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| Dated:  April 13, 2010 | ELRON ELECTRONIC INDUSTRIES LTD.  |                      |
|----------------------------------|----------------------------------------|---------------------------|
|                             | By:                          | /s/ Ari Bronshtein   |   |
|                             |                                   | Name:           | Ari Bronshtein  |   |
|                             |                                   | Title:          | Co-Chief Executive Officer  |   |
|                             |                                   |                      |
|                             | By:                          | /s/ Zvi Slovin       |   |
|                             |                                   | Name:           | Zvi Slovin  |   |
|                             |                                   | Title:          | Co-Chief Executive Officer  |   |
|                             |                                   |                      |
|                             | By:                          | /s/ Yaron Elad            |   |
|                             |                                   | Name:           | Yaron Elad |   |
|                             |                                   | Title:          | Vice President & Chief Financial Officer  |   |

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|                                                                                                           | Page   |
|----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                           |   |
| Reports of Independent Registered Public Accounting Firm                                                       | F-2    |
|                                                                                                           |   |
| Consolidated Balance Sheets                                                                                    | F-4    |
|                                                                                                           |   |
| Consolidated Statements of Loss                                                                                | F-6    |
|                                                                                                           |   |
| Consolidated Statements of Comprehensive Loss                                                                  | F-7    |
|                                                                                                           |   |
| Consolidated Statements of Changes in Equity                                                                   | F-8    |
|                                                                                                           |   |
| Consolidated Statements of Cash Flows                                                                          | F-10   |
|                                                                                                           |   |
| Notes to the Consolidated Financial Statements                                                                 | F-13   |
|                                                                                                           |   |
| Appendix to the Consolidated Financial Statements regarding Details relating to Investments in Group companies | F-107  |

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

| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER     |
|------------------|--------------------------------------|
| March 28, 2010   | A Member of Ernst & Young Global |

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| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER     |
|------------------|--------------------------------------|
| March 28, 2010   | A Member of Ernst & Young Global |

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Consolidated Balance Sheets as of 

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|                                                |   |   |   |   | December 31 |   |    | December 31 |   |   | January 1   |   |
|-----------------------------------------------------|--------|--------|--------|--------|-------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                                |   |   |   |   | 2009        |   |    | 2008        |   |   | 2008        |   |
|                                                |   | Note   |   |   | $ thousands |   |    | $ thousands |   |   | $ thousands |   |
|                                                |   |   |   |   |        |   |    |        |   |   |        |   |
| Assets:                                             |   |   |   |   |        |   |    |        |   |   |        |   |
| Current assets                                      |   |   |   |   |        |   |    |        |   |   |        |   |
| Cash and cash equivalents                           |   |   | 4      |   |        |   | 64,747  |        |   |   | 17,364      |   |   |   | 20,090 |   |
| Short-term financial investments                    |   |   | 5      |   |        |   | -       |        |   |   | -           |   |   |   | 16,900 |   |
| Restricted cash                                     |   |   | 3D.1   |   |        |   | 60      |        |   |   | 143         |   |   |   | 7,642 |   |
| Available for sale marketable securities            |   |   | 6      |   |        |   | -       |        |   |   | -           |   |   |   | 29,730 |   |
| Trade receivables, net                              |   |   | 7      |   |        |   | 2,084   |        |   |   | 1,150       |   |   |   | 1,043 |   |
| Other current assets                                |   |   | 8      |   |        |   | 3,391   |        |   |   | 5,787       |   |   |   | 5,269 |   |
| Inventories                                         |   |   | 9      |   |        |   | 3,582   |        |   |   | 2,002       |   |   |   | 1,732 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                                |   |   |   |   |        |   | 73,864  |        |   |   | 26,446      |   |   |   | 82,406 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Non-current assets                                  |   |   |   |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Investments in associates                           |   |   | 3      |   |        |   | 113,237 |        |   |   | 168,366     |   |   |   | 144,957 |   |
| Other investments (accounted as available for sale) |   |   | 10     |   |        |   | 14,527  |        |   |   | 7,511       |   |   |   | 13,102 |   |
| Property, plant and equipment, net                  |   |   | 11     |   |        |   | 2,991   |        |   |   | 4,458       |   |   |   | 1,796 |   |
| Intangible assets, net                              |   |   | 12     |   |        |   | 7,521   |        |   |   | 12,798      |   |   |   | 1,109 |   |
| Deferred taxes                                      |   |   | 25     |   |        |   | -       |        |   |   | -           |   |   |   | 56 |   |
| Other long-term receivables                         |   |   |   |   |        |   | 940     |        |   |   | -           |   |   |   | - |   |
|                                                |   |   |   |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                                |   |   |   |   |        |   | 139,216 |        |   |   | 193,133     |   |   |   | 161,020 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Total assets                                        |   |   |   |   |        |   | 213,080 |        |   |   | 219,579     |   |   |   | 243,426 |   |

----

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|                                              |   |   |    |   | December 31 |   |    | December 31 |   |   | January 1   |   |
|---------------------------------------------------|--------|--------|---------|--------|-------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                              |   |   |    |   | 2009        |   |    | 2008        |   |   | 2008        |   |
|                                              |   | Note   |    |   | $ thousands |   |    | $ thousands |   |   | $ thousands |   |
| Liabilities:                                      |   |   |    |   |        |   |    |        |   |   |        |   |
| Current liabilities                               |   |   |    |   |        |   |    |        |   |   |        |   |
| Short term credit and loans                       |   |   | 13      |   |        |   | 10,865  |        |   |   | 3,780       |   |   |   | 3,325 |   |
| Trade payables                                    |   |   | 14      |   |        |   | 4,273   |        |   |   | 3,829       |   |   |   | 3,236 |   |
| Other current liabilities                         |   |   | 15      |   |        |   | 9,627   |        |   |   | 12,486      |   |   |   | 9,116 |   |
| Convertible Debentures                            |   |   | 3D.1,16 |   |        |   | 1,172   |        |   |   | -           |   |   |   | 5,549 |   |
| Option to Convertible Debentures                  |   |   | 3D.1,16 |   |        |   | -       |        |   |   | -           |   |   |   | 830 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                              |   |   |    |   |        |   | 25,937  |        |   |   | 20,095      |   |   |   | 22,056 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Long-term liabilities                             |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Long term loans from banks and others             |   |   | 16      |   |        |   | 36,981  |        |   |   | 35,141      |   |   |   | 2,244 |   |
| Long term loan from shareholders                  |   |   | 16      |   |        |   | 16,737  |        |   |   | 6,176       |   |   |   | - |   |
| Convertible Debentures                            |   |   | 3D.1,16 |   |        |   | 2,211   |        |   |   | 2,161       |   |   |   | - |   |
| Royalty bearing government grants                 |   |   | 17      |   |        |   | 8,685   |        |   |   | 8,814       |   |   |   | 5,453 |   |
| Employee benefits                                 |   |   | 18      |   |        |   | 194     |        |   |   | 991         |   |   |   | 561 |   |
| Deferred taxes                                    |   |   | 25      |   |        |   | -       |        |   |   | -           |   |   |   | 456 |   |
| Other long term liabilities                       |   |   |    |   |        |   | 242     |        |   |   | 150         |   |   |   | - |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                              |   |   |    |   |        |   | 65,050  |        |   |   | 53,433      |   |   |   | 8,714 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Total Liabilities                                 |   |   |    |   |        |   | 90,987  |        |   |   | 73,528      |   |   |   | 30,770 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Equity attributable to the Company's shareholders |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Issued capital                                    |   |   | 19      |   |        |   | 9,573   |        |   |   | 9,573       |   |   |   | 9,573 |   |
| Share premium                                     |   |   | 19      |   |        |   | 190,328 |        |   |   | 190,328     |   |   |   | 190,328 |   |
| Retained earnings (accumulated deficit)           |   |   |    |   |        |   | (83,499 | )           |   |   | (70,052     | )      |   |   | 1,275 |   |
| Other capital reserves                            |   |   |    |   |        |   | 10,067  |        |   |   | 9,657       |   |   |   | 8,437 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Non-controlling interests                         |   |   |    |   |        |   | (4,376  | )           |   |   | 6,545       |   |   |   | 3,043 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Total equity                                      |   |   |    |   |        |   | 122,093 |        |   |   | 146,051     |   |   |   | 212,656 |   |
|                                              |   |   |    |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Total liabilities and equity                      |   |   |    |   |        |   | 213,080 |        |   |   | 219,579     |   |   |   | 243,426 |   |

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

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Consolidated Statements of Loss 

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|                                                                                      |   |   |   |   | For the                          |   |   | For the     |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|--------|----------------------------------|--------|--------|-------------|--------|
|                                                                                      |   |   |   |   | year ended                       |   |   | year ended  |   |
|                                                                                      |   |   |   |   | December 31                      |   |   | December 31 |   |
|                                                                                      |   |   |   |   | 2009                             |   |   | 2008        |   |
|                                                                                      |   |   |   |   | $ thousands                      |   |   | $ thousands |   |
|                                                                                      |   | Note   |   |   | (except for loss per share data) |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |
| Income                                                                                    |   |   |   |   |                             |   |   |        |   |
| Sales of goods                                                                            |   |   |   |   |                             | 9,904  |   |        |   | 6,237 |   |
| Gain from disposal of businesses and associates and changes in holding in associates, net |   |   | 24B    |   |                             |   | 31,802 |        |   |   | 783 |   |
| Financial income                                                                          |   |   | 24D    |   |                             |   | 1,413  |        |   |   | 6,259 |   |
|                                                                                      |   |   |   |   |                             |   | 43,119 |        |   |   | 13,279 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Cost and Expenses                                                                         |   |   |   |   |                             |   |   |        |   |   |   |   |
| Cost of sales                                                                             |   |   | 24E    |   |                             |   | 4,824  |        |   |   | 3,200 |   |
| Research and development expenses, net                                                    |   |   | 24F    |   |                             |   | 25,699 |        |   |   | 29,911 |   |
| Selling and marketing expenses                                                            |   |   | 24G    |   |                             |   | 8,985  |        |   |   | 7,525 |   |
| General and administrative expenses                                                       |   |   | 24H    |   |                             |   | 15,865 |        |   |   | 19,065 |   |
| Equity in losses of associates, net                                                       |   |   | 24A    |   |                             |   | 10,514 |        |   |   | 40,146 |   |
| Amortization of intangible assets                                                         |   |   |   |   |                             |   | 1,416  |        |   |   | 1,061 |   |
| Other expenses, net                                                                       |   |   | 24C    |   |                             |   | 2,230  |        |   |   | 257 |   |
| Financial expenses                                                                        |   |   | 24D    |   |                             |   | 5,434  |        |   |   | 4,800 |   |
|                                                                                      |   |   |   |   |                             |   | 74,967 |        |   |   | 105,965 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Loss before tax benefit                                                                   |   |   |   |   |                             |   | 31,848 |        |   |   | 92,686 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Tax benefit                                                                               |   |   | 25A    |   |                             |   | 2,453  |        |   |   | 32 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Net Loss                                                                                  |   |   |   |   |                             |   | 29,395 |        |   |   | 92,654 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Attributable to:                                                                          |   |   |   |   |                             |   |   |        |   |   |   |   |
| The Company's shareholders                                                                |   |   |   |   |                             |   | 14,304 |        |   |   | 71,834 |   |
| Non-controlling interests                                                                 |   |   |   |   |                             |   | 15,091 |        |   |   | 20,820 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
|                                                                                      |   |   |   |   |                             |   | 29,395 |        |   |   | 92,654 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Net loss per share attributable to the Company’s shareholders (in $)                |   |   |   |   |                             |   |   |        |   |   |   |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Basic loss per share                                                                      |   |   |   |   |                             |   | 0.48   |        |   |   | 2.43 |   |
|                                                                                      |   |   |   |   |                             |   |   |        |   |   |   |   |
| Diluted loss per share                                                                    |   |   |   |   |                             |   | 0.49   |        |   |   | 2.44 |   |

