) |   |   | 26 |   |   |   | (26 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|                                  |   | Change of 1% in the interest rate at |   |
|---------------------------------------|--------|--------------------------------------|--------|
|                                  |   | December 31,                         |   |
|                                  |   | 2010                                 |   |   | 2009 |   |
|                                  |   | Increase                             |   |   | Decrease |   |   | Increase |   |   | Decrease |   |
|                                  |   | of                                   |   |   | of |   |   | of |   |   | of |   |
|                                  |   | 1%                                   |   |   |   | 1% |   |   |   | 1% |   |   |   | 1% |   |
|                                  |   | $ thousands                          |   |
|                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments bearing variable interest |   |                                 | 649    |   |   |   | (649 | ) |   |   | 52 |   |   |   | (52 | ) |

|   | 2.     | Sensitivity test to changes in CPI and foreign currency rates                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | A change in the exchange rate of the following currencies as of December 31, 2010 and a change in the CPI would increase (decrease) the Company’s equity and income or loss in the amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect of December 31, 2009 was prepared under the same assumptions. |

|   |   | Change in         |   | December 31 |    | December 31 |
|--------|--------|-------------------|--------|-------------|---------|-------------|
|   |   | the currency      |   | 2010        |    | 2009        |
|   |   | exchange rate/    |   | Gain (loss) |    | Gain (loss) |
|   |   | change in the CPI |   | $ thousands |
|   |   |              |   |        |    |        |   |   |   |
| CPI    |   | 1                 | %      |        | – |        |   | (164 | ) |
| NIS    |   | 5                 | %      |        | 1,162   |        |   | 290 |   |
|   |   |              |   |        |    |        |   |   |   |
| CPI    |   | 2                 | %      |        | – |        |   | (329 | ) |
| NIS    |   | 10                | %      |        | 2,324   |        |   | 578 |   |
|   |   |              |   |        |    |        |   |   |   |
| CPI    |   | (1                | %)     |        | – |        |   | 164 |   |
| NIS    |   | (5                | %)     |        | (1,162  | )           |   | (290 | ) |
|   |   |              |   |        |    |        |   |   |   |
| CPI    |   | (2                | %)     |        | – |        |   | 329 |   |
| NIS    |   | (10               | %)     |        | (2,324  | )           |   | (578 | ) |
|   |   |              |   |        |    |        |   |   |   |

| F.     | Sensitivity tests relating to price risk                                                                                                                                                                                                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                  |
|   | A change in the fair value of available for sale financial assets (including available for sale financial assets classified as held for sale) would increase (decrease) the Company’s equity in the theoretical amounts presented below. Such change does not affect the annual income or loss. |

|         |   | 2010        |   | 2009   |   | 2008   |
|--------------|--------|-------------|--------|--------|--------|--------|
|         |   | $ thousands |
|         |   |        |   |   |   |   |   |   |   |
| 5% increase  |   | 1,872       |   |   | 837    |   |   | 309 |   |
| 10% increase |   | 3,743       |   |   | 1,674  |   |   | 618 |   |
| 5% decrease  |   | (1,872      | )      |   | (837   | )      |   | (309 | ) |
| 10% decrease |   | (3,743      | )      |   | (1,674 | )      |   | (618 | ) |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | A change in the market value of convertible debentures issued by Starling would increase (decrease) the Company’s equity and income or loss in the theoretical amounts presented below. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         |   | 2010        |   | 2009   |   | 2008   |
|--------------|--------|-------------|--------|--------|--------|--------|
|         |   | $ thousands |
|         |   |        |   |   |   |   |   |   |   |
| 30% increase |   | (1,054      | )      |   | (1,062 | )      |   | (768 | ) |
| 30% decrease |   | 1,054       |   |   | 1,062  |   |   | 768 |   |

| G.     | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The carrying amount of certain financial assets and liabilities, including cash and cash equivalents, restricted cash, trade receivables, other current assets, available for sale financial assets classified as held for sale, other investments (accounted for as available for sale), other long term liabilities, credit from banks and others, other current liabilities, trade payables, convertible debentures, royalty bearing government grants and certain long term loans from banks and others, conforms to or approximates their fair values. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | The fair value and carrying amount of all other financial assets and liabilities presented in the statement of financial position are presented below:                                                                                                                                                                                                                                                                                                                                                                                                      |

|                                           |   | December 31, 2010 |   | December 31, 2009 |
|------------------------------------------------|--------|-------------------|--------|-------------------|
|                                           |   |              |   |              |   | Interest |   |   |   |   |   | Interest |
|                                           |   |              |   |              |   | rate |   |   |   |   |   | rate |
|                                           |   |              |   |              |   | used to |   |   |   |   |   | used to |
|                                           |   |              |   |              |   | calculate |   |   |   |   |   | calculate |
|                                           |   |              |   |              |   | the |   |   |   |   |   | the |
|                                           |   | Carrying          |   | Fair              |   | fair |   | Carrying |   | Fair |   | fair |
|                                           |   | amount            |   | value             |   | value |   | amount |   | value |   | value |
|                                           |   | $ thousands       |
|                                           |   |              |   |              |   |   |   |   |   |   |   |   |   |   |
| Non-current assets                             |   |              |   |              |   |   |   |   |   |   |   |   |   |   |
| Loans and receivables (Enablence debentures) * |   | 3,878             |   | 3,828             |   | 6 | % |   | – |   | – |   | – |   |
|                                           |   |              |   |              |   |   |   |   |   |   |   |   |   |   |
| Financial liabilities                          |   |              |   |              |   |   |   |   |   |   |   |   |   |   |
| Long-term loans from bank and others *         |   | 1,385             |   | 1,385             |   | 6.3 | % |   | 36,981 |   | 36,141 |   | 2.85% – 3.99 | % |
| Long-term loans from shareholders              |   | –           |   | –           |   | – |   |   | 16,737 |   | 18,229 |   | 2.5 | % |
|                                           |   | 5,263             |   | 5,213             |   |   |   |   | 53,718 |   | 54,370 |   |   |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| H.     | Classification of financial instruments by fair value hierarchy                                                                                                                                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                   |
|   | The financial instruments presented in the statement of financial position at fair value are grouped into classes with similar characteristics using the following fair value hierarchy which is determined based on the source of input used in measuring fair value: |

| Level 1 | -      | quoted prices (unadjusted) in active markets for identical assets or liabilities.                                                         |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                      |
| Level 2 | -      | inputs other than quoted prices included within Level 1 that are observable either directly or indirectly.                                |
|    |   |                                                                                                                                      |
| Level 3 | -      | inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data). |

|   | Financial assets (financial liabilities) measured at fair value: |
|--------|------------------------------------------------------------------|
|   |                                                             |
|   | December 31, 2010:                                               |

|                                                    |   | Level 1     |   | Level 2 |    | Level 3 |
|---------------------------------------------------------|--------|-------------|--------|---------|---------|---------|
|                                                    |   | $ thousands |
|                                                    |   |        |   |    |    |    |   |   |   |
| Other investments (accounted for as available for sale) |   | 219         |   |    | – |    |   | 20,002 |   |
| Assets held for sale                                    |   | 2,129       |   |    | *15,082 |    |   | – |   |
| Convertible debentures                                  |   | (3,514      | )      |    | – |    |   | – |   |

|   | December 31, 2009:  |
|--------|--------------------------|

|                                                    |   | Level 1     |   | Level 2 |    | Level 3 |
|---------------------------------------------------------|--------|-------------|--------|---------|---------|---------|
|                                                    |   | $ thousands |
|                                                    |   |        |   |    |    |    |   |   |   |
| Other investments (accounted for as available for sale) |   | 2,013       |   |    | – |    |   | 12,514 |   |
| Convertible debentures                                  |   | (3,383      | )      |    | – |    |   | – |   |

|   | *                                                                                                                                                                    | As said above in Notes 3.C.1.b) and 8.B, the fair value of the investment in Enablence's shares  is determined by reference to their quoted market price less the Discount in respect of the lock-up period. The Discount is estimated based on the Option Pricing Model method and amounted to $1,600 as ofDecember 31, 2010. The Discount alone is measured in respect of level 2, and deducted from the quoted market price of the shares according to level 1. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | During 2010 and 2009, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | Changes in financial assets classified in Level 3: |
|--------|----------------------------------------------------|

|                                                                                                       |   | Available-for-sale financial assets |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                       |   | $ thousands                         |   |
|                                                                                                       |   |                                |   |
| Balance as of January 1, 2009                                                                              |   |                                | 6,703  |   |
|                                                                                                       |   |                                |   |   |
| Total recognized gains (losses):                                                                           |   |                                |   |   |
| In profit or loss                                                                                          |   |                                | (567   | ) |
| In other comprehensive income                                                                              |   |                                | 4,906  |   |
| Transfer into level 3 (classification from investments in associates due to loss of significant influence) |   |                                | 1,472  |   |
|                                                                                                       |   |                                |   |   |
| Balance as of December 31, 2009                                                                            |   |                                | 12,514 |   |
|                                                                                                       |   |                                |   |   |
| Total recognized gains (losses):                                                                           |   |                                |   |   |
| In profit or loss                                                                                          |   |                                | 118    |   |
| In other comprehensive income                                                                              |   |                                | 5,291  |   |
| Transfer into level 3 (classification from investments in associates due to loss of significant influence) |   |                                | 2,079  |   |
|                                                                                                       |   |                                |   |   |
| Balance as of December 31, 2010                                                                            |   |                                | 20,002 |   |
|                                                                                                       |   |                                |   |   |
| Total gain for 2010 included in profit or loss relating to assets held at the end of the reporting year    |   |                                | 118    |   |
| Total loss for 2009 included in profit or loss relating to assets held at the end of the reporting year    |   |                                | (567   | ) |

| I.     | Liquidity risk |
|--------|----------------|
|   |           |   |
|   | 1.             | Set forth below are the contractual repayment dates of financial liabilities, including an estimate of the interest payments, without amounts with respect to which there are offset agreements: |

|                                |   | December 31, 2010 |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | Total             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   | projected         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                |   | cash              |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                |   | flows*            |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                |   | $ thousands       |   |
|                                |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                      |   | 3,856             |   |   | 3,856 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Other current financial liabilities |   | 6,075             |   |   | 6,075 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Convertible debentures              |   | 4,286             |   |   | 1,505 |   |   | 1,429 |   |   | 1,352 |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Loans from banks and others         |   | 1,422             |   |   | 893 |   |   | 324 |   |   | 205 |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Royalty bearing government grants   |   | 9,156             |   |   | 771 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | 8,385 |   |
|                                |   | 24,795            |   |   | 13,100 |   |   | 1,753 |   |   | 1,557 |   |   | – |   |   | – |   |   | – |   |   | 8,385 |   |

|   |   | * | The anticipated cash flows were calculated on the basis of the CPI and the exchange rates that prevailed on December 31, 2010. |
|--------|--------|---|--------------------------------------------------------------------------------------------------------------------------------|

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|                                |   | December 31, 2009 |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | Total             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   | projected         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                |   | cash              |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                |   | flows*            |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                |   | $ thousands       |   |
|                                |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                      |   | 4,273             |   |   | 4,273 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Other current financial liabilities |   | 8,367             |   |   | 8,125 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | 242 |   |
| Convertible debentures              |   | 5,461             |   |   | 1,453 |   |   | 1,383 |   |   | 1,383 |   |   | 1,242 |   |   | – |   |   | – |   |   | – |   |
| Loans from banks and others         |   | 49,598            |   |   | 12,242 |   |   | 37,356 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Shareholders’ loans           |   | 18,111            |   |   | – |   |   | 18,111 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |
| Royalty bearing government grants   |   | 9,116             |   |   | 431 |   |   | – |   |   | – |   |   | – |   |   | – |   |   | – |   |   | 8,685 |   |
|                                |   | 94,926            |   |   | 26,524 |   |   | 56,850 |   |   | 1,383 |   |   | 1,242 |   |   | – |   |   | – |   |   | 8,927 |   |

|   |   | *      | The anticipated cash flows were calculated on the basis of the CPI and the exchange rates that prevailed on December 31, 2009. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                           |
|   |   |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | December 31, 2010: |
|--------|--------------------|

|                                                            |   | Less than one year |    |   | 1 to 2 years |    |   | 2 to 3years |    |   | 3 to 4 years |    |   | 4 to 5 years |    |   | > 5 years |    |   | Un-determined |    |   | Total  |   |
|-----------------------------------------------------------------|--------|--------------------|---------|--------|--------------|---------|--------|-------------|---------|--------|--------------|---------|--------|--------------|---------|--------|--------------|---------|--------|---------------|---------|--------|--------|--------|
|                                                            |   | $ thousands        |    |
|                                                            |   |               |    |   |         |    |   |        |    |   |         |    |   |         |    |   |         |    |   |          |    |   |   |   |   |
| Available-for-sale financial assets                             |   |               | – |   |         | – |   |        | – |   |         | – |   |         | – |   |         | – |   |          | 20,221  |   |   | 20,221 |   |
| Available-for-sale financial assets classified as held for sale |   |               | 17,211  |   |         | – |   |        | – |   |         | – |   |         | – |   |         | – |   |          | – |   |   | 17,211 |   |
| Loans and receivables                                           |   |               | 5,028   |   |         | 27,966  |   |        | 109     |   |         | 78      |   |         | 56      |   |         | 138     |   |          | – |   |   | 33,375 |   |
|                                                            |   |               |    |   |         |    |   |        |    |   |         |    |   |         |    |   |         |    |   |          |    |   |   |   |   |
|                                                            |   |               | 22,239  |   |         | 27,966  |   |        | 109     |   |         | 78      |   |         | 56      |   |         | 138     |   |          | 20,221  |   |   | 70,807 |   |

|   | December 31, 2009: |
|--------|--------------------|

|                                |   | Less than one year |    |   | 1 to 2 years |    |   | 2 to 3years |    |   | 3 to 4 years |    |   | 4 to 5 years |    |   | > 5 years |    |   | Un-determined |    |   | Total  |   |
|-------------------------------------|--------|--------------------|---------|--------|--------------|---------|--------|-------------|---------|--------|--------------|---------|--------|--------------|---------|--------|--------------|---------|--------|---------------|---------|--------|--------|--------|
|                                |   | $ thousands        |    |
|                                |   |               |    |   |         |    |   |        |    |   |         |    |   |         |    |   |         |    |   |          |    |   |   |   |   |
| Available-for-sale financial assets |   |               | – |   |         | – |   |        | – |   |         | – |   |         | – |   |         | – |   |          | 14,527  |   |   | 14,527 |   |
| Loans and receivables               |   |               | 3,585   |   |         | – |   |        | – |   |         | – |   |         | – |   |         | – |   |          | – |   |   | 3,585  |   |
|                                |   |               |    |   |         |    |   |        |    |   |         |    |   |         |    |   |         |    |   |          |    |   |   |   |   |
|                                |   |               | 3,585   |   |         | – |   |        | – |   |         | – |   |         | – |   |         | – |   |          | 14,527  |   |   | 18,112 |   |

| J.     | Derivatives and hedging                            |
|--------|----------------------------------------------------|
|   |                                               |   |
|   | Derivatives not designated as hedging instruments: |
|   |                                               |   |
|   |                                               | The Group Companies participate from time to time in forward foreign currency contracts to manage exposure to fluctuations in exchange rates. These forward foreign currency contracts do not qualify for hedge accounting and are entered into for periods of up to 12 months, with various expiry dates throughout the year. As of December 31, 2010, there is no liability in respect of forward contracts. The liability in respect of these contracts as of December 31, 2009 and the amounts recorded in the statement of income for the years ended December 31, 2010, 2009 and 2008 were immaterial. |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

| L.     | Linkage terms of assets and liabilities on a consolidated basis |
|--------|-----------------------------------------------------------------|
|   |                                                            |
|   | December 31, 2010:                                              |

|                                                |   | NIS(CPIlinked) |   | USD(or USDlinked) |   |  Other currencies |   | NIS(not linked) |   | Non-monetary item** |   |  Total |   |
|-----------------------------------------------------|--------|----------------|--------|-------------------|--------|------------------------|--------|-----------------|--------|---------------------|--------|-------------|--------|
|                                                |   | $ thousands    |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Assets *                                            |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Cash and cash equivalents                           |   | –        |   | 51,205            |   | –                |   | 5,334           |   | –             |   | 56,539      |   |
| Restricted cash                                     |   | 65             |   | 300               |   | –                |   | –         |   | –             |   | 365         |   |
| Trade receivables                                   |   | –        |   | 2,842             |   | –                |   | 219             |   | –             |   | 3,061       |   |
| Other current assets                                |   | –        |   | 643               |   | –                |   | 1,210           |   | 2,471               |   | 4,324       |   |
| Inventories                                         |   | –        |   | –           |   | –                |   | –         |   | 5,356               |   | 5,356       |   |
| Assets held for sale                                |   | –        |   | –           |   | –                |   | –         |   | 17,211              |   | 17,211      |   |
| Investments in associates                           |   | –        |   | –           |   | –                |   | –         |   | 109,369             |   | 109,369     |   |
| Other investments (accounted as available for sale) |   | –        |   | –           |   | –                |   | –         |   | 20,221              |   | 20,221      |   |
| Property, plant and equipment, net                  |   | –        |   | –           |   | –                |   | –         |   | 2,079               |   | 2,079       |   |
| Intangible assets, net                              |   | –        |   | –           |   | –                |   | –         |   | 3,595               |   | 3,595       |   |
| Other long-term receivables                         |   | –        |   | 27,997            |   | –                |   | 221             |   | –             |   | 28,218      |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Total assets                                        |   | 65             |   | 82,987            |   | –                |   | 6,984           |   | 60,302              |   | 250,338     |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Liabilities *                                       |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Trade payables                                      |   | –        |   | 494               |   | 14                     |   | 3,348           |   | –             |   | 3,856       |   |
| Other current liabilities                           |   | 128            |   | 489               |   | –                |   | 5,482           |   | 1,931               |   | 8,030       |   |
| Long term loans from banks and others               |   | –        |   | 1,385             |   | –                |   | –         |   | –             |   | 1,385       |   |
| Convertible debentures                              |   | 3,385          |   | –           |   | –                |   | –         |   | –             |   | 3,385       |   |
| Royalty bearing government grants                   |   | –        |   | 9,156             |   | –                |   | –         |   | –             |   | 9,156       |   |
| Employee benefits, net                              |   | –        |   | –           |   | –                |   | –         |   | 134                 |   | 134         |   |
| Deferred taxes                                      |   | –        |   | –           |   | –                |   | –         |   | 4,746               |   | 4,746       |   |
| Other long term liabilities                         |   | –        |   | –           |   | –                |   | –         |   | 153                 |   | 153         |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Total liabilities                                   |   | 3,513          |   | 11,524            |   | 14                     |   | 8,830           |   | 6,964               |   | 30,845      |   |

|   |   | *  | Non-current assets and liabilities in this table include their current maturities. |
|--------|--------|----|------------------------------------------------------------------------------------|
|   |   | ** | Including non-financial items.                                                     |

----

| Elron Electronic Industries Ltd.                                    |
|---------------------------------------------------------------------|
|                                                                |
| Notes to the Consolidated Financial Statements                      |
| (USD in thousands, except for price per share and number of shares) |

|   | December 31, 2009: |
|--------|--------------------|

|                                                |   | NIS(CPIlinked) |   | USD(or USDlinked) |   |  Other currencies |   | NIS(not linked) |   | Non-monetary item** |   |  Total |   |
|-----------------------------------------------------|--------|----------------|--------|-------------------|--------|------------------------|--------|-----------------|--------|---------------------|--------|-------------|--------|
|                                                |   | $ thousands    |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Assets                                              |   |           |   |              |   |                   |   |            |   |                |   |        |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Cash and cash equivalents                           |   | –        |   | 42,742            |   | 3                      |   | 22,002          |   | –             |   | 64,747      |   |
| Restricted cash                                     |   | –        |   | –           |   | –                |   | 60              |   | –             |   | 60          |   |
| Trade receivables                                   |   | –        |   | 1,997             |   | –                |   | 87              |   | –             |   | 2,084       |   |
| Other current assets                                |   | 212            |   | 14                |   | –                |   | 1,169           |   | 1,996               |   | 3,391       |   |
| Inventories                                         |   | –        |   | –           |   | –                |   | –         |   | 3,582               |   | 3,582       |   |
| Investments in associates                           |   | –        |   | –           |   | –                |   | –         |   | 113,237             |   | 113,237     |   |
| Other investments (accounted as available for sale) |   | –        |   | –           |   | –                |   | –         |   | 14,527              |   | 14,527      |   |
| Property, plant and equipment, net                  |   | –        |   | –           |   | –                |   | –         |   | 2,991               |   | 2,991       |   |
| Intangible assets, net                              |   | –        |   | –           |   | –                |   | –         |   | 7,521               |   | 7,521       |   |
| Other long-term receivables                         |   | 106            |   | 612               |   | –                |   | 204             |   | 18                  |   | 940         |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Total assets                                        |   | 318            |   | 45,365            |   | 3                      |   | 23,522          |   | 143,872             |   | 213,080     |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Liabilities *                                       |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Trade payables                                      |   | –        |   | 587               |   | 21                     |   | 3,665           |   | –             |   | 4,273       |   |
| Other current liabilities                           |   | 419            |   | 539               |   | –                |   | 7,428           |   | 810                 |   | 9,196       |   |
| Long term loans from banks and others               |   | –        |   | 47,846            |   | –                |   | –         |   | –             |   | 47,846      |   |
| Long term loans from shareholders                   |   | 16,737         |   | –           |   | –                |   | –         |   | –             |   | 16,737      |   |
| Convertible debentures                              |   | 3,383          |   | –           |   | –                |   | –         |   | –             |   | 3,383       |   |
| Royalty bearing government grants                   |   | –        |   | 9,116             |   | –                |   | –         |   | –             |   | 9,116       |   |
| Employee benefits, net                              |   | –        |   | –           |   | –                |   | –         |   | 194                 |   | 194         |   |
| Other long term liabilities                         |   | –        |   | –           |   | –                |   | –         |   | 242                 |   | 242         |   |
|                                                |   |           |   |              |   |                   |   |            |   |                |   |        |   |
| Total liabilities                                   |   | 20,539         |   | 58,088            |   | 21                     |   | 11,093          |   | 1,246               |   | 90,987      |   |

|   |   | *  | Non-current assets and liabilities in this table include their current maturities. |
|--------|--------|----|------------------------------------------------------------------------------------|
|   |   | ** | Including non-financial items.                                                     |