----

Consolidated Statements of Comprehensive Loss 

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|                                                                                                                       |   | For the     |    |   | For the     |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                                                                                                       |   | year ended  |    |   | year ended  |   |
|                                                                                                                       |   | December 31 |    |   | December 31 |   |
|                                                                                                                       |   | 2009        |    |   | 2008        |   |
|                                                                                                                       |   | $ thousands |    |   | $ thousands |   |
|                                                                                                                       |   |        |    |   |        |   |
| Reserve from revaluation of investment following consolidation                                                             |   |        | -       |   |        |   | 5,219 |   |
| Actuarial gains from defined benefit plan                                                                                  |   |        | 15      |   |        |   | 69 |   |
| Foreign currency translation differences for foreign operations                                                            |   |        | (45     | )      |        |   | 902 |   |
| Foreign currency translation differences charged to the statement of   income upon disposal of an associate |   |        | (4,330  | )      |        |   | - |   |
| Changes in fair value of available for sale financial assets                                                               |   |        | 5,001   |   |        |   | (1,990 | ) |
| Net change in fair value of available-for-sale financial assets classified to the statement of income                      |   |        | (84     | )      |        |   | (2,266 | ) |
| Company's share of other comprehensive income (loss) of associates                                                         |   |        | 455     |   |        |   | (609 | ) |
|                                                                                                                       |   |        |    |   |        |   |   |   |
| Other comprehensive income for the year                                                                                    |   |        | 1,012   |   |        |   | 1,325 |   |
|                                                                                                                       |   |        |    |   |        |   |   |   |
| Loss for the year                                                                                                          |   |        | (29,395 | )      |        |   | (92,654 | ) |
|                                                                                                                       |   |        |    |   |        |   |   |   |
| Total comprehensive loss for the year                                                                                      |   |        | (28,383 | )      |        |   | (91,329 | ) |
|                                                                                                                       |   |        |    |   |        |   |   |   |
| Attributable to:                                                                                                           |   |        |    |   |        |   |   |   |
| Company's shareholders                                                                                                     |   |        | (13,381 | )      |        |   | (70,485 | ) |
| Non-controlling interests                                                                                                  |   |        | (15,002 | )      |        |   | (20,844 | ) |
|                                                                                                                       |   |        |    |   |        |   |   |   |
| Total comprehensive loss for the year                                                                                      |   |        | (28,383 | )      |        |   | (91,329 | ) |

----

Consolidated Statements of Changes in Equity 

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

----

----

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

----

Consolidated Statements of Cash Flows 

----

|                                                                                       |   | For the     |    |   | For the     |   |
|--------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                                                                       |   | year ended  |    |   | year ended  |   |
|                                                                                       |   | December 31 |    |   | December 31 |   |
|                                                                                       |   | 2009        |    |   | 2008        |   |
|                                                                                       |   | $ thousands |    |   | $ thousands |   |
|                                                                                       |   |        |    |   |        |   |
| Cash flows from operating activities                                                       |   |        |    |   |        |   |
| Net loss                                                                                   |   |        | (29,395 | )      |        |   | (92,654 | ) |
|                                                                                       |   |        |    |   |        |   |   |   |
| Adjustments to reconcile net loss to net cash used in operating activities:                |   |        |    |   |        |   |   |   |
| Equity in  losses of associates, net                                             |   |        | 10,514  |   |        |   | 40,146 |   |
| Gain from disposal of businesses and associates and changes in holdings in associates, net |   |        | (31,802 | )      |        |   | (783 | ) |
| Depreciation and amortization                                                              |   |        | 2,958   |   |        |   | 2,050 |   |
| Impairment of investments                                                                  |   |        | 1,853   |   |        |   | 909 |   |
|     Accrued interest on loans from shareholders                                  |   |        | 1,561   |   |        |   | 176 |   |
|     Loss resulted from early redemption of Convertible Debentures           |   |        | -       |   |        |   | 359 |   |
| Gain from sale of investments in available for sale securities                             |   |        | (85     | )      |        |   | (239 | ) |
| Reevaluation of restricted cash                                                            |   |        | 83      |   |        |   | 389 |   |
| Decrease (increase) in fair value of Convertible Debentures                                |   |        | 921     |   |        |   | (2,143 | ) |
| Stock based compensation and changes in liability in respect of call options               |   |        | 2,398   |   |        |   | 2,128 |   |
| Deferred taxes, net                                                                        |   |        | -       |   |        |   | (111 | ) |
| Loss from sale of property and equipment, net                                              |   |        | 64      |   |        |   | 8 |   |
| Financial income, net                                                                      |   |        | 949     |   |        |   | 647 |   |
| Other                                                                                      |   |        | 323     |   |        |   | 1,565 |   |
|                                                                                       |   |        | (10,263 | )      |        |   | 45,101 |   |
|                                                                                       |   |        |    |   |        |   |   |   |
| Changes in Working Capital:                                                                |   |        |    |   |        |   |   |   |
| Increase in trade receivables                                                              |   |        | (1,103  | )      |        |   | (99 | ) |
|     Decrease in Other current assets                                        |   |        | 62      |   |        |   | 1,752 |   |
| Deacrease in liabilities in respect of government grants                                   |   |        | (589    | )      |        |   | (1,270 | ) |
| Increase in inventories                                                                    |   |        | (2,634  | )      |        |   | (329 | ) |
|     Increase in trade payables                                              |   |        | 307     |   |        |   | 8 |   |
| Increase (decrease) in Other current liabilities (mainly provision for income taxes)       |   |        | (1,444  | )      |        |   | 793 |   |
|                                                                                       |   |        | (5,401  | )      |        |   | 855 |   |
| Cash paid and received during the year for:                                                |   |        |    |   |        |   |   |   |
| Interest paid                                                                              |   |        | (1,542  | )      |        |   | (1,742 | ) |
| Interest received                                                                          |   |        | 593     |   |        |   | 1,095 |   |
|                                                                                       |   |        | (949    | )      |        |   | (647 | ) |
|                                                                                       |   |        |    |   |        |   |   |   |
| Net cash used in operating activities                                                      |   |        | (46,008 | )      |        |   | (47,345 | ) |

----

----

|                                                             |   | For the     |   |   | For the     |   |
|------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                             |   | year ended  |   |   | year ended  |   |
|                                                             |   | December 31 |   |   | December 31 |   |
|                                                             |   | 2009        |   |   | 2008        |   |
|                                                             |   | $ thousands |   |   | $ thousands |   |
| Cash flows from investment activities                            |   |        |   |   |        |   |
| Investment in associates and other companies                     |   |        | (8,630 | )      |        |   | (57,765 | ) |
| Proceeds from sale of associates and other companies             |   |        | 66,290 |   |        |   | - |   |
| Dividend received from associates                                |   |        | 9,553  |   |        |   | - |   |
| Acquisition of subsidiaries, net of cash acquired (Schedule A)   |   |        | -      |   |        |   | (117 | ) |
| Proceeds from sale and maturity of available for sale securities |   |        | 728    |   |        |   | 29,452 |   |
| Investments in long term deposits                                |   |        | (430   | )      |        |   | (228 | ) |
| Purchase of intangible assets                                    |   |        | (172   | )      |        |   | - |   |
| Proceeds from long term deposits                                 |   |        | 430    |   |        |   | 17,040 |   |
| Proceeds from sale of investments in subsidiaries (Schedule B)   |   |        | (1,044 | )      |        |   | - |   |
| Investment in restricted cash                                    |   |        | -      |   |        |   | (3,184 | ) |
| Proceeds from restricted cash                                    |   |        | -      |   |        |   | 10,294 |   |
| Purchase of property and equipment                               |   |        | (1,293 | )      |        |   | (1,331 | ) |
| Proceeds from sale of property and equipment                     |   |        | 105    |   |        |   | 68 |   |
|                                                             |   |        |   |   |        |   |   |   |
| Net cash provided by (used in) investment activities             |   |        | 65,537 |   |        |   | (5,771 | ) |

|                                                                                   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Cash flows from financing activities                                                   |   |   |   |   |   |   |
| Receipt of long-terms loans from shareholders                                          |   |   | 9,000  |   |   |   | 6,000 |   |
| Repayment of long-term loans                                                           |   |   | (566   | )      |   |   | - |   |
| Receipt of long-term loans from banks                                                  |   |   | 13,500 |   |   |   | 31,078 |   |
| Increase (decrease) in short-term bank loan, net                                       |   |   | (593   | )      |   |   | 424 |   |
| Receipt of government grants                                                           |   |   | 2,984  |   |   |   | 1,025 |   |
| Proceeds from issuance of shares to non-controlling interests                          |   |   | 3,529  |   |   |   | 13,080 |   |
| Proceeds from issuance of Convertible Debentures and Options to Convertible Debentures |   |   | -      |   |   |   | 3,184 |   |
|     Early redemption of Convertible Debentures                          |   |   | -      |   |   |   | (4,401 | ) |
| Net cash provided by financing activities                                              |   |   | 27,854 |   |   |   | 50,390 |   |
|                                                                                   |   |   |   |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                       |   |   | 47,383 |   |   |   | (2,726 | ) |
|                                                                                   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents as of beginning of the year                                  |   |   | 17,364 |   |   |   | 20,090 |   |
|                                                                                   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents as of end of the year                                        |   |   | 64,747 |   |   |   | 17,364 |   |

----

----

|                                                                      |   | For the     |   |   | For the     |   |
|---------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                      |   | year ended  |   |   | year ended  |   |
|                                                                      |   | December 31 |   |   | December 31 |   |
|                                                                      |   | 2009        |   |   | 2008        |   |
|                                                                      |   | $ thousands |   |   | $ thousands |   |
| Schedule A                                                                |   |        |   |   |        |   |
| Acquisition of  subsidiaries (Impliant and Wavion)              |   |        |   |   |        |   |
| Assets and liabilities of the subsidiaries as of the date of acquisition: |   |        |   |   |        |   |
| Working capital (excluding cash and cash equivalents)                     |   |        | -      |   |        |   | 8,292 |   |
| Property, plant and equipment, net                                        |   |        | -      |   |        |   | (2,182 | ) |
| Intangible assets, net                                                    |   |        | -      |   |        |   | (10,069 | ) |
| Accrued severance pay, net                                                |   |        | -      |   |        |   | 114 |   |
| Non-controlling interest                                                  |   |        | -      |   |        |   | 3,791 |   |
| Payables in respect of acquisition of subsidiaries                        |   |        | -      |   |        |   | (5,046 | ) |
| Investment in associate                                                   |   |        | -      |   |        |   | 4,983 |   |
|                                                                      |   |        |   |   |        |   |   |   |
|                                                                      |   |        | -      |   |        |   | (117 | ) |

| Schedule B                                                            |   |   |   |   |   |   |
|-----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Proceeds from sale of investments in subsidiaries (Impliant and Sela) |   |   |   |   |   |   |
| Assets and liabilities of the subsidiaries as of the date of sale:    |   |   |   |   |   |   |
| Working capital (excluding cash and cash equivalents)                 |   |   | (3,031 | )      |   |   | - |   |
| Property, plant and equipment, net                                    |   |   | 1,259  |   |   |   | - |   |
| Intangible assets, net                                                |   |   | 3,810  |   |   |   | - |   |
| Long-term assets                                                      |   |   | 24     |   |   |   | - |   |
| Long-term liabilities                                                 |   |   | (2,164 | )      |   |   | - |   |
| Non-controlling interest                                              |   |   | (1,627 | )      |   |   | - |   |
| Capital gain                                                          |   |   | 1,574  |   |   |   | - |   |
| Accrued severance pay, net                                            |   |   | 26     |   |   |   | - |   |
| Investment in associate                                               |   |   | (915   | )      |   |   | - |   |
|                                                                  |   |   |   |   |   |   |   |   |
|                                                                  |   |   | (1,044 | )      |   |   | - |   |

----

Notes to the Consolidated Financial Statements 

----

----

----

----

----

|   | 1. | Contingent liabilities |
|--------|----|------------------------|

|   | When assessing the possible outcomes of legal claims that were filed against the Company and its group 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 assets |
|--------|----|----------------------|

|   | The Company examines on every balance sheet date whether there have been any events or changes in circumstances which would indicate impairment of one or more assets. When indications of impairment exists, 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 estimated future cash flows are discounted to their present value using a discount rate 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 Company regarding the economic conditions that will exist during the remaining useful life of the asset. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Valuation of intangible assets, goodwill and investments in companies that are not accounted for in accordance with the equity method of accounting |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company is required to allocate the purchase price of group companies (other than in the acquisition of non-controlling interests that do not confer control) to the assets and liabilities of such group companies on the basis of their estimated fair value. In addition, the Company estimates the fair value of its investments in companies that are not consolidated or not accounted for in accordance with the equity method of accounting. The material intangible assets that were recognized as a result of business combination were commercial customer relations, technology, and research and development in progress. 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. | Employee benefits |
|--------|----|-------------------|

|   | The liability in respect of post-employment defined benefit plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about, among others, discount rates, expected rates of return on assets, future salary increases and mortality rates. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Further details are given in Note 18. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 5. | Deferred tax assets |
|--------|----|---------------------|

|   | Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant 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 provided in Note 25. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | Determining the fair value of an unquoted financial asset |
|--------|----|-----------------------------------------------------------|

|   | The fair value of unquoted financial assets in Level 3 of the fair value hierarchy of IFRS 7 is determined using valuation techniques including the projected cash flows discounted at current rates applicable for items with similar terms and risk characteristics and estimation based upon recent transactions in the entity's securities. The projected future cash flows and discount rates, as well as additional factors considered in these analysis are subject to uncertainty and include consideration of inputs such as liquidity risk, credit risk and volatility. Further details are provided in Note 10. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 1. | Subsidiaries |
|--------|----|--------------|

|   | The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31, 2009. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Transactions eliminated upon consolidation |
|--------|----|--------------------------------------------|

|   | Intercompany balances and expenses not yet realized arising from intercompany transactions, are eliminated when preparing these consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated based on the Company's share in the said investments. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Gaining control in existing holding |
|--------|----|-------------------------------------|

|   | When control is achieved in stages, all identifiable assets, liabilities and contingent liabilities of the acquired entity are re-measured at fair value. Any difference arising from such re-measurement on the date of gaining control is included in a capital reserve account. Such capital reserve account created in respect of amortizable assets is re-classified to retained earnings (accumulated deficit) in direct relation with the related asset amortization, or when the item or investment is realized in all or in part. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | 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 stated above was not achieved. Associates are accounted for using the equity method of accounting (equity accounted investees). The Company's consolidated financial statements include the Company's share of the income and expenses of equity accounted investees, after adjustments required to align the accounting policies with those of the Company for uniform accounting policies, from the date that significant influence commences until the date that significant influence ceases. When the Company'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 Company 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 to which the equity method is being applied. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Excess cost of associates is presented as part of the investment. 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) at the date of acquisition is goodwill which is not amortized. The excess of the Company's interest in the fair value of the associate's identifiable assets (including identifiable intangible assets) net of the fair value of its identifiable liabilities (after the allocation of taxes) over the cost of the investment in the associate is negative goodwill that is recognized immediately in the statement of income. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 4. | Associates accounted for using the equity method of accounting (Cont.) |
|--------|----|------------------------------------------------------------------------|

|   | 5. | Accounting upon loss of significance influence |
|--------|----|------------------------------------------------|

|   | When the Company loses its significant influence in an associate previously accounted for under the equity method. Subsequently, the remaining investment is revalued to its fair value and accounted for as available for sale. Such revaluation is recorded in a revaluation reserve in the shareholders' equity section and recognized in the statement of income upon sale of any remaining investment. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Transactions in foreign currency |
|--------|----|----------------------------------|

|   | The Company’s consolidated financial statements are presented in dollars. Transactions in foreign currencies are translated into the Company's functional currency at the exchange rates in effect on the dates of the transactions. 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 that 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Foreign operations |
|--------|----|--------------------|

|   | When the functional currency of a group company is different than the Company's functional currency, the Company defines it as foreign operations. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, were translated into dollars at the exchange rates in effect as of the balance sheet date. The income and expenses of foreign operations were translated into dollars at exchange rates in effect on the dates of the transactions, or based on an average exchange rate for the period. Share capital, reserves and other capital movements are translated into dollars at the exchange rate on the date they transpired. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | When a foreign operation is disposed of, in part or in full, the appropriate amount in the foreign currency translation reserve is classified to the statement of income. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | CPI-linked monetary items |
|--------|----|---------------------------|

|   | Monetary assets and liabilities linked in accordance with their terms to the changes in the CPI are adjusted based on the relevant index, at every balance sheet date, pursuant to the terms of the agreement. Linkage differences deriving from the said adjustment are recognized in the statement of income. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Financial instruments |
|--------|----|-----------------------|

|   | Financial instruments include investments in shares and debt instruments, trade and other receivables, cash and cash equivalents, convertible debentures issued by a subsidiary, loans and credit received, and trade and other payables. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Financial instruments are recognized initially at fair value plus, for instruments not at fair value through the statement of income, all directly attributable transaction costs. Subsequent to the initial recognition, non-derivative financial instruments are measured as described below. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A financial instrument is recognized when the Company assumes upon itself the contractual conditions of the instrument. A financial asset is eliminated when the Company's contractual rights to the cash flows deriving from the financial asset expire. Purchases or sales of financial assets made in the ordinary manner are recognized on the trade date, meaning on the date the Company undertook to purchase or sell the financial asset. Financial liabilities are eliminated when the Company's obligation, as specified in the agreement, expires or when it is settled or cancelled. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 1. | Financial instruments (Cont.) |
|--------|----|-------------------------------|

|   | Cash and cash equivalents |
|--------|---------------------------|

|   | Cash includes cash balances deposits available for immediate use. Cash equivalents include short-term highly liquid investments that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value. Bank overdrafts that are repayable on demand and form an integral part of the cash management of the Group companies are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Loans and receivables |
|--------|-----------------------|

|   | Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not traded on an active market. After the initial recognition, the 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 the income statement in finance expenses. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Investments at fair value through the profit and loss |
|--------|-------------------------------------------------------|

|   | A financial instrument is classified as measured at fair value through profit and loss if it is held for trading or is designated as such upon initial recognition. Designated financial instruments as stated are measured at fair value through profit and loss at the time of their initial recognition. Attributable transaction costs are recognized in the statement of income when incurred. These financial instruments are measured at fair value and the changes therein are recognized in the statement of income. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Other investments accounted for as available for sale and 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. 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 with unrealized gains or losses recognized as other comprehensive income in the available-for-sale reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other income (expenses), or determined to be impaired, at which time the cumulative loss is recognized in the income statement in other income (expenses), and removed from the available-for-sale reserve. For a financial asset reclassified out of the available-for-sale category, any previous gain or loss on that asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the effective interest rate ("EIR"). Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired then the amount recorded in equity is reclassified to the income statement. As for impairment of financial assets – see section G.1 below. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 1. | Financial instruments (Cont.) |
|--------|----|-------------------------------|

|   | Financial liabilities |
|--------|-----------------------|

|   | Financial liabilities measured at fair value through the statement of income include financial liabilities that are designated at the time of their initial recognition to be presented at fair value with the changes therein being recorded on the statement of income. The Company has designated its liability in respect of Convertible Debentures and Options to Convertible Debentures (both issued by a subsidiary – see Note 3 D.1. below), as  financial liabilities measured at fair value through the statement of income. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Determination of fair value of investments in shares and debt instruments |
|--------|---------------------------------------------------------------------------|

|   | The fair value of financial assets measured at fair value through the statement of income and of available-for-sale financial assets is determined with reference to their quoted closing bid price as of the date of the report without any deduction of transaction costs, and in the absence of such a quoted price, by other appropriate valuation methods. These valuation methods may include using transactions recently executed at arm's length market conditions, reference to the current market value of another, essentially similar financial instrument, discounted  cash flows analysis or other valuation methods (see details in Note 10 B.3.). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Derivatives not used for hedging or that do not meet the definition of an accounting hedge transaction |
|--------|--------------------------------------------------------------------------------------------------------|

|   | Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currency or linked to the CPI. Changes in the fair value of such derivatives are recognized in the statement of income as part of the financing income or financing expenses. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Determination of fair value of derivatives |
|--------|--------------------------------------------|

|   | 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. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Receivedloans and borrowings |
|--------|----|------------------------------|

|   | After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the EIR method amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortization is included in finance cost in the income statement. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Share capital |
|--------|----|---------------|

|   | Ordinary shares |
|--------|-----------------|

|   | Costs directly attributable to the issuance of Ordinary shares and warrants exercisable to shares classified as equity are recognized as a deduction from equity. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Issue of a unit of securities |
|--------|----|-------------------------------|

|   | The issue of a unit of securities involves the allocation of the proceeds received (before issuance expenses) to the components of the securities issued in the unit based on the following priority: fair value is initially determined for derivatives (such as warrants with an exercise increment in a currency other than the Company's functional currency) and other financial instruments presented at fair value in each period, then the fair value is determined for financial liabilities and compound instruments (such as Convertible Debentures) that are not presented at fair value in each period but rather at present value when the proceeds allocated in respect of equity instruments are determined as the residual value according to the difference that would be received between the overall proceeds and the relevant proceeds allocated as above. The issuance costs are allocated to each component pro rata to the amounts determined for each component net of tax effect, if any, in respect of equity instruments. After said allocation, each component is accounted for based on its classification (financial liability or equity instrument). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Recognition and measurement |
|--------|----|-----------------------------|

|   | Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses, if any. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | The cost includes expenditures that are directly attributable to acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to the place and condition required for them to function 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Where major items of property, plant and equipment (including costs of major periodic inspections) have different useful lives, they are accounted for as separate items (major components) of the property, plant and equipment. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 1. | Recognition and measurement (Cont.) |
|--------|----|-------------------------------------|

|   | Gains and losses on disposal of an item of property, plant and equipment are recognized in the statement of income as Other income (loss). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Subsequent costs |
|--------|----|------------------|

|   | The cost of replacing part of an item of property, plant and equipment is recognized as part of the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is eliminated. The costs of ongoing maintenance are recognized in the statement of income as incurred. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Depreciation |
|--------|----|--------------|

|   | 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. Land is not depreciated. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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                           |

|   | Leasehold improvements are amortized over the period of the lease (including any optional term the Company is entitled to and intended to be realized), which does not exceed the useful life of the asset. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The estimates regarding the depreciation method, useful life and residual value are reexamined at least at the end of each fiscal year. 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Goodwill |
|--------|----|----------|