----

| Elron Electronic Industries Ltd.               |
|------------------------------------------------|
|                                           |
| ANNEX TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands                      |

| A. | Details regarding investments in the consolidated financial statements as of December 31, 2010 |
|----|------------------------------------------------------------------------------------------------|

|                                  |   | Rate of holdings in equity |        | Consolidated rate of    |               | Elron’s effective rate of |          | Fully diluted consolidated |    | Elron’s fully diluted effective |         | Consolidated carrying value of investment |         | Market value of investment |
|---------------------------------------|--------|----------------------------|-------------|-------------------------|--------------------|---------------------------------|---------------|----------------------------|---------|---------------------------------------|--------------|-------------------------------------------|--------------|----------------------------|
|                                  |   |                       | holdings in |                    |   holdings in |                            |  rate of |                       | rate of |                                  | December 31, |                                      | December 31, |                       | March 9, |
|                                  |   | Elron*                     |        | RDC                     |               | equity                          |          | equity **                  |    | holdings                              |         | holdings **                               |         |  2010                 |   |  2010 |   |  2010 |
|                                  |   | %                          |        | In thousands of dollars |
|                                  |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |
| Investments in investee companies     |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |
|                                  |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Subsidiaries:                         |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Starling Advanced Communications Ltd. |   | 31.61                      |        |                    | 36.44              |                            |          | 68.05                      |    |                                  | 49.86        |                                      |         | 59.83                      |   |   | 44.62 |   |   | (2,339 | ) |   | 8,726 |   |   | 7,373 |   |
| SyncRx Ltd.                           |   | –                    |        |                    | 87.47              |                            |          | 87.47                      |    |                                  | 43.82        |                                      |         | 78.10                      |   |   | 39.13 |   |   | 2,035 |   |   | – |   |   |  – |   |
| Actysafe Ltd.                         |   | –                    |        |                    | 100.00             |                            |          | 100.00                     |    |                                  | 50.10        |                                      |         | 85.00                      |   |   | 42.59 |   |   | (67 | ) |   | – |   |   |  – |   |
| Xsights Ltd. (formerly: PaperLynx)    |   | –                    |        |                    | 99.81              |                            |          | 99.81                      |    |                                  | 50.00        |                                      |         | 99.81                      |   |   | 50.00 |   |   | – |   |   | – |   |   |  – |   |
| Wavion Inc.                           |   | 66.96                      |        |                    | –            |                            |          | 66.96                      |    |                                  | 66.96        |                                      |         | 54.91                      |   |   | 54.91 |   |   | (2,353 | ) |   | – |   |   |  – |   |
|                                  |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Associates:                           |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd.                    |   | 22.81                      |        |                    | 8.92               |                            |          | 31.78                      |    |                                  | 27.28        |                                      |         | 26.10                      |   |   | 22.43 |   |   | 104,121 |   |   | 138,565 |   |   | 179,264 |   |
|                                  |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   | – |   |   |  – |   |
| Aqwise Ltd.                           |   | 34.03                      |        |                    | –            |                            |          | 34.03                      |    |                                  | 34.03        |                                      |         | 29.95                      |   |   | 29.95 |   |   | 2,837 |   |   | – |   |   |  – |   |
| NuLens Ltd.                           |   | 34.74                      |        |                    |               |                            |          | 34.74                      |    |                                  | 34.74        |                                      |         | 30.10                      |   |   | 30.10 |   |   | 680 |   |   | – |   |   |  – |   |
| BrainsGate Ltd.                       |   | 23.28                      |        |                    | –            |                            |          | 23.28                      |    |                                  | 23.28        |                                      |         | 20.83                      |   |   | 20.83 |   |   | 477 |   |   | – |   |   |  – |   |
| Safend Ltd.                           |   | 25.61                      |        |                    | –            |                            |          | 25.61                      |    |                                  | 25.61        |                                      |         | 20.25                      |   |   | 20.25 |   |   | 10 |   |   | – |   |   |  – |   |
| Atlantium Inc.                        |   | 23.44                      |        |                    | –            |                            |          | 23.44                      |    |                                  | 23.44        |                                      |         | 20.22                      |   |   | 20.22 |   |   | 10 |   |   | – |   |   |  – |   |
| Pocared Ltd.                          |   | 31.51                      |        |                    | –            |                            |          | 31.51                      |    |                                  | 31.51        |                                      |         | 30.32                      |   |   | 30.32 |   |   | 651 |   |   | – |   |   |  – |   |
| Plymedia Inc.                         |   | 27.55                      |        |                    | –            |                            |          | 27.55                      |    |                                  | 27.55        |                                      |         | 21.84                      |   |   | 21.84 |   |   | 10 |   |   | – |   |   |  – |   |
| Kyma Medical Technologies Ltd.        |   | 27.32                      |        |                    | –            |                            |          | 27.32                      |    |                                  | 27.32        |                                      |         | 20.00                      |   |   | 20.00 |   |   | 603 |   |   | – |   |   |  – |   |
| Other investments:                    |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |
|                                  |   |                       |        |                    |               |                            |          |                       |    |                                  |         |                                      |         |                       |   |   |   |   |   |   |   |   |   |   |   |
| Notal Vision Inc.                     |   | 22.63                      |        |                    | –            |                            |          | 22.63                      |    |                                  | 22.63        |                                      |         | 17.29                      |   |   | 17.29 |   |   | 2,079 |   |   | – |   |   | – |   |
| GigOptix Inc.                         |   | 6.35                       |        |                    | –            |                            |          | 6.35                       |    |                                  | 6.35         |                                      |         | N/A                        |   |   | N/A |   |   | 2,129 |   |   | 2,129 |   |   | 955 | (#) |
| BPT Ltd.                              |   | 17.45                      |        |                    | –            |                            |          | 17.45                      |    |                                  | 17.45        |                                      |         | 15.88                      |   |   | 15.88 |   |   | 2,797 |   |   | – |   |   |  – |   |
| Jordan Valley Ltd.                    |   | 18.83                      |        |                    | –            |                            |          | 18.83                      |    |                                  | 18.83        |                                      |         | 17.56                      |   |   | 17.56 |   |   | 13,510 |   |   | – |   |   |  – |   |
| Elbit Vision Systems Ltd.             |   | 4.77                       |        |                    | –            |                            |          | 4.77                       |    |                                  | 4.77         |                                      |         | N/A                        |   |   | N/A |   |   | 200 |   |   | 200 |   |   | 266 |   |
| InnoMed Ventures L.P.                 |   | 13.92                      |        |                    | –            |                            |          | 13.92                      |    |                                  | 13.92        |                                      |         | N/A                        |   |   | N/A |   |   | 1,552 |   |   | – |   |   |  – |   |
| Enablence Technologies Inc. ***       |   | 8.02                       |        |                    | –            |                            |          | 8.02                       |    |                                  | 8.02         |                                      |         | 7.38                       |   |   | 7.38 |   |   | 15,082 | **** |   | 15,082 | **** |   | 8,078 | ****  |

| *)    | Including holding through Elron’s fully-owned subsidiaries.                                                                                                                                           |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **)   | Elron’s effective holdings include holdings by RDC multiplied by 50.10%.                                                                                                                              |
| ***)  | Includes shares held in escrow in rate of approximately1.1% holdings in equity.                                                                                                                             |
| ****) | The value of Enablence Technologies Inc.’s shares are determined by their price quoted on the TSX Venture Exchange, net of the discount element in respect of the lock-up period (see Note 3F above). |

| (#) | Represents the market value of investment after the sale of shares subsequent to the reported date (see Note 9 above). |
|-----|------------------------------------------------------------------------------------------------------------------------|

----

| Given Imaging Ltd.and its Subsidiaries ConsolidatedFinancial Statements As of and for theYear Ended December 31, 2010  |
|---------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                    | Page       |
|---------------------------------------------------------|------------|
|                                                    |       |
| Report of Independent Registered Public Accounting Firm | G - 2 |
|                                                    |       |
| Consolidated Balance Sheets                             | G - 3 |
|                                                    |       |
| Consolidated Statements of Operations                   | G - 5 |
|                                                    |       |
| Consolidated Statements of Changes in Equity            | G - 6 |
|                                                    |       |
| Consolidated Statements of Cash Flows                   | G - 7 |
|                                                    |       |
| Notes to the Consolidated Financial Statements          | G - 9 |

----

|   | Somekh Chaikin 18 Hanevi’im StreetPO Box 4484Haifa 33104 Israel | Telephone   972 4  861  4800Fax                   972 4  861  4844Internet           www.kpmg.co.il |
|--------|----------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Somekh Chaikin, a partnership registered under the Israeli PartnershipOrdinance, is the Israeli member firm of KPMG International, a Swiss cooperative. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Shee

|                                                |   |   |       |   | December 31, |   |
|-----------------------------------------------------|--------|--------|------------|--------|--------------|--------|
|                                                |   | Note   |       |   | 2010         |   |   | 2009 |   |
| Assets                                              |   |   |       |   |         |   |   |   |   |
|                                                |   |   |       |   |         |   |   |   |   |
| Current assets                                      |   |   |       |   |         |   |   |   |   |
| Cash and cash equivalents                           |   |   | 1D; 2      |   |         | $      | 34,619 |   |   | $ | 46,458 |   |
| Short-term investments                              |   |   | 1H; 5      |   |         |   | 51,973 |   |   |   | 31,736 |   |
| Accounts receivable:                                |   |   |       |   |         |   |   |   |   |   |   |   |
|  Trade, net                                    |   |   | 1E         |   |         |   | 27,862 |   |   |   | 24,742 |   |
|  Other                                         |   |   | 3          |   |         |   | 4,291 |   |   |   | 3,799 |   |
| Inventories                                         |   |   | 1F; 4      |   |         |   | 19,076 |   |   |   | 17,302 |   |
| Advances to suppliers                               |   |   |       |   |         |   | 441 |   |   |   | 534 |   |
| Deferred tax assets                                 |   |   | 1Q; 14D    |   |         |   | 1,638 |   |   |   | 2,207 |   |
| Prepaid expenses                                    |   |   |       |   |         |   | 1,585 |   |   |   | 1,036 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Total current assets                                |   |   |       |   |         |   | 141,485 |   |   |   | 127,814 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Deposits                                            |   |   |       |   |         |   | 1,212 |   |   |   | 1,062 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Assets held for employees’ severance payments |   |   | 1G; 10     |   |         |   | 6,393 |   |   |   | 4,968 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Marketable securities                               |   |   | 1H; 5      |   |         |   | 3,873 |   |   |   | 16,956 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Long-term inventory                                 |   |   | 1F; 4      |   |         |   | 5,626 |   |   |   | 6,015 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Fixed assets, less accumulated depreciation         |   |   | 1I; 6      |   |         |   | 13,709 |   |   |   | 13,843 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Deferred tax assets                                 |   |   | 1Q; 14D    |   |         |   | - |   |   |   | 192 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Intangible assets less accumulated amortization     |   |   | 1J; 7; 16  |   |         |   | 25,813 |   |   |   | 11,284 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
| Goodwill                                            |   |   | 1K; 16; 17 |   |         |   | 24,089 |   |   |   | 3,586 |   |
|                                                |   |   |       |   |         |   |   |   |   |   |   |   |
|     Total Assets                     |   |   |       |   |         | $      |   222,200 |   |   | $ | 185,720 |   |

|              |   |            |
|-------------------|--------|-----------------|
| President and CEO |   |   CFO |