|   | Goodwill or negative goodwill arises at the acquisition of subsidiaries, including acquisitions of rights that do not confer control thereof, and from acquisition of associates (including acquisition of additional rights in associates). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 1. | Goodwill (Cont.) |
|--------|----|------------------|

|   | Acquisitions prior to January 1, 2007 |
|--------|---------------------------------------|

|   | As part of the transition to IFRS, as permitted by IFRS 1, the Company elected not to restate according to IFRS business combinations, acquisitions of associated and acquisition of shares that do not confer control that occurred before January 1, 2007, (the date of DIC’s transition to IFRS, see additional details in the beginning of Note 2 above).In respect of prior to January 1, 2007 acquisitions, the accounting classification and treatment were not adjusted to IFRS for purposes of preparing the Company's opening balance. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Acquisitions after January 1, 2007 |
|--------|------------------------------------|

|   | Regarding acquisitions after January 1, 2007, the goodwill represents the excess of the acquisition cost of over the Company's rights in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired entity. When the excess is negative (negative goodwill), it is recognized immediately in the statement of income as a gain. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Subsequent measurement |
|--------|------------------------|

|   | Goodwill in respect of investments, which is accounted for in accordance with the equity method of accounting, is included in the carrying value of the investment. The goodwill is not amortized in a systematic manner but, rather, based on the need for its write-down due to a decline in value – see in this section and in sections H to Note 2 below. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Research and development |
|--------|----|--------------------------|

|   | Expenditures relating to research activities, undertaken with the goal of gaining new scientific or technical knowledge and understanding, are recognized in the statement of income as 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 Company 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Development costs recognized as an intangible asset are measured at cost less accumulated amortization and accumulated impairment losses. Costs incurred during the research stage or after the asset is ready for use are recorded as an expense immediately. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 3. | Other intangible assets |
|--------|----|-------------------------|

|   | a. | Intangible assets are presented at cost and include direct costs required in order to place the assets into service. 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. Expenditures relating to internally generated intangible assets, excluding capitalized development costs, are recognized in the statement of income when incurred. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | 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. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Amortization is calculated in accordance with the expected economic benefit from the assets in each period, on the basis of the estimated useful life of each group of assets. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | Intangible assets having an indefinite useful life are not amortized in a systematic manner and are subject to an examination for impairment in each reporting period or at any time there is an indication that there may have been an impairment in value (see also Section H to Note 2 below). The useful lives of these assets are examined in each reporting period in order to ascertain whether the events and circumstances continue to support the determination that the intangible asset has an indefinite useful life. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A summary of the policies applied to the Company’s intangible assets is as follows: |
|--------|-------------------------------------------------------------------------------------------|

|                             | Technology and development in process*                                              | Agreement with Rafael** | Other***                     |
|----------------------------------|-------------------------------------------------------------------------------------|-------------------------|------------------------------|
| Useful lives                     | Finite                                                                              | Indefinite              | Finite/Indefinite            |
| Amortization method used         | Over the period of expected future sales from the related project (mainly 5 years). | No amortization         | Useful life (mainly 3 years) |
| Internally generated or acquired | Acquired                                                                            | Acquired                | Acquired                     |

|   | * Mainly Technology and development in process acquired in  business combinations. |
|--------|----------------------------------------------------------------------------------------------|

|   | ** As a result of the agreement with Rafael – see Note 3 D.6. |
|--------|---------------------------------------------------------------------|

|   | *** Mainly  software. The estimates regarding the amortization method and useful life are reexamined at least at the end of every fiscal year. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Inventory is measured at the lower of cost or net realizable value. The cost of the inventory includes the expenses for acquisition of the inventory and bringing it to its 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 executing the sale. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Raw materials    | – | based on acquisition cost 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. |

|   | 1. | Financial assets |
|--------|----|------------------|

|   | The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For financial assets carried at amortised cost the Company first assesses individually 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 characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 1. | Financial assets(Cont.) |
|--------|----|-------------------------|

|   | The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in the income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | and all collateral has been realised or has been transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the income statement. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Future interest income continues to be accrued based on the reduced carrying amount of the asset and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the income statement, the impairment loss is reversed through the income statement. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Non-financial assets |
|--------|----|----------------------|

|   | The carrying amount of the Company's non-financial assets, other than inventories and deferred tax assets, is reviewed at each reporting date to determine whether there are indicators of impairment in value. Included among these indicators that the Company examines with respect to the value of its investments are general market data, a decline in the stock market prices, continuing losses in the group companies, the industry in which the group companies operate, lack of success in R&D processes in the group companies, a significant deviation from the business plan of the group companies, excess cost included in the investments, capital raising efforts made at a price less than cost and other parameters. If there are signs as stated, an estimate of the asset's recoverable amount is calculated. On January 1, 2008, the transition date to IFRS, the Company tested for impairment goodwill, intangible assets having indefinite useful lives and investments in associates including, but not limited to, investees for which goodwill and other intangibles were recognized as part of the carrying amount of the investment. In subsequent periods, the Company estimates, once a year, the recoverable amount of the goodwill and intangible assets that have indefinite useful lives or are unavailable for use, or more frequently – if there are indications of impairment. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | 2. | Non-financial assets (Cont.) |
|--------|----|------------------------------|

|   | The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its net selling price (fair value less selling expenses). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For purposes of testing impairment of identifiable assets, the assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit"). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | An impairment loss is recognized if the carrying amount of an asset or the cash-generating unit to which it relates exceeds the estimated recoverable amount. Impairment losses are recorded in the statement of income. Impairment losses recognized in respect of cash-generating units are allocated to the carrying amount of the assets in the cash-generating unit on a pro rata basis. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Losses from impairment in value recognized in prior periods are reexamined in every fiscal period in order to determine whether there are signs that the losses have declined or no longer exist. An impairment loss is revised wholly or partly in any period when there has been a change in the estimates used to determine the recoverable value, only where the asset's carrying value after reversal of the impairment loss does not exceed the carrying value net of depreciation or amortization that would have been determined if no impairment loss had been recognized. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Examination of impairment in value of an investment in an associate is made based on the overall investment. Accordingly, a loss recognized from impairment in value of an investment is not allocated specifically to the goodwill included in the investment but, rather, it is allocated to the entire investment. Therefore, the full amount of the loss from impairment in value may be reversed if the conditions required for cancellation exist. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A non-current asset or disposal group 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 plan 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 balance sheet, 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 is 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 balance sheet in a similar manner. Also, the related other comprehensive income (loss) is presented separately in the statement of changes in equity. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The Company 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Defined contribution plans |
|--------|----|----------------------------|

|   | Some of the subsidiaries have defined contribution plans, in accordance with Section 14 of the 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 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Defined benefit plans |
|--------|----|-----------------------|

|   | 3. | Short-term benefits |
|--------|----|---------------------|

|   | Short-term employee benefits include salaries, contributions to Social Security, vacation days, sick days and recreation pay, the payment date of which is expected to be in the year following the balance sheet date. The aforesaid obligations are measured on an undiscounted basis and are expensed as the related service is provided. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

|   | 3. | Short-term benefits |
|--------|----|---------------------|

|   | 4. | Share-based payment transactions |
|--------|----|----------------------------------|

|   | The fair value of employee options on the grant date is recognized as salary expense, with a corresponding increase in retained earnings, over the period that the employees become entitled to the options. The amount recognized as an expense 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, see additional details in the beginning of Note 2 above), are not accounted for retroactively, in accordance with IFRS 2 and the relief adopted pursuant to IFRS 1. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Certain options have been granted to employees for acquisition of shares in Group companies. The cost of cash-settled transactions is measured at fair value on the grant date using the Black and Scholes model, additional details are given in Note 19. The fair value is recognized as an expense over the vesting period and a corresponding liability is recognized. The liability is remeasured at each reporting date until settled at fair value with any changes in fair value recognized in the statement of income |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The provisions are determined by discounting the expected future cash flows at a pre-tax interest rate that reflects the current market assessments of the time value of money and the risks specific to the liability. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Sale of goods |
|--------|---------------|

----

----

|   | Sale of goods (Cont.) |
|--------|-----------------------|

|   | 1. | Cost of sales includes expenses for loss, storage and conveyance of inventories to the point of sale. Cost of sales also includes impairment provisions in respect of inventories, inventory write offs and provisions for slow-moving inventories , if any. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Supplier discounts – the Company recognizes discounts received from its suppliers as a reduction of the cost of the purchases. Therefore, the part of the discounts that relates to the purchases added to the closing inventory is attributed to inventory, and the rest of the discounts reduce the cost of sales. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Abovementioned discounts are fixed discounts that do not depend on the volume of purchases (this discount is calculated as a fixed percentage of the purchases 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 Company to the said discounts. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Lease agreements where the Company does not actually accept substantially all the risks and benefits incidental to ownership of the leased asset are classified as operating leases. Payments made under operating leases are recognized in the statement of income on a straight-line basis over the term of the lease, including the option period, when on the date of the transaction it was reasonably certain that the option will be exercised. Lease incentives received are recognized as an integral part of the total lease expense on a straight-line basis, over the term of the lease. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Financial income includes interest income on funds invested (including interest income on available-for-sale financial assets that constitute part of the Company’s liquid resources), gains on the sale of available-for-sale financial assets, an increase in the fair value of financial assets recognized at fair value through the statement of income, a decrease in the fair value of financial liabilities recognized at fair value through the statement of income and foreign currency gains and gains on the ineffective portion of hedging instruments that are recognized in the statement of income. Interest income is recognized as it accrues in profit or loss, using the effective interest method. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Gains and losses deriving from changes in currency exchange rate are reported on a net basis. |
|--------|-----------------------------------------------------------------------------------------------|

|   | Taxes on income include current and deferred taxes. Taxes on income are recognized in the statement of income except to the extent that they relate to items recognized directly in equity, in which case it is recorded in equity. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The current tax is the amount of tax expected to be paid on the taxable income for the reported period, using the tax rates enacted or substantially enacted as of the balance sheet date, and including changes in the tax payments relating to previous years. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. The Company does not recognize deferred taxes for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting income nor the income for tax purposes, and differences deriving from investments in subsidiaries and associates to the extent that it is probable that they will not reverse in the foreseeable future. The deferred taxes are measured using the tax rates that are expected to apply to the temporary differences when they reverse, based on the laws that have been enacted or effectively enacted as of the balance sheet date. The Company offsets deferred tax assets and liabilities if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, if they intended to settle current tax liabilities and assets on a net basis or if their tax assets and liabilities will be realized concurrently. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. The deferred tax assets are reviewed at every balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 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 the item taxes on income. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Deferred tax in respect of intercompany transactions in the consolidated financial statements is recorded according to the tax rate applicable to the buying entity. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Government grants are recognized where there is reasonable assurance that the grant will be received and the Company will comply with the attached conditions. Up to December 31, 2008, government grants received from the Office of the Chief Scientist in Israel (“OCS”), in respect of support of research and development activities, which include a commitment for royalty payments to the State of Israel that are contingent on execution of future sales deriving from the development, were recognized as a liability and a loan received from the government bearing no interest or interest lower than market interest rate was accounted for upon the initial recognition thereof and in subsequent periods if it was expected that economic benefits stemming from the research and development activities will lead to sales entitling the State to royalties. Amounts paid as royalties were recorded as repayment of the liability. The difference between the amount of the loan received and the fair value is 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) Where economic benefits, as stated, were not expected, the grant receipts were recognized as a reduction in the 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 approved grant). In such a case, the liability to pay royalties was accounted for as a contingent liability pursuant to IAS 37 until such liability is recognized. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Commencing from January 1, 2009, and in accordance with the amended IAS 20, a loan received from the government bearing no interest or interest lower than market interest rate is accounted for upon the initial recognition thereof and in subsequent periods pursuant to the provisions of IAS 39 – "Financial Instruments: Recognition and Measurement". Therefore, the loan is initially recognized at fair value along with discounting using the market interest rate unless loan is considered a forgivable loan under the provisions of IAS 20 as revised. The difference between the amount of the loan received and the fair value is accounted for commencing from January 1, 2009 as a government grant in accordance with the provisions of the IAS 20 (i.e., recognized as income in direct relation to expenses attributable to the approved grant). There has been no change to the accounting for the government grants which are considered a forgivable loan and for which economic benefits, as stated, were not expected. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The amendment is applied prospectively commencing from January 1, 2009, in connection with grants received after this date. |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The earnings (loss) per share are computed by dividing the net income attributable to the Company's shareholders by the weighted-average number of shares outstanding during the period. Calculation of the basic earnings (loss) per share includes only shares actually outstanding during the period. Potential ordinary shares (convertible securities, such as, Convertible Debentures, options and employee options) are included in calculation of the diluted earnings (loss) per share only if their impact dilutes the earnings (loss) per share in that their conversion reduces the earnings (loss) per share or increases the loss per share from continuing operations. In addition, potential ordinary shares converted during the period are included in calculation of the diluted earnings (loss) per share only up to the conversion date, and from this date forward they are included in calculation of the basic earnings (loss) per share. In earning per share computation, the Company's share in the income of group companies is calculated based on its share in the earnings (loss) per share of those group companies multiplied by the number of shares held by the Company. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Presentation of consolidated financial statements |
|--------|----|---------------------------------------------------|