----

|                                                                                        |   |   |   |   | December 31, |   |
|---------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------|--------|
|                                                                                        |   | Note   |   |   | 2010         |   |   | 2009 |   |
| Liabilities and equity                                                                      |   |   |   |   |         |   |   |   |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |
| Current liabilities                                                                         |   |   |   |   |         |   |   |   |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |
| Current installments of obligation under capital lease                                      |   |   | 8A     |   |         | $      | 168 |   |   | $ | 145 |   |
| Accounts payable:                                                                           |   |   |   |   |         |   |   |   |   |   |   |   |
|   Trade                                                                           |   |   |   |   |         |   | 9,125 |   |   |   | 6,789 |   |
|   Other                                                                           |   |   | 9      |   |         |   | 26,065 |   |   |   | 20,060 |   |
| Deferred revenue                                                                            |   |   |   |   |         |   | 788 |   |   |   | 234 |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Total current liabilities                                                                   |   |   |   |   |         |   | 36,146 |   |   |   | 27,228 |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Long-term liabilities                                                                       |   |   |   |   |         |   |   |   |   |   |   |   |
| Obligation under capital lease                                                              |   |   | 8A     |   |         |   | 244 |   |   |   | 356 |   |
| Liability in respect of employees’ severance payments                                 |   |   | 10     |   |         |   | 7,151 |   |   |   | 5,530 |   |
| Deferred tax liabilities                                                                    |   |   | 14D    |   |         |   | 5,871 |   |   |   | - |   |
| Total long-term liabilities                                                                 |   |   |   |   |         |   | 13,266 |   |   |   | 5,886 |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Total liabilities                                                                           |   |   |   |   |         |   | 49,412 |   |   |   | 33,114 |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Commitments and contingencies                                                               |   |   | 8      |   |         |   |   |   |   |   |   |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Equity                                                                                      |   |   |   |   |         |   |   |   |   |   |   |   |
| Shareholders` equity:                                                                       |   |   | 11     |   |         |   |   |   |   |   |   |   |
| Ordinary Shares, NIS 0.05 par value each                                                    |   |   |   |   |         |   |   |   |   |   |   |   |
|  (90,000,000 shares authorized as of December 31, 2010 and 2009,                       |   |   |   |   |         |   |   |   |   |   |   |   |
|  29,829,277 and 29,370,972 shares issued and fully                                     |   |   |   |   |         |   |   |   |   |   |   |   |
|  paid as of December 31, 2010 and 2009, respectively)                                  |   |   |   |   |         |   | 350 |   |   |   | 345 |   |
| Additional paid-in capital                                                                  |   |   |   |   |         |   | 194,899 |   |   |   | 182,203 |   |
| Capital reserve                                                                             |   |   |   |   |         |   | 2,051 |   |   |   | 2,166 |   |
| Accumulated other comprehensive income                                                      |   |   |   |   |         |   | 95 |   |   |   | 399 |   |
| Accumulated deficit                                                                         |   |   |   |   |         |   | (24,707 | ) |   |   | (33,185 | ) |
| Shareholders` equity                                                                        |   |   |   |   |         |   | 172,688 |   |   |   | 151,928 |   |
| Non-controlling interests                                                                   |   |   |   |   |         |   | 100 |   |   |   | 678 |   |
| Total equity                                                                                |   |   |   |   |         |   | 172,788 |   |   |   | 152,606 |   |
|                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Total liabilities,  shareholders’ equity and non-controlling interests |   |   |   |   |         | $      | 222,200 |   |   | $ | 185,720 |   |

----

peratio

|                                              |   |   |     |   | Year ended December 31, |   |
|---------------------------------------------------|--------|--------|----------|--------|-------------------------|--------|
|                                              |   | Note   |     |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Revenues                                          |   |   | 1O; 12   |   |                    | $      | 157,809 |   |   | $ | 141,763 |   |   | $ | 125,108 |   |
| Cost of revenues                                  |   |   |     |   |                    |   | (37,629 | ) |   |   | (33,145 | ) |   |   | (33,001 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                      |   |   |     |   |                    |   | 120,180 |   |   |   | 108,618 |   |   |   | 92,107 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Research and development, gross                   |   |   | 1R       |   |                    |   | (21,695 | ) |   |   | (17,842 | ) |   |   | (15,126 | ) |
| In-process research and development acquired      |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|  in a business combination                   |   |   | 16       |   |                    |   | - |   |   |   | - |   |   |   | (4,700 | ) |
|                                              |   |   |     |   |                    |   | (21,695 | ) |   |   | (17,842 | ) |   |   | (19,826 | ) |
| Government grants                                 |   |   | 1P; 8A   |   |                    |   | 1,477 |   |   |   | 1,109 |   |   |   | 1,530 |   |
| Research and development, net                     |   |   |     |   |                    |   | (20,218 | ) |   |   | (16,733 | ) |   |   | (18,296 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                               |   |   |     |   |                    |   | (67,114 | ) |   |   | (61,428 | ) |   |   | (60,902 | ) |
| General and administrative                        |   |   |     |   |                    |   | (25,138 | ) |   |   | (18,919 | ) |   |   | (19,320 | ) |
| Termination of marketing agreement                |   |   | 8C       |   |                    |   | - |   |   |   | - |   |   |   | 5,443 |   |
| Other, net                                        |   |   | 6; 7; 17 |   |                    |   | (759 | ) |   |   | (1,220 | ) |   |   | (867 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Total operating expenses                          |   |   |     |   |                    |   | (113,229 | ) |   |   | (98,300 | ) |   |   | (93,942 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit (loss)                           |   |   |     |   |                    |   | 6,951 |   |   |   | 10,318 |   |   |   | (1,835 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Financial income, net                             |   |   | 13       |   |                    |   | 2,599 |   |   |   | 1,584 |   |   |   | 4,004 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Profit before taxes on income                     |   |   |     |   |                    |   | 9,550 |   |   |   | 11,902 |   |   |   | 2,169 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                      |   |   | 1Q; 14   |   |                    |   | (1,362 | ) |   |   | 1,542 |   |   |   | (250 | ) |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net Profit                                        |   |   |     |   |                    |   | 8,188 |   |   |   | 13,444 |   |   |   | 1,919 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net loss attributable to non-controlling interest |   |   |     |   |                    |   | 290 |   |   |   | 891 |   |   |   | 2,087 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net profit attributable to shareholders           |   |   |     |   |                    | $      | 8,478 |   |   | $ | 14,335 |   |   | $ | 4,006 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share:                               |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Basic Earnings per Ordinary Share                 |   |   | 1M       |   |                    | $      | 0.29 |   |   | $ | 0.49 |   |   | $ | 0.14 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Diluted Earnings per Ordinary Share               |   |   | 1M       |   |                    | $      | 0.28 |   |   | $ | 0.47 |   |   | $ | 0.13 |   |
|                                              |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary               |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|  Shares used to compute basic Earnings       |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|  per Ordinary Share                          |   |   | 1M       |   |                    |   | 29,670,842 |   |   |   | 29,281,897 |   |   |   | 29,254,035 |   |
| Weighted average number of Ordinary               |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|  Shares used to compute diluted Earnings     |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|  per Ordinary Share                          |   |   | 1M       |   |                    |   | 30,525,654 |   |   |   | 30,423,162 |   |   |   | 30,798,360 |   |

----

Changes in Equity

|                                                                |   | Company’s shareholders |       |   |    |   |   |              |   |
|---------------------------------------------------------------------|--------|------------------------------|------------|--------|---------|--------|--------|-------------------|--------|
|                                                                |   |                         |       |   |    |   |   |              |   |   |   |   |   | AccumulatedOtherComprehensive |   |   |   |   |   |   |   |   |   |   |
|                                                                |   |                         |       |   |    |   |   | AdditionalPaid-In |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                |   |                         |       |   |    |   |   |              |   | Capital |   |   |   |   | Accumulated |   |   | Non-controlling |   |   |   |   |
|                                                                |   | Ordinary shares              |       |   | Capital |   |   | Reserve           |   |   | Income (loss) |   |   | Deficit |   |   | interests |   |   | Total |   |
|                                                                |   | Shares                       |       |   | Amount  |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2008                                       |   |                         | 29,241,785 |   |    | $      | 343    |              |   | $ | 166,813 |   |   | $ | 2,166 |   |   |   | - |   |   | $ | (35,727 | ) |   | $ | 1,996 |   |   | $ | 135,591 |   |
|                                                                |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2008:                                        |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                           |   |                         | 16,000     |   |    |   | *      |              |   |   | 252 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 252 |   |
| Stock based compensation                                            |   |                         | -          |   |    |   | -      |              |   |   | 6,918 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,918 |   |
| Change in unrealized loss on available for sale securities          |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | (600 | ) |   |   | - |   |   |   | - |   |   |   | (600 | ) |
| Issuance of shares with respect to non-controlling interest         |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,084 |   |   |   | 2,084 |   |
| Net profit                                                          |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,006 |   |   |   | (2,087 | ) |   |   | 1,919 |   |
| Balance as of December 31, 2008                                     |   |                         | 29,257,785 |   |    |   | 343    |              |   |   | 173,983 |   |   |   | 2166 |   |   |   | (600 | ) |   |   | (31,721 | ) |   |   | 1,993 |   |   |   | 146,164 |   |
|                                                                |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2009:                                        |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                           |   |                         | 113,187    |   |    |   | 2      |              |   |   | 952 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 954 |   |
| Stock based compensation                                            |   |                         | -          |   |    |   | -      |              |   |   | 7,268 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 7,268 |   |
| Change in unrealized income on   available for sale securities |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | 999 |   |   |   | - |   |   |   | - |   |   |   | 999 |   |
| Dividend distribution                                               |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (15,799 | ) |   |   | - |   |   |   | (15,799 | ) |
| Change in noncontrolling interest                                   |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (424 | ) |   |   | (424 | ) |
| Net profit                                                          |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 14,335 |   |   |   | (891 | ) |   |   | 13,444 |   |
| Balance as of December 31, 2009                                     |   |                         | 29,370,972 |   |    |   | 345    |              |   |   | 182,203 |   |   |   | 2,166 |   |   |   | 399 |   |   |   | (33,185 | ) |   |   | 678 |   |   |   | 152,606 |   |
|                                                                |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2010:                                        |   |                         |       |   |    |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                           |   |                         | 458,305    |   |    |   | 5      |              |   |   | 4,214 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,219 |   |
| Stock based compensation                                            |   |                         |       |   |    |   |   |              |   |   | 8,482 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8,482 |   |
| Change in unrealized income on available for sale securities        |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | (304 | ) |   |   | - |   |   |   | - |   |   |   | (304 | ) |
| Acquisition of non-controlling interest                             |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | (115 | ) |   |   | - |   |   |   | - |   |   |   | (288 | ) |   |   | (403 | ) |
| Net profit                                                          |   |                         | -          |   |    |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,478 |   |   |   | (290 | ) |   |   | 8,188 |   |
| Balance as of December 31, 2010                                     |   | $                            | 29,829,277 |   |    | $      | 350    |              |   | $ | 194,899 |   |   | $ | 2,051 |   |   | $ | 95 |   |   | $ | (24,707 | ) |   | $ | 100 |   |   | $ | 172,788 |   |