|   | Commencing from January 1, 2009, the Company applies Accounting Standard IAS 1, "Presentation of Financial Statements, Amended" ("IAS 1"). IAS 1 permits presentation of the total income in one statement (a combined statement of income and other comprehensive income), or in two separate statements – a statement of income and a statement of other comprehensive income. The Company chose to present items of income and expense and items of other comprehensive income in two statements – a statement of income and thereafter a statement of comprehensive income. In addition, the Company presents a statement of changes in equity in place of disclosure as part of the notes to the financial statements, immediately following the statement of comprehensive income. IAS 1 was applied retroactively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | IFRS 2 - Share-based Payment |
|--------|----|------------------------------|

----

----

|   | 2. | IFRS 2 - Share-based Payment (Cont.) |
|--------|----|--------------------------------------|

|   | 3. | IAS 28 - Investment in Associates |
|--------|----|-----------------------------------|

|   | 4. | IFRS 7 Financial Instruments: Disclosures |
|--------|----|-------------------------------------------|

|   | 5. | IFRIC 16 - Hedges of a Net Investment in a Foreign Operation |
|--------|----|--------------------------------------------------------------|

----

----

|   | 1. | IFRS 3 (Revised) - Business Combinations and IAS 27 (Amended) - Consolidated and Separate Financial Statements |
|--------|----|----------------------------------------------------------------------------------------------------------------|

|   | IFRS 3 (Revised) and the amendments to IAS 27 ("the Standards") will be effective for annual financial statements for periods beginning on January 1, 2010. Earlier application is permitted. The Company did not early adopt the provisions of these 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. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | IFRS 3 currently prescribes that goodwill, as opposed to the acquiree's other identifiable assets and liabilities, will be measured as the excess of the cost of the acquisition over the acquirer's share in the fair value of the identifiable assets, net on the acquisition date. According to the Standards, non-controlling interests, including goodwill, can be measured either at fair value or at the proportionate share of the acquiree's fair value of net identifiable assets, this is measured 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 simultaneously recognized as goodwill adjustments. If the contingent consideration is classified as a financial liability 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 as opposed to the previous requirement of carrying them as part of the consideration of the cost of the business combination, which has been removed. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | 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 transaction with the non-controlling interests, whether a sale or an acquisition, will be 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, will be allocated between the parent company and non-controlling interests, even if the non-controlling interest has not guaranteed or has no contractual obligation for sustaining the subsidiary or of investing further amounts. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 1. | IFRS 3 (Revised) - Business Combinations and IAS 27 (Amended) - Consolidated and Separate Financial Statements (cont.) |
|--------|----|------------------------------------------------------------------------------------------------------------------------|

|   | - | On the loss or achievement of control of a subsidiary, the remaining investment, 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. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | IFRS 9 - Financial Instruments |
|--------|----|--------------------------------|

|   | In November 2009, the IASB issued IFRS 9, "Financial Instruments", which represents the first phase 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. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. 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. 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 made with a retrospective restatement of comparative figures, subject to the reliefs set out in the Standard. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | IFRS 9 - Financial Instruments (Cont.) |
|--------|----|----------------------------------------|

|   | The Company is evaluating the possible effect of the adoption of the new Standard on the consolidated financial statements but is presently unable to assess such effect, if any. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | IAS 1 - Presentation of Financial Statements |
|--------|----|----------------------------------------------|

|   | The amendment to IAS 1 deals with current or non-current classification of the liability component of a convertible instrument. Pursuant to the amendment, terms of a liability that can, at the option of the counterparty, be settled by the issue of the entity's equity instruments do not affect its classification as current or non-current. The amendment will be prospectively adopted starting from the financial statements for periods beginning on January 1, 2010. Earlier application is permitted. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company believes that the effect of the amendment on the financial statements is not expected to be material. |
|--------|-------------------------------------------------------------------------------------------------------------------|

|   | 4. | IAS 32 - Financial Instruments: Presentation - Classification of Rights Issues |
|--------|----|--------------------------------------------------------------------------------|

|   | The amendment to IAS 32 determines that rights, options or share options to acquire a fixed number of the entity's equity instruments for a fixed amount of any currency are classified as equity instruments if the entity offers the rights, options or share options pro rata to all of its existing owners of the same class of its non-derivative equity instruments. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company believes that the effect of the amendment on the financial statements is not expected to be material |
|--------|------------------------------------------------------------------------------------------------------------------|

|   | 5. | IAS 36 - Impairment of Assets |
|--------|----|-------------------------------|

|   | The amendment to IAS 36 defines the required accounting unit to which goodwill will be allocated for impairment testing of goodwill. Pursuant to the amendment, the largest unit permitted for impairment testing of goodwill acquired in a business combination is an operating segment as defined in IFRS 8, "Operating Segments" before the aggregation for reporting purposes. The amendment will be prospectively adopted starting from the financial statements for periods beginning on January 1, 2010. Earlier application is permitted. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company believes that the effect of the amendment on the financial statements is not expected to be material. |
|--------|-------------------------------------------------------------------------------------------------------------------|

|   | 6. | IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations |
|--------|----|-----------------------------------------------------------------------|

|   | 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 to significant influence, all the assets and liabilities attributed to the subsidiary will be classified as held for sale if the relevant criteria of IFRS 5 are met, including the presentation as a discontinued operation. Further, an additional 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 non-current assets or disposal groups. The amendment will be prospectively adopted starting from the financial statements for periods beginning on January 1, 2010. Earlier application is permitted. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 6. | IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations (Cont.) |
|--------|----|-------------------------------------------------------------------------------|

|   | The Company is currently evaluating the impact of adopting the provisions of IFRS 5. |
|--------|--------------------------------------------------------------------------------------|

|   | 7. | IFRIC 17 - Distributions of Non-cash Assets to Owners |
|--------|----|-------------------------------------------------------|

|   | IFRIC 17 ("the Interpretation") provides guidance on how to account for a non-cash asset distribution to owners, including property and equipment, a business as defined in IFRS 3 and ownership interests in another entity. The Interpretation will be prospectively adopted starting from the financial statements for periods beginning on January 1, 2010. Earlier application is permitted. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | According to the Interpretation, a liability to distribute is recognized when it is appropriately authorized by the entity. The liability is measured at the fair value of the asset to be distributed and carried directly to retained earnings in equity. At each balance sheet date, until the derecognition of the asset, the liability is measured at the fair value of the assets and the changes in fair value are carried to retained earnings. At the date of derecognition, a gain or loss is recognized in the statement of income in the amount of the difference between the amount of the liability and the carrying amount of the asset until the date of derecognition. Further, the scope of IFRS 5 was amended to include non-cash asset distributions to owners. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company does not expect IFRIC 17 to have an impact on the consolidated financial statements as the Company has not made any non-cash distributions to shareholders. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments |
|--------|----|------------------------------------------------------------------------|

|   | IFRIC 19 ("the Interpretation") which was published in November 2009 addresses the accounting treatment of transactions in which financial liabilities are settled by issuing equity instruments. According to the Interpretation, equity instruments issued as a replacement of a debt instrument are measured at fair value of the equity instruments issued unless the fair value can not be reliably measured. If the fair value of the equity instruments issued can not be reliably measured, then the equity instruments are measured to reflect the fair value of the financial liability extinguished when extinguished. The difference between the carrying amount of the financial liability extinguished and the fair value of the equity instruments issued is recognized in the statement of income. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Interpretation will be adopted for annual periods beginning on or after January 1, 2010. Earlier application is permitted. The Company believes that the effect of the amendment on the financial statements is not expected be material. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| A. | Composition of investments in associates |
|----|------------------------------------------|

|                           |   | December 31 |     |   | December 31 |   |     | January 1   |   |
|--------------------------------|--------|-------------|----------|--------|-------------|--------|----------|-------------|--------|
|                           |   | 2009        |     |   | 2008        |   |     | 2008        |   |
|                           |   | $ thousands |     |   | $ thousands |   |     | $ thousands |   |
| Original cost of shares        |   |        | 296,479  |   |        |   | 300,437  |        |   |   | 268,738 |   |
| Equity in losses of associates |   |        | (181,788 | )      |        |   | (132,071 | )           |   |   | (123,781 | ) |
| Less impairment provision      |   |        | (1,454   | )      |        |   | -        |        |   |   | - |   |
| Carrying amount                |   |        | 113,237  |   |        |   | 168,366  |        |   |   | 144,957 |   |
|                           |   |        |     |   |        |   |     |        |   |   |   |   |
| The carrying amount includes:  |   |        |     |   |        |   |     |        |   |   |   |   |
| Allocated excess of cost       |   |        | 47,080   |   |        |   | 55,100   |        |   |   | 45,890 |   |
| Goodwill                       |   |        | 21,424   |   |        |   | 22,353   |        |   |   | 18,552 |   |
|                           |   |        | 68,504   |   |        |   | 77,453   |        |   |   | 64,442 |   |

| B. | Condensed financial-statement data of associates |
|----|--------------------------------------------------|

|               |   | Assets      |    |   | Liabilities |   |    | Revenues |   |   | Net income (loss) |   |
|--------------------|--------|-------------|---------|--------|-------------|--------|---------|----------|--------|--------|-------------------|--------|
|               |   | $ thousands |    |
|               |   |        |    |   |        |   |    |     |   |   |              |   |
| 2009(A)            |   |        |    |   |        |   |    |     |   |   |              |   |
| Given Imaging Ltd. |   |        | 188,136 |   |        |   | 28,835  |     |   |   | 145,016           |   |   |   | 17,450 |   |
| Other              |   |        | 98,461  |   |        |   | 150,416 |     |   |   | 85,708            |   |   |   | (55,065 | ) |

|               |   | Assets      |    |   | Liabilities |   |    | Revenues |   |   | Net income (loss) |   |
|--------------------|--------|-------------|---------|--------|-------------|--------|---------|----------|--------|--------|-------------------|--------|
|               |   | $ thousands |    |
|               |   |        |    |   |        |   |    |     |   |   |              |   |
| 2008(A)            |   |        |    |   |        |   |    |     |   |   |              |   |
| NetVision Ltd.     |   |        | 427,898 |   |        |   | 144,978 |     |   |   | 344,102           |   |   |   | 24,180 |   |
| Given Imaging Ltd. |   |        | 178,929 |   |        |   | 28,601  |     |   |   | 132,361           |   |   |   | 6,098 |   |
| Other              |   |        | 121,426 |   |        |   | 189,061 |     |   |   | 103,534           |   |   |   | (124,025 | ) |