----

Cash 

|                                                                                                                    |   |  Year ended December 31, |    |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                                    |   | 2010                          |    |   | 2009 |   |   | 2008 |   |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |
| Cash flows from operating activities:                                                                                   |   |                          |    |   |   |   |   |   |   |
| Net profit                                                                                                              |   | $                             | 8,188   |   |   | $ | 13,444 |   |   | $ | 1,919 |   |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |   |
| Adjustments required to reconcile net profit to net cash provided by operating activities:                              |   |                          |    |   |   |   |   |   |   |   |   |   |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                                           |   |                          | 7,662   |   |   |   | 6,096 |   |   |   | 5,183 |   |
| In-process research and development                                                                                     |   |                          | -       |   |   |   | - |   |   |   | 4,700 |   |
| Goodwill impairment                                                                                                     |   |                          | 20      |   |   |   | 483 |   |   |   | 406 |   |
| Deferred tax assets                                                                                                     |   |                          | 761     |   |   |   | (1,221 | ) |   |   | 172 |   |
| Deferred tax liabilities                                                                                                |   |                          | (888    | ) |   |   | - |   |   |   | - |   |
|     Stock based  compensation                                                                  |   |                          | 8,482   |   |   |   | 7,268 |   |   |   | 6,918 |   |
|     Loss from disposal of long term assets                                                               |   |                          | 739     |   |   |   | 714 |   |   |   | 473 |   |
| Other                                                                                                                   |   |                          | 304     |   |   |   | (144 | ) |   |   | 148 |   |
| Decrease (increase) in accounts receivable – trade                                                           |   |                          | 560     |   |   |   | (3,069 | ) |   |   | 1,642 |   |
| Decrease (increase) in other accounts receivable                                                                        |   |                          | (488    | ) |   |   | 863 |   |   |   | 5,723 |   |
| Decrease (increase) in prepaid expenses                                                                                 |   |                          | (23     | ) |   |   | 595 |   |   |   | (342 | ) |
| Decrease (increase) in advances to suppliers                                                                            |   |                          | 93      |   |   |   | 3,006 |   |   |   | (3,350 | ) |
| Decrease (increase) in inventories                                                                                      |   |                          | 2,331   |   |   |   | (4,386 | ) |   |   | (2,971 | ) |
| Increase (decrease) in accounts payable                                                                                 |   |                          | 3,389   |   |   |   | 1,819 |   |   |   | (3,287 | ) |
| Increase (decrease) in deferred revenue                                                                                 |   |                          | 554     |   |   |   | (1,289 | ) |   |   | (7,856 | ) |
| Net cash provided by operating activities                                                                               |   |                          | 31,684  |   |   |   | 24,179 |   |   |   | 9,478 |   |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                   |   |                          |    |   |   |   |   |   |   |   |   |   |
| Purchase of fixed assets and intangible assets                                                                          |   |                          | (5,056  | ) |   |   | (4,794 | ) |   |   | (6,300 | ) |
| Purchase of fixed assets, intangible assets, and goodwill in a       business combination |   |                          | -       |   |   |   | - |   |   |   | (16,660 | ) |
| Deposits, net                                                                                                           |   |                          | (6      | ) |   |   | 34 |   |   |   | (192 | ) |
| Acquisition of Sierra, net of cash acquired (1)                                                                         |   |                          | (34,709 | ) |   |   |   |   |   |   |   |   |
| Proceeds from sale and maturity of marketable securities and      short term investments       |   |                          | 29,352  |   |   |   | 38,085 |   |   |   | 67,743 |   |
| Proceeds from sales of fixed assets                                                                                     |   |                          | -       |   |   |   | - |   |   |   | 61 |   |
| Investments in marketable securities                                                                                    |   |                          | (36,968 | ) |   |   | (27,410 | ) |   |   | (61,986 | ) |
| Net cash provided by (used in) investing activities                                                                     |   |                          | (47,387 | ) |   |   | 5,915 |   |   |   | (17,334 | ) |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                   |   |                          |    |   |   |   |   |   |   |   |   |   |
| Principal payments on capital lease obligation                                                                          |   |                          | (143    | ) |   |   | (131 | ) |   |   | (120 | ) |
| Proceeds from the issuance of Ordinary Shares                                                                           |   |                          | 4,219   |   |   |   | 954 |   |   |   | 252 |   |
| Dividend distribution                                                                                                   |   |                          | -       |   |   |   | (15,799 | ) |   |   | - |   |
| Purchase of shares from a non-controlling shareholder in a subsidiary                                                   |   |                          | (403    | ) |   |   | (382 | ) |   |   | - |   |
| Issuance of shares by a consolidated company                                                                            |   |                          | -       |   |   |   | - |   |   |   | 2,288 |   |
| Net cash provided by (used in) financing activities                                                                     |   |                          | 3,673   |   |   |   | (15,358 | ) |   |   | 2,420 |   |
|                                                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                                                            |   |                          | 191     |   |   |   | 25 |   |   |   | 30 |   |
| Increase (decrease) in cash and cash equivalents                                                                        |   |                          | (11,839 | ) |   |   | 14,761 |   |   |   | (5,406 | ) |
| Cash and cash equivalents at beginning of year                                                                          |   |                          | 46,458  |   |   |   | 31,697 |   |   |   | 37,103 |   |
| Cash and cash equivalents at end of year                                                                                |   | $                             | 34,619  |   |   | $ | 46,458 |   |   | $ | 31,697 |   |

|                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|     Supplementary cash flow information: |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Income taxes paid                                       |   | $      | 234    |   |   | $      | 877    |   |   | $      | 259    |   |

----

|                                                  |   | Year ended   |    |
|-------------------------------------------------------|--------|--------------|---------|
|                                                  |   | December 31, |    |
|                                                  |   | 2010         |    |
| Working capital (excluding cash and cash equivalents) |   | $            | (3,165  | )  |
| Deposits                                              |   |         | (65     | ) |
| Fixed assets, net                                     |   |         | (533    | ) |
| Intangible assets (including Goodwill)                |   |         | (37,714 | ) |
| Deferred tax liabilities                              |   |         | 6,759   |   |
| Other long-term liabilities                           |   |         | 9       |   |
|                                                  |   |         |    |   |
|                                                  |   | $            | (34,709 | ) |

----

Financial Statements

|   | • | a proprietary software, known as RAPID, for downloading, processing and analyzing recorded data. |
|--------|---------|--------------------------------------------------------------------------------------------------|

|   | In 2001, the Company commenced marketing the Given System with the PillCam SB capsule for visualizing and detecting disorders of the small bowel.  PillCam SB is cleared for marketing in the United States, the European Union and Japan, which are the Company’s principal markets. In November 2004, the Company began marketing and sale of the PillCam ESO capsule for visualization of the esophagus. This capsule is cleared for marketing in all principal markets, except Japan.  In the second half of 2007, the Company began selling the first generation of its PillCam COLON capsule in Europe following receipt of the CE mark for this capsule in late 2009. The European Union is currently the only major market with clearance to market and sell the PillCam COLON capsule. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2008, the Company acquired the Bravo pH monitoring business from Medtronic, Inc. The Bravo pH monitoring system is the only wireless, catheter-free pH test for Gastro Esophageal Reflux Disease, or GERD, and uses a disposable capsule temporarily placed in the esophagus that measures pH levels and transmits the data to an external receiver. pH testing is considered the standard test for diagnosing GERD. As part of this acquisition, the Company acquired 100% of the shares of Endonetics, Inc., which owns a number of intellectual property assets related to the Bravo business and is not an operating entity (for more details see Note 16A). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On April 1, 2010, the Company acquired privately-held Sierra Scientific Instruments, (“Sierra”), for approximately $35 million in cash. Sierra is a leading provider of specialty diagnostic devices for the gastrointestinal tract.  Sierra’s primary business is the development, manufacture and sale of high-resolution pressure systems, also known as high resolution manometry, for the diagnosis of motility disorders within the GI tract. Sierra’s high resolution manometry systems are sold under the name ManoScan 360.  Since sales began in 2004, Sierra has produced and installed ManoScanTM systems world-wide and supported numerous clinical procedures. Sierra also markets and sells catheter-based pH and impedance monitoring systems. As part of the acquisition, the Company gained holding in 100% of the shares of Sierra’s subsidiary, a Vietnamese company, which manufactures catheters as a contract manufacturer to the Company and third party users (for more details see Note 16C). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|            |   | Year ended December 31, |   |
|-----------------|--------|-------------------------|--------|
|            |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Opening balance |   | $                       | 252    |   |   | $ | 210 |   |   | $ | 329 |   |
| Provision       |   |                    | 362    |   |   |   | 265 |   |   |   | 10 |   |
| Write-offs      |   |                    | (319   | ) |   |   | (223 | ) |   |   | (129 | ) |
|            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Closing balance |   | $                       | 295    |   |   | $ | 252 |   |   | $ | 210 |   |

|   | Inventory that is not expected to be consumed in the subsequent year, based upon sales forecast, is classified as non-current (for more details see Note 4). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                 |   | %      |   |
|--------------------------------------|--------|--------|--------|
| Computers and software               |   |   | 33     |   |
| Instruments and laboratory equipment |   |   | 15     |   |
| Leasehold improvements               |   |   | 10     |   |
| Motor vehicles                       |   |   | 15     |   |
| Machinery and equipment              |   |   | 15     |   |
| Communication equipment              |   |   | 15     |   |
| Office furniture and equipment       |   |   | 10-15  |   |

----

|   | L. | Stock compensation plans |
|--------|----|--------------------------|

----

|                                                   |   | Year ended December 31, |       |
|--------------------------------------------------------|--------|-------------------------|------------|
|                                                   |   | 2010                    |       |   | 2009 |   |   | 2008 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |
| Net profit attributable to Ordinary Shares             |   | $                       | 8,478      |   |   | $ | 14,335 |   |   | $ | 4,006 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstanding |   |                    |       |   |   |   |   |   |   |   |   |   |
|  used in basic earnings per Ordinary Share        |   |                    |       |   |   |   |   |   |   |   |   |   |
|  calculation                                      |   |                    | 29,670,842 |   |   |   | 29,281,897 |   |   |   | 29,254,035 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Add assumed exercise of outstanding dilutive           |   |                    |       |   |   |   |   |   |   |   |   |   |
|  potential Ordinary Shares                        |   |                    | 854,812    |   |   |   | 1,141,265 |   |   |   | 1,544,325 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstanding |   |                    |       |   |   |   |   |   |   |   |   |   |
|  used in diluted earnings per Ordinary Share      |   |                    |       |   |   |   |   |   |   |   |   |   |
|  calculation                                      |   |                    | 30,525,654 |   |   |   | 30,423,162 |   |   |   | 30,798,360 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Basic earnings per Ordinary Share                      |   | $                       | 0.29       |   |   | $ | 0.49 |   |   | $ | 0.14 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Diluted earnings per Ordinary Share                    |   | $                       | 0.28       |   |   | $ | 0.47 |   |   | $ | 0.13 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Number of equity awards excluded from the              |   |                    |       |   |   |   |   |   |   |   |   |   |
|  diluted earnings per share calculation           |   |                    |       |   |   |   |   |   |   |   |   |   |
|  because of anti-dilutive effect                  |   |                    | 4,763,410  |   |   |   | 4,849,070 |   |   |   | 5,461,047 |   |

----

|   | Taxes collected from customers and remitted to governmental authorities are presented in the financial statements on a net basis. For sales contracts, which include a Post Contract Customer Support (“PCS”) component, revenues allocated to PCS in accordance with ASC Subtopic 605-25, “Revenue Recognition - Multiple Element Arrangements”, are deferred and recognized ratably over the term of the support period. In 2010, the Company has elected to early adopt recently issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, and therefore for multi-element arrangements that include tangible products that contain software that is essential to the tangible product’s functionality and undelivered software elements that relate to the tangible product’s essential software, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”).The Company routinely evaluates its products for inclusion of any embedded software that is more than incidental thereby requiring consideration of ASC Subtopic 985-605, “Software Revenue Recognition”.  Based on such evaluation, the Company had concluded that none of its products have such embedded software. In 2010, the Company has elected to early adopt recently issued ASU 2009-14, “Software (Topic 985)”, which amends ASC Subtopic 985-605 to exclude from its scope tangible products which contain both software and nonsoftware components that function together to deliver a tangible product’s essential functionality. The adoption of ASU 2009-13 and ASU 2009-14 did not have a material effect on the financial position, results of operations or cash flows of the Company. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company accounts for multiple element arrangements that consist only of software or software-related products, including PCS, in accordance with ASC Subtopic 985-605. For such arrangements, revenue that includes multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | P. | Government-Sponsored Research and Development |
|--------|----|-----------------------------------------------|