----

----

| B. | Condensed financial-statement data of associates (Cont.) |
|----|----------------------------------------------------------|

|               |   | Assets      |    |   | Liabilities |   |
|--------------------|--------|-------------|---------|--------|-------------|--------|
|               |   | $ thousands |    |
|               |   |        |    |   |        |   |
| January 1, 2008(A) |   |        |    |   |        |   |
| NetVision Ltd.     |   |        | 393,628 |   |        |   | 144,561 |   |
| Given Imaging Ltd. |   |        | 174,309 |   |        |   | 38,807 |   |
| Other              |   |        | 169,254 |   |        |   | 261,220 |   |

|   | A) | Condensed financial-statement data of companies having a functional currency other than the dollar was translated based on the relevant rates of exchange (assets and liabilities - rate as of the end of the period, revenues and gain (loss) – average rate for the year ended). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C. | Details regarding investment in listed securities of associates |
|----|-----------------------------------------------------------------|

|               |   | December 31, 2009    |   |   | December 31, 2008 |   |    | January 1, 2008 |   |
|--------------------|--------|----------------------|--------|--------|-------------------|--------|---------|----------------------|--------|
|               |   | Equity               |   |   |              |   |    |                 |   |   | Equity |   |   |   |   |   |   |   |   | Equity |   |   |   |   |   |   |   |
|               |   | holding              |   |   |              |   |    |                 |   |   | holding |   |   |   |   |   |   |   |   | holding |   |   |   |   |   |   |   |
|               |   | Share (consolidated) |   |   | Carrying value    |   |    | Market value         |   |   | Share (consolidated) |   |   | Carrying value |   |   | Market value |   |   | Share (consolidated) |   |   | Carrying value |   |   | Market value |   |
|               |   | %                    |   |   | $ thousands       |   |    | %                    |   |   | $ thousands |   |   | % |   |   | $ thousands |   |
|               |   |                 |   |   |              |   |    |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Netvision Ltd.*    |   |                 | -      |   |              |   | -       |                 |   |   | - |   |   |   | 15.79 |   |   |   | 43,503 |   |   |   | 29,700 |   |   |   | 16.04 |   |   |   | 39,201 |   |   |   | 53,000 |   |
|               |   |                 |   |   |              |   |    |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd. |   |                 | 32.23  |   |              |   | 104,501 |                 |   |   | 165,256 |   |   |   | 32.35 |   |   |   | 107,901 |   |   |   | 78,400 |   |   |   | 27.37 |   |   |   | 85,826 |   |   |   | 186,100 |   |

| D. | Significant changes in investments |
|----|------------------------------------|

|   | Subsidiaries |
|--------|--------------|

|   | 1. | Starling |
|--------|----|----------|

|   | Starling Advanced Communications Ltd. ("Starling") specializes in the development, design and marketing of SATCOM, low profile antenna systems that enable full featured broadband connectivity on any mobile platform. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 1. | Starling (Cont.) |
|--------|----|------------------|

|   |   | On June 13, 2007, Starling, then a 72.5% subsidiary of Elron, completed an initial public offering on the Tel Aviv Stock Exchange (TASE) in Israel of shares and convertible securities (convertible, bearing annual 6% interest  and NIS, ("New Israeli Shekels") Israeli CPI linked debentures ("Convertible Debentures")) and options to purchase the Convertible Debentures ("Convertible Debentures Options") in consideration for aggregate gross proceeds of approximately NIS 57,000 (approximately $14,000). An amount of approximately $12,100 (amount denominated in NIS) proceeds from the issuance of 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 its subsidiary, 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%. Since Elron still has control over Starling, Elron continues to account for Starling as a consolidated subsidiary. During October 2008 Elron purchased 7,638,323 Convertible Debentures in private transactions and additional 10,139,455 as a part of partial tender offer for a total amount of approximately $2,000 and $2,400, respectively. Subsequent to the abovementioned transactions, Elron and RDC beneficially owns 26,453,578 out of a total of 42,364,000 outstanding Convertible Debentures which represent approximately 62% of the outstanding Convertible Debentures. In May 2009, Elron and RDC signed a loan agreement ("the First Loan Agreement") in the aggregate amount of $2,600 which was advanced to Starling in two installments. The first installment in the amount of $1,400 (of which Elron's share is approximately $650) was advanced during June 2009. The second installment in the amount of $1,200 (of which Elron's share is approximately $560) was advanced during July 2009. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In July 2009, Elron and RDC signed a second loan agreement ("the Second Loan Agreement") with substantially the same terms as in the First Loan Agreement, pursuant to which Elron and RDC provided Starling with an additional loan in five installments in the aggregate amount of $3,200 (of which Elron's share is $1,486), which were advanced during August through December 2009. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 2. | Medingo |
|--------|----|---------|

|   | Medingo Ltd. ("Medingo") is developing solutions specifically for the needs of insulin-dependent diabetic patients. Medingo's device is a miniature dispensing patch, which is aimed to be convenient, easy to use, discreet and more cost-effective than standard insulin pumps. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Medingo is a subsidiary of Elron, which directly holds 9% of the issued share capital and which holds an additional 84% through its subsidiary RDC, on outstanding and on as converted basis. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In February 2009, the shareholders of Medingo, including Elron and RDC, extended to Medingo an investment in the aggregate amount of $5,500 in two installments. The first installment in the amount of $1,200 (of which Elron's and RDC's share is approximately $100 and $1,000, respectively) was granted immediately and the second installment in the amount of $4,300 (of which Elron's and RDC's share is approximately $400 and $3,600, respectively) was granted during April 2009. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 2. | Medingo (Cont.) |
|--------|----|-----------------|

|   | 3. | Impliant |
|--------|----|----------|

|   | Impliant Inc. ("Impliant") is a privately held medical device company, engaged in the development of a novel posterior motion preservation system for spine surgery. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In March, 2008, Elron extended an investment in the amount $6,000 to Impliant as part of an aggregate investmnet of $10,000 in two installments. The first installment in the amount of $5,000 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 3. | Impliant (Cont.) |
|--------|----|------------------|

|                                        |   | Value on books of Impliant on date of consolidation |   |   | Fair value adjustments |   |   | Values recognized upon beginning of consolidation |   |
|---------------------------------------------|--------|-----------------------------------------------------|--------|--------|------------------------|--------|--------|---------------------------------------------------|--------|
|                                        |   | $ in thousands                                      |   |
| Cash and cash equivalents                   |   |                                                | 3,349  |   |                   |   | -      |                                              |   |   | 3,349 |   |
| Short term bank deposits                    |   |                                                | 24     |   |                   |   | -      |                                              |   |   | 24 |   |
| Other receivables                           |   |                                                | 1,987  |   |                   |   | -      |                                              |   |   | 1,987 |   |
| Property and equipment, net                 |   |                                                | 1,093  |   |                   |   | -      |                                              |   |   | 1,093 |   |
| Current liabilities                         |   |                                                | (3,826 | )      |                   |   | -      |                                              |   |   | (3,826 | ) |
| Accrued severance pay, net                  |   |                                                | (59    | )      |                   |   | -      |                                              |   |   | (59 | ) |
| Amount allocated to IPR&D               |   |                                                | -      |   |                   |   | 3,346  |                                              |   |   | 3,346 |   |
| Total identifiable net assets at fair value |   |                                                | 2,568  |   |                   |   | 3,346  |                                              |   |   | 5,914 |   |
| Non-controlling interest resulted           |   |                                                |   |   |                   |   |   |                                              |   |   | (2,605 | ) |

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

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

|   | Wavion Inc. ("Wavion") is a developer of broadband wireless access systems for Wi-Fi networks. |
|--------|------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 4. | Wavion (Cont.) |
|--------|----|----------------|

|                                        |   | Value on books of Wavion on date of consolidation |   |   | Fair value adjustments |   |   | Values recognized upon beginning of consolidation |   |
|---------------------------------------------|--------|---------------------------------------------------|--------|--------|------------------------|--------|--------|---------------------------------------------------|--------|
|                                        |   | $ in thousands                                    |   |
| Cash and cash equivalents                   |   |                                              | 1,557  |   |                   |   | -      |                                              |   |   | 1,557 |   |
| Trade receivables                           |   |                                              | 8      |   |                   |   | -      |                                              |   |   | 8 |   |
| Other receivables                           |   |                                              | 289    |   |                   |   | -      |                                              |   |   | 289 |   |
| Inventory                                   |   |                                              | 377    |   |                   |   | -      |                                              |   |   | 377 |   |
| Property and equipment, net                 |   |                                              | 1,089  |   |                   |   | -      |                                              |   |   | 1,089 |   |
| Deposits with leasing companies             |   |                                              | 46     |   |                   |   | -      |                                              |   |   | 46 |   |
| Current liabilities                         |   |                                              | (6,805 | )      |                   |   | (367   | )                                                 |   |   | (7,172 | ) |
| Accrued severance pay, net                  |   |                                              | (55    | )      |                   |   | -      |                                              |   |   | (55 | ) |
| Amount allocated to acquired Technology     |   |                                              | -      |   |                   |   | 6,723  |                                              |   |   | 6,723 |   |
| Total identifiable net assets at fair value |   |                                              | (3,494 | )      |                   |   | 6,356  |                                              |   |   | 2,862 |   |
| Non-controlling interest resulted           |   |                                              |   |   |                   |   |   |                                              |   |   | (1,186 | ) |

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 4. | Wavion (Cont.) |
|--------|----|----------------|

|   | 5. | 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | Rafael Development Corporation Ltd. ("RDC") |
|--------|----|---------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Subsidiaries (Cont.) |
|--------|----------------------|

|   | 6. | Rafael Development Corporation Ltd. ("RDC") (Cont.) |
|--------|----|-----------------------------------------------------|

|   | Associates |
|--------|------------|

|   | 7. | 3DV |
|--------|----|-----|

|   | 3DV Systems Ltd. ("3DV") was an Israeli company that developed a unique 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. In consideration for the sale and following the payment of certain expenses, proceeds to be distributed to Elron and RDC are expected to amount of approximately $3,600 and $4,400, respectively. During June-July 2009, 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds, in the aggregate amount of approximately $18,800, of which the shares of Elron and RDC were approximately $3,100 and $3,700, respectively. As a result of the sale of 3DV’s assets, the Company recorded a gain of $6,090 that was recorded as gain from disposal of associate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Netvision |
|--------|----|-----------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Associates (Cont.) |
|--------|--------------------|

|   | 8. | Netvision (Cont.) |
|--------|----|-------------------|

|   | 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 million and NIS 26 million, respectively (approximately $21,200 and $7,000, respectively), in the aggregate, of which the Company’s share was approximately NIS 14.2 and NIS 4 million, respectively (approximately $3,300 and $1,048, respectively, as of date of payment). Payments of these dividends took place on April 7, 2009 and on September 9, 2009, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 9. | Given Imaging |
|--------|----|---------------|

|   | Given Imaging Ltd. ("Given"), a medical device company that develops manufactures and markets innovative diagnostic systems for visualizing the gastrointestinal tract, using a disposable miniature swallowable video capsules. Given is traded on the NASDAQ and the Tel-Aviv Stock Exchange (symbol: GIVN). The investment in Given is accounted according to the equity method of accounting. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Associates (Cont.) |
|--------|--------------------|

|   | 9. | Given Imaging (Cont.) |
|--------|----|-----------------------|

|   | Regarding placement of a lien on Given shares in favor of two banks, see Note 16. |
|--------|-----------------------------------------------------------------------------------|

|   | 10. | ChipX |
|--------|-----|-------|

|   | On November 9, 2009, ChipX Inc. ("ChipX") completed a merger with GigOptix Inc. ("GigOptix") (a U.S. company traded on the OTC.BB. in the United States), pursuant to which the former shareholders of ChipX received 40% of the shares of the merged company, of which Elron's share is approximately 8.7%, on an issued and outstanding basis. As a result of the merger, Elron recognized a gain of $1,500 during the fourth quarter of 2009, which was recorded in the statement income as gain from disposal of associate. The Company accounted for its investment in the merged company as Other Investment, since it does not retain a significance influence post the completion of the merger transaction. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Associates (Cont.) |
|--------|--------------------|

|   | 11. | Pocared |
|--------|-----|---------|

|   | Pocared Diagnostics Ltd. ("Pocared") provides an innovative solution for real-time, reagentless In-Vitro Diagnostics (IVD). Pocared's technological platform is aimed to be used to address a wide range of medical and industrial diagnostic applications. Pocared is 31.5% held by Elron on an issued and outstanding and as converted basis. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During April 2009, Pocared completed a financing round of $ 6,600, of which Elron's share was approximately $2,400,  in consideration for 10,413,052 Preferred E shares. The financing round was completed in two installments during April 2009. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During January 2010, subsequent to the balance sheet date, the shareholders of Pocared including Elron, granted Pocared an additional investment in the aggregate amount of $3,000, of which Elron's share was $ 1,500. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 12. | Teledata |
|--------|-----|----------|

|   |   | Teledata Networks Ltd. ("Teledata"), an associate, the investment in which is accounted for using the equity method of accounting designs, develops, manufactures, markets and supports advanced wire line customer access network equipment for telephone operating companies worldwide. In April 2007 and June 2008, Teldata received loans and guarantees convertible into loans from its shareholders in the amount of $4,000. Elron's share in the said amount is $2,000 ($800 as a loan and $1,200 as a guarantee). On January 25, 2010, subsequent to the balance sheet date, Teldata received an additional guarantee in the amount of $3,000. Elron's share in the said amount was approximately $1,500, outstanding until June, 2010. Elron's total share in the loss of Teledata included its share in the abovementioned loan and guarantees. As a result, equity losses in the total amount of $ 1,520 in the year ended December 31, 2009 ($ 1,250 in the year ended December 31, 2008) were recorded. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| D. | Significant changes in investments (Cont.) |
|----|--------------------------------------------|

|   | Associates (Cont.) |
|--------|--------------------|

|   | 12. | Teledata (Cont.) |
|--------|-----|------------------|

|                                   |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|----------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                   |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                   |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Cash                                   |   |        | 5,512  |   |        |   | 14,866 |        |   |   | 8,354 |   |
| Cash equivalents - short-term deposits |   |        | 59,235 |   |        |   | 2,498  |        |   |   | 11,736 |   |
|                                   |   |        |   |   |        |   |   |        |   |   |   |   |
| Cash and cash equivalents              |   |        | 64,747 |   |        |   | 17,364 |        |   |   | 20,090 |   |

|                               |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                               |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                               |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
|                               |   |        |   |   |        |   |   |        |   |
| Marketable securities - Debentures |   |        | -      |   |        |   | -      |        |   |   | 16,900 |   |

----

----

|                                                                  |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|-----------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                                  |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                                  |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Financial instruments available for sale (1)(2)                       |   |        |   |   |        |   |   |        |   |
| U.S. government agencies and corporate debentures                     |   |        | -      |   |        |   | -      |        |   |   | 29,730 |   |
|                                                                  |   |        |   |   |        |   |   |        |   |   |   |   |
|    (1)    Includes unrealized gain |   |        | -      |   |        |   | -      |        |   |   | 437 |   |
|    (2)    Includes unrealized loss |   |        | -      |   |        |   | -      |        |   |   | (186 | ) |

|                               |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                               |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                               |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Open accounts                      |   |        | 2,105  |   |        |   | 1,172  |        |   |   | 1,043 |   |
| Less: provision for doubtful debts |   |        | 21     |   |        |   | 22     |        |   |   | - |   |
|                               |   |        |   |   |        |   |   |        |   |   |   |   |
|                               |   |        | 2,084  |   |        |   | 1,150  |        |   |   | 1,043 |   |

|                                                    |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|---------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                    |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                    |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Associates                                              |   |        | 13     |   |        |   | 48     |        |   |   | 139 |   |
| Government institutions                                 |   |        | 1,169  |   |        |   | 1,455  |        |   |   | 1,317 |   |
| Prepaid expenses                                        |   |        | 1,129  |   |        |   | 2,590  |        |   |   | 216 |   |
| Government grants                                       |   |        | 319    |   |        |   | 79     |        |   |   | 385 |   |
| Receivables in respect of shares issued by a subsidiary |   |        | -      |   |        |   | -      |        |   |   | 2,550 |   |
| Advances to suppliers                                   |   |        | 454    |   |        |   | 657    |        |   |   | - |   |
| Other current assets                                    |   |        | 307    |   |        |   | 958    |        |   |   | 662 |   |
|                                                    |   |        |   |   |        |   |   |        |   |   |   |   |
|                                                    |   |        | 3,391  |   |        |   | 5,787  |        |   |   | 5,269 |   |

|             |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|             |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|             |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Raw materials    |   |        | 2,589  |   |        |   | 736    |        |   |   | 432 |   |
| Goods in process |   |        | 251    |   |        |   | 353    |        |   |   | 744 |   |
| Finished goods   |   |        | 742    |   |        |   | 913    |        |   |   | 556 |   |
|             |   |        |   |   |        |   |   |        |   |   |   |   |
|             |   |        | 3,582  |   |        |   | 2,002  |        |   |   | 1,732 |   |

----

----

|                                |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|-------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Financial assets available for sale |   |        | 14,527 |   |        |   | 7,511  |        |   |   | 13,102 |   |

|                  |   | December 31, 2009 |   |   | December 31, 2008 |   |   | January 1, 2008 |   |
|-----------------------|--------|-------------------|--------|--------|-------------------|--------|--------|----------------------|--------|
|                  |   |              |   |   | Not               |   |   |                 |   |   |   |   |   | Not |   |   |   |   |   |   |   |   | Not |   |   |   |   |
|                  |   | Registered        |   |   | registered        |   |   |                 |   |   | Registered |   |   | registered |   |   |   |   |   | Registered |   |   | registered |   |   |   |   |
|                  |   | for               |   |   | for               |   |   |                 |   |   | for |   |   | for |   |   |   |   |   | for |   |   | for |   |   |   |   |
|                  |   | trade             |   |   | trade             |   |   | Total                |   |   | trade |   |   | trade |   |   | Total |   |   | trade |   |   | trade |   |   | Total |   |
|                  |   | $ thousands       |   |   | $ thousands       |   |   | $ thousands          |   |
| Investment in shares* |   |              | 2,013  |   |              |   | 12,514 |                 |   |   | 14,527 |   |   |   | 808 |   |   |   | 6,703 |   |   |   | 7,511 |   |   |   | 2,965 |   |   |   | 10,137 |   |   |   | 13,102 |   |
|                  |   |              |   |   |              |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | a. | Discounted Future Earnings Method- This methodology was used in valuing the shares as of the balance sheet date because the investees were 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 value of these shares. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Company Security Transaction Method ("CSTM") – according to the CSTM method the value of each entity was estimated based upon recent transactions in the entity's securities. For these transactions to be relied upon to develop an estimate of fair value, they must be arms 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 and the subject securities; volatility with the investee's projections and the volatility of comparable firms. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Allocation of fair value- After deriving the investee value, it is generally accepted that market participants would allocate the value of the investee to the different classes of equity. A method approved by the American Institute of Certified Public Accountants ("AICPA") for such allocation is an option pricing model based on the Black Scholes formula or 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 option on the value of the firm. The model uses a Black-Scholes option model or a Binomial (lattice) model to estimate the value of the investee between proceed ranges. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Note 11 - Property, Plant and Equipment |
|--------|-----------------------------------------|

|                                        |   |        |   |   |     |   |   | Computers, |   |   |         |   |   |   |   |
|---------------------------------------------|--------|-------------|--------|--------|----------|--------|--------|------------|--------|--------|--------------|--------|--------|--------|--------|
|                                        |   |        |   |   |     |   |   | office     |   |   |         |   |   |   |   |
|                                        |   |        |   |   |     |   |   | furniture  |   |   |         |   |   |   |   |
|                                        |   | Machinery   |   |   |     |   |   | and        |   |   |         |   |   |   |   |
|                                        |   | and         |   |   | Motor    |   |   | other      |   |   | leasehold    |   |   |   |   |
|                                        |   | equipment   |   |   | vehicles |   |   | equipment  |   |   | improvements |   |   | Total  |   |
|                                        |   | $ thousands |   |
|                                        |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
| Cost                                        |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
| Balance at January 1, 2008             |   |        | 931    |   |     |   | 539    |       |   |   | 2,003        |   |   |   | 842    |   |   |   | 4,315 |   |
| Additions                                   |   |        | 987    |   |     |   | 16     |       |   |   | 510          |   |   |   | 114    |   |   |   | 1,627 |   |
| Acquisitions as part of business            |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
|  combination                           |   |        | 2,651  |   |     |   | -      |       |   |   | 2,130        |   |   |   | 250    |   |   |   | 5,031 |   |
| Disposals                                   |   |        | (122   | )      |     |   | (71    | )          |   |   | (10          | )      |   |   | -      |   |   |   | (203 | ) |
| Impact of changes in currency exchange rate |   |        | 6      |   |     |   | -      |       |   |   | 4            |   |   |   | 1      |   |   |   | 11 |   |
| Balance at December 31, 2008           |   |        | 4,453  |   |     |   | 484    |       |   |   | 4,637        |   |   |   | 1,207  |   |   |   | 10,781 |   |
| Additions                                   |   |        | 922    |   |     |   | 27     |       |   |   | 287          |   |   |   | 42     |   |   |   | 1,278 |   |
| Disposals                                   |   |        | (120   | )      |     |   | (206   | )          |   |   | (139         | )      |   |   | -      |   |   |   | (465 | ) |
| Impact of changes in curenncy exchange rate |   |        | 4      |   |     |   | 0      |       |   |   | 4            |   |   |   | 0      |   |   |   | 8 |   |
| Deletions as a result of                    |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
|  discontinuance of consolidation       |   |        | (1,946 | )      |     |   | -      |       |   |   | (1,074       | )      |   |   | (113   | ) |   |   | (3,133 | ) |
| Balance at December 31, 2009           |   |        | 3,313  |   |     |   | 305    |       |   |   | 3,715        |   |   |   | 1,136  |   |   |   | 8,469 |   |