----

----

----

----

|                               |   | December 31, |   |
|------------------------------------|--------|--------------|--------|
|                               |   | 2010         |   |   | 2009 |   |
|                               |   |         |   |   |   |   |
| Denominated in U.S. dollars        |   | $            | 25,471 |   |   | $ | 30,515 |   |
| Denominated in New Israeli Shekels |   |         | 2,251  |   |   |   | 3,058 |   |
| Denominated in Euros               |   |         | 3,653  |   |   |   | 4,920 |   |
| Denominated in Japanese Yen        |   |         | 2,372  |   |   |   | 6,195 |   |
| Denominated in other currencies    |   |         | 872    |   |   |   | 1,770 |   |
|                               |   |         |   |   |   |   |   |   |
|                               |   | $            | 34,619 |   |   | $ | 46,458 |   |

|                    |   | December 31, |   |
|-------------------------|--------|--------------|--------|
|                    |   | 2010         |   |   | 2009 |   |
| Government institutions |   | $            | 2,514  |   |   | $ | 2,397 |   |
| Other                   |   |         | 1,777  |   |   |   | 1,402 |   |
|                    |   |         |   |   |   |   |   |   |
|                    |   | $            | 4,291  |   |   | $ | 3,799 |   |

|                         |   | December 31, |   |
|------------------------------|--------|--------------|--------|
|                         |   | 2010         |   |   | 2009 |   |
| Raw materials and components |   | $            | 12,782 |   |   | $ | 11,736 |   |
| Work-in-progress             |   |         | 4,973  |   |   |   | 6,012 |   |
| Finished goods               |   |         | 6,947  |   |   |   | 5,569 |   |
|                         |   |         |   |   |   |   |   |   |
|                         |   | $            | 24,702 |   |   | $ | 23,317 |   |

|               |   | December 31, |   |
|--------------------|--------|--------------|--------|
|               |   | 2010         |   |   | 2009 |   |
| Current assets     |   |         | 19,076 |   |   | $ | 17,302 |   |
| Non-current assets |   |         | 5,626  |   |   |   | 6,015 |   |
|               |   | $            | 24,702 |   |   | $ | 23,317 |   |

----

|   | A. | Short-term investments and marketable securities |
|--------|----|--------------------------------------------------|

|                          |   | December 31, |   |
|-------------------------------|--------|--------------|--------|
|                          |   | 2010         |   |   | 2009 |   |
|                          |   |         |   |   |   |   |
| Available-for-sale securities |   | $            | 10,058 |   |   | $ | 7,789 |   |
| Trading securities            |   |         | 1,123  |   |   |   | 14,058 |   |
| Deposits                      |   |         | 40,792 |   |   |   | 9,889 |   |
| Total                         |   | $            | 51,973 |   |   | $ | 31,736 |   |

----

|                                       |   |     |   |   | Gross         |   |   | Gross            |   |   |       |   |
|--------------------------------------------|--------|----------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------|--------|
|                                       |   | Carrying |   |   | unrealized    |   |   | unrealized       |   |   |       |   |
|                                       |   | amount   |   |   | holding gains |   |   | holding (losses) |   |   | Fair value |   |
| At December 31, 2010                       |   |     |   |   |          |   |   |             |   |   |       |   |
| U.S government or government agencies |   | $        | 2,021  |   |          | $      | 12     |             |   | $      | -          |   |   | $ | 2,033 |   |
| Corporate debt securities                  |   |     | 11,814 |   |          |   | 102    |             |   |   | (18        | )      |   |   | 11,898 |   |
| Total At December 31, 2010                 |   | $        | 13,835 |   |          | $      | 114    |             |   | $      | (18        | )      |   | $ | 13,931 |   |

|                                  |   |     |   |   | Gross         |   |   | Gross            |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------|--------|
|                                  |   | Carrying |   |   | unrealized    |   |   | unrealized       |   |   |       |   |
|                                  |   | amount   |   |   | holding gains |   |   | holding (losses) |   |   | Fair value |   |
| At December 31, 2009                  |   |     |   |   |          |   |   |             |   |   |       |   |
| U.S government or government agencies |   | $        | 5,318  |   |          | $      | 54     |             |   | $      | -          |   |   | $ | 5,372 |   |
| Corporate debt securities             |   |     | 19,028 |   |          |   | 346    |             |   |   | (1         | )      |   |   | 19,373 |   |
| Total At December 31, 2009            |   | $        | 24,346 |   |          | $      | 400    |             |   | $      | (1         | )      |   | $ | 24,745 |   |

|                                  |   | Carrying |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|------------|--------|
|                                  |   | amount   |   |   | Fair value |   |
| Current maturities                    |   | $        | 10,035 |   |       | $      | 10,058 |   |
| Due after one year through five years |   |     | 3,800  |   |       |   | 3,873 |   |
|                                  |   | $        | 13,835 |   |       | $      | 13,931 |   |

----

|                      |   | More than 12 months |   |   | Total      |   |
|---------------------------|--------|---------------------|--------|--------|------------|--------|
|                      |   | Unrealized          |   |   |       |   |   | Unrealized |   |   |   |   |
|                      |   | losses              |   |   | Fair value |   |   | losses |   |   | Fair value |   |
| Corporate debt securities |   | $                   | 18     |   |       | $      | 1,981 |   |   | $ | 18 |   |   | $ | 1,981 |   |
|                      |   | $                   | 18     |   |       | $      | 1,981 |   |   | $ | 18 |   |   | $ | 1,981 |   |

|                                                |   | December 31, |    |
|-----------------------------------------------------|--------|--------------|---------|
|                                                |   | 2010         |    |   | 2009 |   |
| Computers and software                              |   | $            | 11,368  |   |   | $ | 9,630 |   |
| Instruments and laboratory equipment                |   |         | 1,413   |   |   |   | 1,343 |   |
| Leasehold improvements                              |   |         | 5,514   |   |   |   | 4,932 |   |
| Motor vehicles                                      |   |         | 170     |   |   |   | 233 |   |
| Machinery and equipment                             |   |         | 17,561  |   |   |   | 16,558 |   |
| Communication equipment                             |   |         | 504     |   |   |   | 480 |   |
| Office furniture and equipment                      |   |         | 2,199   |   |   |   | 1,951 |   |
|                                                |   |         |    |   |   |   |   |   |
| Fixed assets, at cost                               |   |         | 38,729  |   |   |   | 35,127 |   |
|                                                |   |         |    |   |   |   |   |   |
| Accumulated depreciation                            |   |         | (25,020 | ) |   |   | (21,284 | ) |
|                                                |   |         |    |   |   |   |   |   |
| Fixed assets at cost, less accumulated depreciation |   | $            | 13,709  |   |   | $ | 13,843 |   |

----

|                                                              |   | December 31, |   |
|-------------------------------------------------------------------|--------|--------------|--------|
|                                                              |   | 2010         |   |   | 2009 |   |
| Capitalized patents and trademarks                                |   | $            | 7,600  |   |   | $ | 7,212 |   |
| Web site development                                              |   |         | 1,453  |   |   |   | 1,396 |   |
| Software development                                              |   |         | 647    |   |   |   | 647 |   |
| IPR&D  acquired in a business combination (note 16) |   |         | 5,306  |   |   |   | - |   |
| Patents and technology acquired in a business                     |   |         |   |   |   |   |   |   |
|   combination (note 16)                                      |   |         | 12,562 |   |   |   | 5,000 |   |
| Trademarks and trade names acquired in a                          |   |         |   |   |   |   |   |   |
|   business combination (note 16)                             |   |         | 4,020  |   |   |   | 1,400 |   |
| Customer relationships acquired in a business                     |   |         |   |   |   |   |   |   |
|   combination (note 16)                                      |   |         | 2,891  |   |   |   | 1,800 |   |
|                                                              |   |         |   |   |   |   |   |   |
| Intangible assets, at cost                                        |   |         | 34,479 |   |   |   | 17,455 |   |
|                                                              |   |         |   |   |   |   |   |   |
| Accumulated amortization                                          |   |         | (8,666 | ) |   |   | (6,171 | ) |
|                                                              |   |         |   |   |   |   |   |   |
| Intangible assets, less accumulated amortization                  |   | $            | 25,813 |   |   | $ | 11,284 |   |

----

|                |   | Capital leases |   |   | Operating leases |   |
|---------------------|--------|----------------|--------|--------|------------------|--------|
| 2011                |   | $              | 172    |   |             | $      | 4,977 |   |
| 2012                |   |           | 172    |   |             |   | 4,420 |   |
| 2013                |   |           | 149    |   |             |   | 3,456 |   |
| 2014                |   |           | -      |   |             |   | 2,667 |   |
| 2015 and thereafter |   |           | -      |   |             |   | 2,221 |   |
|                |   |           |   |   |             |   |   |   |
|                |   | $              | 493    |   |             | $      | 17,741 |   |

----

|   | (1) | The Company has agreements with a number of single source suppliers for some of the components necessary for the production of its products. For example, the Company has sole suppliers for the imaging sensor and transmitter of its PillCam capsules and the data recorder unit of the Bravo system. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The Company’s annual commitments under agreements with single source and other suppliers for the next 5 years are as follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------|

| 2011            |   | $      | 5,694  |   |
|-----------------|--------|--------|--------|--------|
| 2012            |   |   | 260    |   |
| 2013            |   |   | 817    |   |
| 2014            |   |   | 1,251  |   |
| 2015 and beyond |   |   | 8,922  |   |
|            |   | $      | 16,994 |   |

----

|                              |   | December 31, |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | 2010         |   |   | 2009 |   |
| Government institutions           |   | $            | 4,983  |   |   | $ | 3,584 |   |
| Liabilities relating to employees |   |         | 14,385 |   |   |   | 11,985 |   |
| Advances from customers           |   |         | 109    |   |   |   | 62 |   |
| Warranty                          |   |         | 340    |   |   |   | 57 |   |
| Commissions                       |   |         | 1,497  |   |   |   | 975 |   |
| Accrued expenses                  |   |         | 4,751  |   |   |   | 3,397 |   |
|                              |   |         |   |   |   |   |   |   |
|                              |   | $            | 26,065 |   |   | $ | 20,060 |   |

----

|   | B. | Employees’ and non employees’ stock options |
|--------|----|---------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont’d) |
|--------|----|------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|   | · | The 2009 Plan permits the grant of “Other Awards” defined as a right or other interest granted to a plan participant that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | If the employment of a particular holder of outstanding awards is terminated by the Company or by such holder in circumstances of “constructive termination” (as defined in the 2009 Plan), as of or during the 12-month period following an acquisition or merger, all unvested awards of such holder (as opposed to awards that are scheduled to vest within two years of such acquisition or merger) will be automatically accelerated and exercisable, subject to certain adjustments and exceptions; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In the event the Company distributes a dividend in cash and the record date for such distribution is subsequent to the date of grant of a stock option but prior to the exercise or other termination of such stock option, the board or compensation committee administering the 2009 Plan may in its discretion determine that the exercise price of all or any portion of such outstanding stock option shall be reduced by the dividend amount, net of applicable tax. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|   | 2. | Risk free average interest rate of 2.59% and 1.72% for the years ended December 31, 2008 and 2009, respectively, which represents the risk free rate of US$ zero - coupon U.S Government Bonds. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Weighted average expected life of 3.41 and 4.32 years for the years ended December 31, 2008 and 2009, respectively, which represents the period for which the options granted are expected to be outstanding. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Expected average volatility of 35.06% and 44.54% for the years ended December 31, 2008 and 2009 respectively, which represents a weighted average standard deviation rate for the price of the Company's Ordinary Shares in the NASDAQ National Market. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|             |   | Options outstanding as of |      |
|------------------|--------|---------------------------|-----------|
|             |   | December 31, 2010         |      |
|             |   |                      |      |   | Weighted |   |
|             |   |                      |      |   | average |   |
|             |   |                      |      |   | remaining |   |
|             |   | Number                    |      |   | contractual life |   |
| Exercise prices  |   | outstanding at            |      |   | (in years) |   |
|             |   |                      |      |   |   |   |
|  $1 - $10   |   |                      | 976,986   |   |   |   | 3.68 |   |
|  $10.01-$20 |   |                      | 2,354,500 |   |   |   | 3.06 |   |
|  $20.01-$30 |   |                      | 2,075,704 |   |   |   | 2.65 |   |
|  $30.01-$40 |   |                      | 499,440   |   |   |   | 3.90 |   |
|             |   |                      | 5,906,630 |   |   |   |   |   |

|             |   | Options outstanding as of |      |
|------------------|--------|---------------------------|-----------|
|             |   | December 31, 2009         |      |
|             |   |                      |      |   | Weighted |   |
|             |   |                      |      |   | average |   |
|             |   |                      |      |   | remaining |   |
|             |   | Number                    |      |   | contractual life |   |
| Exercise prices  |   | outstanding at            |      |   | (in years) |   |
|             |   |                      |      |   |   |   |
|  $1 - $10   |   |                      | 1,256,467 |   |   |   | 4.19 |   |
|  $10.01-$20 |   |                      | 2,647,138 |   |   |   | 3.91 |   |
|  $20.01-$30 |   |                      | 2,144,907 |   |   |   | 3.51 |   |
|  $30.01-$40 |   |                      | 499,440   |   |   |   | 4.90 |   |
|             |   |                      | 6,547,952 |   |   |   |   |   |

|                         |   |  Number of shares |      |   | Weighted averageexercise price |   |   | Weighted averagegrant date fair value |   |
|------------------------------|--------|------------------------|-----------|--------|--------------------------------|--------|--------|---------------------------------------|--------|
|                         |   |                   |      |   |                           |   |
| Balance at January 1, 2009   |   |                   | 5,806,139 |   |                           |   |   |                                  |   |   |
| Granted                      |   |                   | 1,096,350 |   |                           | $      | 9.14   |                                  |   | $ | 3.48 |   |
| Forfeited                    |   |                   | (241,350  | )      |                           |   | 18.61  |                                  |   |   | 7.45 |   |
| Exercised                    |   |                   | (113,187  | )      |                           |   | 8.43   |                                  |   |   | 4.98 |   |
| Balance at December 31, 2009 |   |                   | 6,547,952 |   |                           |   |   |                                  |   |   |   |   |
| Granted                      |   |                   | -         |   |                           |   | -      |                                  |   |   | - |   |
| Forfeited                    |   |                   | (183,017  | )      |                           |   | 14.85  |                                  |   |   | 6.31 |   |
| Exercised                    |   |                   | (458,305  | )      |                           |   | 9.35   |                                  |   |   | 6.65 |   |
| Balance at December 31, 2010 |   |                   | 5,906,630 |   |                           |   |   |                                  |   |   |   |   |

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|                                  |   |             |       |   | Weighted average      |   |
|---------------------------------------|--------|------------------|------------|--------|-----------------------|--------|
| Non-vested options                    |   | Number of shares |       |   | grant date fair value |   |
| Balance at January  1, 2010 |   |             | 2,441,301  |   |                  |   | 6.20 |   |
| Granted                               |   |             | -          |   |                  |   | - |   |
| Vested                                |   |             | (1,026,143 | )      |                  |   | 7.46 |   |
| Forfeited                             |   |             | (126,062   | )      |                  |   | 5.32 |   |
| Balance at December 31, 2010          |   |             | 1,289,096  |   |                  |   | 5.29 |   |

|                                  |   |             |       |   | Weighted average      |   |
|---------------------------------------|--------|------------------|------------|--------|-----------------------|--------|
| Non-vested options                    |   | Number of shares |       |   | grant date fair value |   |
| Balance at January  1, 2009 |   |             | 2,520,376  |   |                  | $      | 8.20 |   |
| Granted                               |   |             | 1,096,350  |   |                  |   | 3.48 |   |
| Vested                                |   |             | (1,004,525 | )      |                  |   | 8.06 |   |
| Forfeited                             |   |             | (170,900   | )      |                  |   | 7.33 |   |
| Balance at December 31, 2009          |   |             | 2,441,301  |   |                  | $      | 6.20 |   |

|                               |   |             |    |   | Weighted average     |   |
|------------------------------------|--------|------------------|---------|--------|----------------------|--------|
| Non-vested restricted shares units |   | Number of shares |    |   | grant datefair value |   |
| Balance at January 1, 2010         |   |             | 0       |   |                 |   |   |
| Granted                            |   |             | 538,966 |   |                 | $      | 12.89 |   |
| Vested                             |   |             | 0       |   |                 |   | 0.00 |   |
| Forfeited                          |   |             | (5,000  | )      |                 |   | 15.88 |   |
| Exercised                          |   |             | 0       |   |                 |   | 0.00 |   |
| Balance at December 31, 2010       |   |             | 533,966 |   |                 |   | 12.86 |   |

----

|   | B. | Employees’ and non employees’ stock options (cont’d) |
|--------|----|------------------------------------------------------------------------|

|                                |   | Year ended December 31, |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Research and development costs      |   | $                       | 428    |   |   | $ | 257 |   |   | $ | 307 |   |
| Selling and marketing expenses      |   |                    | 1,557  |   |   |   | 1,619 |   |   |   | 1,756 |   |
| General and administrative expenses |   |                    | 6,497  |   |   |   | 5,392 |   |   |   | 4,855 |   |
|                                |   | $                       | 8,482  |   |   | $ | 7,268 |   |   | $ | 6,918 |   |

|                                 |   | Year ended December 31, |    |
|--------------------------------------|--------|-------------------------|---------|
|                                 |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| Workstations, recorders and software |   | $                       | 8,120   |   |   | $ | 11,523 |   |   | $ | 14,523 |   |
| PillCam SB capsule                   |   |                    | 110,189 |   |   |   | 110,371 |   |   |   | 103,005 |   |
| PillCam ESO capsule                  |   |                    | 539     |   |   |   | 702 |   |   |   | 1,213 |   |
| PillCam Colon capsule                |   |                    | 1,291   |   |   |   | 1,021 |   |   |   | 1,465 |   |
| Patency capsules and scanners        |   |                    | 666     |   |   |   | 718 |   |   |   | 662 |   |
| Bravo pH monitoring products         |   |                    | 18,603  |   |   |   | 14,985 |   |   |   | 884 |   |
| Sierra manometry and catheters       |   |                    | 17,913  |   |   |   | - |   |   |   | - |   |
| Services                             |   |                    | 488     |   |   |   |  2,443 |   |   |   |  3,356 |   |
|                                 |   | $                       | 157,809 |   |   | $ | 141,763 |   |   | $ | 125,108 |   |

----

|                                           |   | Year ended December 31, |    |
|------------------------------------------------|--------|-------------------------|---------|
|                                           |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| Americas                                       |   | $                       | 100,501 |   |   | $ | 89,671 |   |   | $ | 75,609 |   |
| Europe, Middle East and Africa (mainly Europe) |   |                    | 40,224  |   |   |   | 38,481 |   |   |   | 34,908 |   |
| Asia Pacific                                   |   |                    | 17,084  |   |   |   | 13,611 |   |   |   | 14,591 |   |
|                                           |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                           |   | $                       | 157,809 |   |   | $ | 141,763 |   |   | $ | 125,108 |   |

|                                           |   | Year ended December 31, |   |
|------------------------------------------------|--------|-------------------------|--------|
|                                           |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Currency gains, net                            |   | $                       | 1,989  |   |   | $ | 397 |   |   | $ | 1,504 |   |
| Income from marketable securities and deposits |   |                    | 1,165  |   |   |   | 1,583 |   |   |   | 2,868 |   |
| Other                                          |   |                    | (555   | ) |   |   | (396 | ) |   |   | (368 | ) |
|                                           |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                           |   | $                       | 2,599  |   |   | $ | 1,584 |   |   | $ | 4,004 |   |

|   | (1) | Israeli income tax is computed on the basis of the Company’s results in New Israeli Shekels (“NIS”) determined for statutory purposes. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | a. | Companies that meet the criteria of the Alternative Path of tax benefits will receive those benefits (now called “Beneficiating Enterprise” benefits) without prior approval. In addition, there will be no requirement to file reports with the Investment Center. Companies will be required to notify the Israeli Income Tax Authorities regarding the implementation of the Alternative Path. Audit will take place via the Income Tax Authorities as part of the tax audits. Request for pre-ruling is possible. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Tax benefits of the Alternative Path include lower tax rates or zero tax depending on the investment zone and the path chosen, lower tax rates on dividends and accelerated depreciation. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | In order to receive benefits in the Grant Path or the Alternative Path, the Industrial Enterprise must contribute to the economic independence of  Israel’s economy in one of the following ways: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Its primary activity is in the Biotechnology or Nanotechnology fields and pre-approval is received from the head of research and development at the Office of the Chief Scientist; |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Its revenue from a specific country is not greater than 75% of its total revenues that year; |
|--------|----|----------------------------------------------------------------------------------------------|

|   | 3. | 25% or more of its revenues are derived from a specific foreign market of at least 12 million residents. |
|--------|----|----------------------------------------------------------------------------------------------------------|

----

|   | A. | Company (cont'd) |
|--------|----|------------------|

|   | (2) | As of December 31, 2010, the Company has no tax loss carryforwards in Israel except for capital losses of approximately $11.8 million which are available to offset future taxable capital gains for indefinite period. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | As explained above, the Israeli Company is exempt from tax for a ten-year period.  Therefore, the Israeli Company has not recorded deferred tax assets and liabilities. Out of the Company’s accumulated deficit as of December 31, 2010, approximately $10.9 million are tax-exempt earnings attributable to its Approved Enterprise and approximately $17 million are tax-exempt earnings attributable to its Beneficiating Enterprise. The tax-exempt income attributable to the Approved and Beneficiating Enterprises cannot be distributed to shareholders without subjecting the Company to taxes. If these retained tax-exempt profits are distributed, the Company would be taxed at the reduced corporate tax rate applicable to such profits (currently- 25% pursuant to the implementation of the Investment Law). According to the Amendment, tax-exempt income generated under the Beneficiating Enterprise will be taxed upon dividend distribution or complete liquidation, whereas tax exempt income generated under the Approved Enterprise will be taxed only upon dividend distribution (but not upon complete liquidation, as the tax liability will be incurred by the shareholders). As of December 31, 2010, if the income attributed to the Approved Enterprise were distributed as dividend, the Company would incur a tax liability of approximately $2.7 million. If income attributed to the Beneficiating Enterprise were distributed as dividend, or upon liquidation, the Company would incur a tax liability in the amount of approximately $4.2 million. These amounts will be recorded as an income tax expense in the period in which the Company declares the dividend. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | On July 25, 2005 the Knesset passed the Law for the Amendment of the Income Tax Ordinance (No. 147) - 2005, which provides, inter-alia, for a gradual reduction in the company tax rate to 25% as from the 2010 tax year. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | In 2009, the Company signed a settlement agreement with the Israeli Tax Authorities (ITA) for fiscal years 2004 through 2007. (see also Note 14(F) below). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | Company (cont'd) |
|--------|----|------------------|

|   | (6) | Amendment to the Law for the Encouragement of Capital Investments – 1959 |
|--------|-----|--------------------------------------------------------------------------------|

|   | B. | Foreign subsidiaries |
|--------|----|----------------------|

----

|   | C. | Profit (loss) before tax and income tax benefit (expense) included in the consolidated statements of operations |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|                                                               |   | Year ended December 31, |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|
|                                                               |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Profit (loss) before taxes on income and non controlling interest: |   |                    |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | 8,232  |   |   | $ | 12,096 |   |   | $ | 2,536 |   |
| Foreign jurisdiction                                               |   |                    | 1,318  |   |   |   | (194 | ) |   |   | (367 | ) |
|                                                               |   | $                       | 9,550  |   |   | $ | 11,902 |   |   | $ | 2,169 |   |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Current taxes:                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | (294   | ) |   | $ | 500 |   |   | $ | (286 | ) |
| Foreign jurisdiction                                               |   |                    | (1,195 | ) |   |   | (179 | ) |   |   | 208 |   |
|                                                               |   | $                       | (1,489 | ) |   | $ | 321 |   |   | $ | (78 | ) |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Deferred taxes:                                                    |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | -      |   |   | $ | - |   |   | $ | - |   |
| Foreign jurisdiction                                               |   |                    | 127    |   |   |   | 1,221 |   |   |   | (172 | ) |
|                                                               |   |                    | 127    |   |   | $ | 1,221 |   |   | $ | (172 | ) |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                                       |   | $                       | (1,362 | ) |   | $ | 1,542 |   |   | $ | (250 | ) |

----

|                                                                                        |   | December 31, |    |
|---------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                        |   | 2010         |    |   | 2009 |   |
| Deferred tax assets:                                                                        |   |         |    |   |   |   |
| Tax loss carryforwards of subsidiaries                                                      |   | $            | 15,111  |   |   | $ | 14,138 |   |
| Other timing differences                                                                    |   |         | 1,638   |   |   |   | 1,474 |   |
|                                                                                        |   |         |    |   |   |   |   |   |
| Total gross deferred tax assets                                                             |   |         | 16,749  |   |   |   | 15,612 |   |
| Valuation allowance                                                                         |   |         | (15,111 | ) |   |   | (13,213 | ) |
|                                                                                        |   |         |    |   |   |   |   |   |
| Net deferred tax asset                                                                      |   | $            | 1,638   |   |   | $ | 2,399 |   |
|                                                                                        |   |         |    |   |   |   |   |   |
| Deferred tax liabilities -intangible assets acquired in business combination (see Note 16C) |   | $            | (5,871  | ) |   |   | - |   |

|                                                   |   | December 31, |   |
|--------------------------------------------------------|--------|--------------|--------|
|                                                   |   | 2010         |   |   | 2009 |   |
|                                                   |   |         |   |   |   |   |
| Current assets – Deferred tax assets             |   | $            | 1,638  |   |   | $ | 2,207 |   |
| Long-term assets – Deferred tax assets           |   |         | -      |   |   |   | 192 |   |
|                                                   |   |         |   |   |   |   |   |   |
|                                                   |   | $            | 1,638  |   |   | $ | 2,399 |   |
|                                                   |   |         |   |   |   |   |   |   |
| Long-term liabilities – Deferred tax liabilities |   | $            | (5,871 | ) |   |   | - |   |

----

|   | E. | Reconciliation of the statutory tax benefit (expense) to actual income tax benefit (expense) |
|--------|----|----------------------------------------------------------------------------------------------|

|                                               |   | Year ended December 31, |    |
|----------------------------------------------------|--------|-------------------------|---------|
|                                               |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| Profit before taxes on income                      |   | $                       | 9,550   |   |   | $ | 11,902 |   |   | $ | 2,169 |   |
| Tax rate                                           |   |                    | 25      | % |   |   | 26 | % |   |   | 27 | % |
| Computed expected tax                              |   |                    | (2,388  | ) |   |   | (3,095 | ) |   |   | (586 | ) |
| Tax benefits arising from approved enterprises (*) |   |                    | 2,058   |   |   |   | 3,145 |   |   |   | 707 |   |
| Changes in unrecognized tax benefits               |   |                    | (57     | ) |   |   | 2,561 |   |   |   | (320 | ) |
| Permanent difference and other                     |   |                    | 64      |   |   |   | 1,020 |   |   |   | 2,034 |   |
| Change in valuation allowance                      |   |                    | (1,898  | ) |   |   | (2,206 | ) |   |   | (2,324 | ) |
| Foreign tax rate differential                      |   |                    | 859     |   |   |   | 117 |   |   |   | 239 |   |
| Income tax benefit (expense)                       |   | $                       | ( 1,362 | ) |   | $ | 1,542 |   |   | $ | (250 | ) |

| Basic   |   | $ | 0.07 |   |   | $ | 0.11 |   |   | $ | 0.02 |   |
|---------|--------|---|------|--------|--------|---|------|--------|--------|---|------|--------|
| Diluted |   | $ | 0.07 |   |   | $ | 0.10 |   |   | $ | 0.02 |   |

----

|                                                         |   | 2010   |   |   |   2009 |   |   | 2008   |   |
|--------------------------------------------------------------|--------|--------|--------|--------|-------------|--------|--------|--------|--------|
| Balance at January 1                                         |   | $      | 3,974  |   |        | $      | 7,091  |   |   | $ | 6,771 |   |
| Additions based on tax positions related to the current year |   |   | 635    |   |        |   | 1,497  |   |   |   | 180 |   |
| Additions for tax positions of prior years                   |   |   | -      |   |        |   | 507    |   |   |   | 140 |   |
| Reductions for tax positions of prior years                  |   |   | (618   | )      |        |   | (2,010 | )      |   |   | - |   |
| Settlements                                                  |   |   | -      |   |        |   | (3,111 | )      |   |   | -  |   |
| Balance at December 31                                       |   | $      | 3,991  |   |        | $      | 3,974  |   |   | $ | 7,091 |   |

----

|                            |   |         |   |   | In activemarkets for |   |   | Significant other |   |   | Significant      |   |
|---------------------------------|--------|--------------|--------|--------|----------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                            |   | December 31, |   |   | identical assets     |   |   | observable        |   |   | unobservable     |   |
|                            |   | 2010         |   |   | (Level 1)            |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                         |   |         |   |   |                 |   |   |              |   |   |             |   |
| Short-term investments          |   | $            | 11,181 |   |                 | $      | 11,181 |              |   | $      | -                |   |   | $ | - |   |
| Long-term marketable securities |   |         | 3,873  |   |                 |   | 3,873  |              |   |   | -                |   |   |   | - |   |
| Derivatives                     |   |         | (132   | )      |                 |   |   |              |   |   | (132             | )      |   |   | - |   |
| Total At December 31, 2010      |   | $            | 14,922 |   |                 | $      | 15,054 |              |   | $      | (132             | )      |   | $ | - |   |

|                            |   |         |   |   | In activemarkets for |   |   | Significant other |   |   | Significant      |   |
|---------------------------------|--------|--------------|--------|--------|----------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                            |   | December 31, |   |   | identical assets     |   |   | observable        |   |   | unobservable     |   |
|                            |   | 2009         |   |   | (Level 1)            |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                         |   |         |   |   |                 |   |   |              |   |   |             |   |
| Short-term investments          |   | $            | 21,847 |   |                 | $      | 21,847 |              |   | $      | -                |   |   | $ | - |   |
| Long-term marketable securities |   |         | 16,956 |   |                 |   | 16,956 |              |   |   | -                |   |   |   | - |   |
| Derivatives                     |   |         | 824    |   |                 |   | -      |              |   |   | 824              |   |   |   | - |   |
| Total At December 31, 2009      |   | $            | 39,627 |   |                 | $      | 38,803 |              |   | $      | 824              |   |   | $ | - |   |

----

| Property, plant and equipment                                  |   | $      | 250    |   |
|----------------------------------------------------------------|--------|--------|--------|--------|
| Identifiable intangible assets:                                |   |   |   |   |
| Patents of core technology                                     |   |   | 5,000  |   |
| Customer relationships                                         |   |   | 1,800  |   |
| Trademarks and trade name                                      |   |   | 1,400  |   |
| In-process research and development                            |   |   | 4,700  |   |
| Goodwill                                                       |   |   | 3,510  |   |
| Total assets acquired                                          |   |   | 16,660 |   |
|                                                           |   |   |   |   |
| Prepayments for inventory supply and future R&D services   |   |   | 3,841  |   |
|                                                           |   |   |   |   |
| Purchase price allocated (including transaction costs of $501) |   | $      | 20,501 |   |

----

----

|                                       |   | $ in thousands |   |
|--------------------------------------------|--------|----------------|--------|
|                                       |   |           |   |
| Current assets                             |   | $              | 7,967  |   |
| Property, plant and equipment              |   |           | 533    |   |
| Other long-term assets                     |   |           | 65     |   |
| Identifiable intangible assets:            |   |           |   |   |
| In-process research and development        |   |           | 5,306  |   |
| Technological intellectual property (1)    |   |           | 7,562  |   |
| Backlog                                    |   |           | 612    |   |
| Business-related intellectual property (2) |   |           | 3,711  |   |
| Goodwill                                   |   |           | 20,523 |   |
| Total assets acquired                      |   |           | 46,279 |   |
| Current liabilities                        |   |           | 4,761  |   |
| Deferred tax liability                     |   |           | 6,759  |   |
| Other non-current liabilities              |   |           | 9      |   |
| Total liabilities assumed                  |   |           | 11,529 |   |
|                                       |   |           |   |   |
| Net assets acquired                        |   | $              | 34,750 |   |

----

|                                     |   | Year ended December 31 |   |
|------------------------------------------|--------|------------------------|--------|
|                                     |   | 2010                   |   |   | 2009 |   |
|                                     |   | $ in millions          |   |
|                                     |   | (unaudited)            |   |
| Net sales                                |   | $                      | 162.5  |   |   | $ | 160.3 |   |
| Net income                               |   | $                      | 9.9    |   |   | $ | 12.9 |   |
| Net income attributable to shareholders* |   | $                      | 10.2   |   |   | $ | 13.8 |   |
| Earnings per share:                      |   |                   |   |   |   |   |   |   |
| Basic                                    |   | $                      | 0.34   |   |   | $ | 0.47 |   |
| Diluted                                  |   | $                      | 0.33   |   |   | $ | 0.45 |   |

|   *  | Includes net amortization in the amount of approximately $766 and $1,528 and decrease in interest income of approximately $88 and $350  in 2010 and 2009, respectively. In addition, transaction costs of $936 that were recorded in 2010, were eliminated. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                              |   | December 31, |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | 2010         |   |   | 2009 |   |
| Balance as of January 1           |   |         |   |   |   |   |
| Goodwill                          |   | $            | 4,475  |   |   | $ | 4,475 |   |
| Accumulated impairment losses     |   |         | (889   | ) |   |   | (406 | ) |
|                              |   |         | 3,586  |   |   |   | 4,069 |   |
| Goodwill acquired during the year |   |         | 20,523 |   |   |   | - |   |
| Impairment loss                   |   |         | (20    | ) |   |   | (483 | ) |
| Balance as of December 31         |   |         |   |   |   |   |   |   |
| Goodwill                          |   |         | 24,998 |   |   |   | 4,475 |   |
| Accumulated impairment losses     |   |         | (909   | ) |   |   | (889 | ) |
|                              |   |         |   |   |   |   |   |   |
|                              |   | $            | 24,089 |   |   | $ | 3,586 |   |

----

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