----

----

| Note 11 - Property, Plant and Equipment (Cont.) |
|-------------------------------------------------|

|                                        |   |        |   |   |     |   |   | Computers, |   |   |         |   |   |   |   |
|---------------------------------------------|--------|-------------|--------|--------|----------|--------|--------|------------|--------|--------|--------------|--------|--------|--------|--------|
|                                        |   |        |   |   |     |   |   | office     |   |   |         |   |   |   |   |
|                                        |   |        |   |   |     |   |   | furniture  |   |   |         |   |   |   |   |
|                                        |   | Machinery   |   |   |     |   |   | and        |   |   |         |   |   |   |   |
|                                        |   | and         |   |   | Motor    |   |   | other      |   |   | leasehold    |   |   |   |   |
|                                        |   | equipment   |   |   | vehicles |   |   | equipment  |   |   | improvements |   |   | Total  |   |
|                                        |   | $ thousands |   |
|                                        |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
|                                        |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
| Depreciation                                |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
| Balance at January 1, 2008             |   |        | 341    |   |     |   | 162    |       |   |   | 1,283        |   |   |   | 733    |   |   |   | 2,519 |   |
| Depreciation for the year                   |   |        | 306    |   |     |   | 49     |       |   |   | 674          |   |   |   | 69     |   |   |   | 1,098 |   |
| Disposals                                   |   |        | (102   | )      |     |   | (36    | )          |   |   | (10          | )      |   |   | -      |   |   |   | (148 | ) |
| Acquisitions as part of business            |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| combination                                 |   |        | 1,114  |   |     |   | -      |       |   |   | 1,526        |   |   |   | 209    |   |   |   | 2,849 |   |
| Impact of changes in curenncy exchange rate |   |        | 2      |   |     |   | -      |       |   |   | 3            |   |   |   | -      |   |   |   | 5 |   |
| Balance at December 31, 2008           |   |        | 1,661  |   |     |   | 175    |       |   |   | 3,476        |   |   |   | 1,011  |   |   |   | 6,323 |   |
| Depreciation for the year                   |   |        | 696    |   |     |   | 63     |       |   |   | 469          |   |   |   | 91     |   |   |   | 1,319 |   |
| Disposals                                   |   |        | (118   | )      |     |   | (77    | )          |   |   | (100         | )      |   |   | -      |   |   |   | (295 | ) |
| Impact of changes in curenncy exchange rate |   |        | 2      |   |     |   | -      |       |   |   | 3            |   |   |   | -      |   |   |   | 5 |   |
| Deletions as a result of                    |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
|  discontinuance of consolidation       |   |        | (833   | )      |     |   | -      |       |   |   | (933         | )      |   |   | (108   | ) |   |   | (1,874 | ) |
| Balance at December 31, 2009           |   |        | 1,408  |   |     |   | 161    |       |   |   | 2,915        |   |   |   | 994    |   |   |   | 5,478 |   |
|                                        |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Depreciated cost                            |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2008             |   |        | 590    |   |     |   | 377    |       |   |   | 720          |   |   |   | 109    |   |   |   | 1,796 |   |
| Balance at December 31, 2008           |   |        | 2,792  |   |     |   | 309    |       |   |   | 1,161        |   |   |   | 196    |   |   |   | 4,458 |   |
| Balance at December 31, 2009           |   |        | 1,905  |   |     |   | 144    |       |   |   | 800          |   |   |   | 142    |   |   |   | 2,991 |   |

----

----

|                                                             |   | Technology and developmentin process (1) |   |   | Agreement with Rafael (2) |   |   | Other  |   |   | Total  |   |
|------------------------------------------------------------------|--------|------------------------------------------|--------|--------|---------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                             |   |                                     |   |   |                      |   |   |   |   |   |   |   |
| Cost                                                             |   |                                     |   |   |                      |   |   |   |   |   |   |   |
| Balance at January 1, 2008                                  |   |                                     | 527    |   |                      |   | 330    |   |   |   | 295    |   |   |   | 1,152 |   |
| Acquisitions                                                     |   |                                     | -      |   |                      |   | -      |   |   |   | 62     |   |   |   | 62 |   |
| Acquisitions as part of business                                 |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  combination (3) (4)                                        |   |                                     | 10,423 |   |                      |   | -      |   |   |   | -      |   |   |   | 10,423 |   |
| Agreement with Rafael(2)                                         |   |                                     | -      |   |                      |   | 2,723  |   |   |   | -      |   |   |   | 2,723 |   |
| Impact of changes in currency                                    |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  exchange rates                                             |   |                                     | -      |   |                      |   | -      |   |   |   | (43    | )      |   |   | (43 | ) |
| Balance at December 31, 2008                                |   |                                     | 10,950 |   |                      |   | 3,053  |   |   |   | 314    |   |   |   | 14,317 |   |
| Acquisitions                                                     |   |                                     | -      |   |                      |   | -      |   |   |   | 172    |   |   |   | 172 |   |
| Deduction as part of sale of investee                            |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  Company and de-consolidation of a susidiary(3) (5)         |   |                                     | (3,846 | )      |                      |   | -      |   |   |   | -      |   |   |   | (3,846 | ) |
| Impact of changes in currency                                    |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  exchange rates                                             |   |                                     | -      |   |                      |   | -      |   |   |   | 2      |   |   |   | 2 |   |
| Balance at December 31, 2009                                |   |                                     | 7,104  |   |                      |   | 3,053  |   |   |   | 488    |   |   |   | 10,645 |   |
|                                                             |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Amortization and impairment losses arising from decline in value |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2008                                  |   |                                     | -      |   |                      |   | -      |   |   |   | 43     |   |   |   | 43 |   |
| Amortization for the year                                        |   |                                     | 1,415  |   |                      |   | -      |   |   |   | 61     |   |   |   | 1,476 |   |
| Balance at December 31, 2008                                |   |                                     | 1,415  |   |                      |   | -      |   |   |   | 104    |   |   |   | 1,519 |   |
| Amortization for the year                                        |   |                                     | 1,480  |   |                      |   | -      |   |   |   | 160    |   |   |   | 1,640 |   |
| Deletion as part of sale of investee                             |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  Company and de-consolidation of a susidiary(3) (5)         |   |                                     | (36    | )      |                      |   | -      |   |   |   | -      |   |   |   | (36 | ) |
| Impact of changes in currency                                    |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
|  exchange rates                                             |   |                                     | -      |   |                      |   | -      |   |   |   | 1      |   |   |   | 1 |   |
| Balance at December 31, 2009                                |   |                                     | 2,859  |   |                      |   | -      |   |   |   | 265    |   |   |   | 3,124 |   |
|                                                             |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Amortized cost                                                   |   |                                     |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2008                                  |   |                                     | 527    |   |                      |   | 330    |   |   |   | 252    |   |   |   | 1,109 |   |
| Balance at December 31, 2008                                |   |                                     | 9,535  |   |                      |   | 3,053  |   |   |   | 210    |   |   |   | 12,798 |   |
| Balance at December 31, 2009                                |   |                                     | 4,245  |   |                      |   | 3,053  |   |   |   | 223    |   |   |   | 7,521 |   |

| (1) Amortization is recognized within Amortization of intangible assets expenses (see also Note 2E.) |
|------------------------------------------------------------------------------------------------------|
| (2) Not amortized- indefinite useful life (see details in Note 3 D.6.)                               |
| (3) As for consolidation in 2008 of Impliant and de-consolidation in 2009 – see Note 3 D.3     |
| (4) As for consolidation in 2008 of Wavion – see Note 3 D.4                                    |
| (5) As for the sale of Sela in 2009 – see Note 3 D.5                                           |

----

----

|                                                                                    |   | Interest rate |   |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|-----------------------------------------------------------------------------------------|--------|---------------|--------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                                                    |   | 2009          |   |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                                                    |   | %             |   |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| A.    Credit and current maturities of loans from banks             |   |          |   |   |        |   |   |        |   |   |        |   |
| Current maturities of loans from banks                                             |   |          |   |   |        | -      |   |        |   | -      |        |   |   | 12 |   |
| Short-term loan(1)                                                                      |   | LIBOR +4%     |   |   |        | 10,000 |   |        |   | 828    |        |   |   | 850 |   |
|                                                                                    |   |          |   |   |        | 10,000 |   |        |   | 828    |        |   |   | 862 |   |
|                                                                                    |   |          |   |   |        |   |   |        |   |   |        |   |   |   |   |
| B.    Short-term credit and current maturities of other liabilities |   |          |   |   |        |   |   |        |   |   |        |   |   |   |   |
| Current maturities of other liabilities                                                 |   |          |   |   |        | -      |   |        |   | 2,349  |        |   |   | - |   |
| Short-term loans                                                                        |   |          | 11     | %      |        |   | 865    |        |   |   | 603         |   |   |   | 2,463 |   |
|                                                                                    |   |          |   |   |        |   | 865    |        |   |   | 2,952       |   |   |   | 2,463 |   |
|                                                                                    |   |          |   |   |        |   |   |        |   |   |        |   |   |   |   |   |
| Total short-term credit and loans                                                       |   |          |   |   |        |   | 10,865 |        |   |   | 3,780       |   |   |   | 3,325 |   |

|   | 1. | In 2008, RDC signed an agreement with a commercial bank in Israel ("the Bank"), whereby the Bank will provide 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 is Libor + 4%, and is payable quarterly. Repayment of the principal of each loan is 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 the annual rate of 0.5%. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The loans provided in accordance with the Credit Line Agreement ("the RDC Loans") are secured by a fixed, first priority lien on all the 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 are secured by a first priority floating charge on all its assets in favor of the Bank. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009, RDC utilized the entire credit line and excepted a lien on 2,461,334 shares of Given held by RDC in favor of the Bank. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|           |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|----------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|           |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|           |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Open accounts  |   |        | 3,909  |   |        |   | 3,426  |        |   |   | 2,431 |   |
| Checks payable |   |        | 364    |   |        |   | 403    |        |   |   | 805 |   |
|           |   |        |   |   |        |   |   |        |   |   |   |   |
|           |   |        | 4,273  |   |        |   | 3,829  |        |   |   | 3,236 |   |

|   | ● | Trade payables are non-interest bearing and are normally settled on 30-90 day terms. |
|--------|---------|--------------------------------------------------------------------------------------|

|   | ● | For explanations on the Company’s credit risk management processes, see Note 27. |
|--------|---------|----------------------------------------------------------------------------------------|

----

----

|                                                  |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|-------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                  |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                  |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Accrued expenses                                      |   |        | 1,828  |   |        |   | 2,406  |        |   |   | 1,026 |   |
| Liabilities to employees                              |   |        | 4,153  |   |        |   | 4,593  |        |   |   | 4,219 |   |
| Government institutions                               |   |        | 681    |   |        |   | 3,800  |        |   |   | 3,133 |   |
| Employees call options                                |   |        | 1,069  |   |        |   | 588    |        |   |   | 172 |   |
| Current maturity of royalty bearing government grants |   |        | 431    |   |        |   | 283    |        |   |   | 209 |   |
| Deferred revenues                                     |   |        | 1,071  |   |        |   | 330    |        |   |   | - |   |
| Other payables                                        |   |        | 394    |   |        |   | 486    |        |   |   | 357 |   |
|                                                  |   |        | 9,627  |   |        |   | 12,486 |        |   |   | 9,116 |   |

|                                                             |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                             |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                             |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| A.    Composition                            |   |        |   |   |        |   |   |        |   |
| Loans from banks (C.1)                                           |   |        | 30,000 |   |        |   | 35,054 |        |   |   | - |   |
| Loans from shareholder (C.2)                                     |   |        | 16,737 |   |        |   | 6,176  |        |   |   | - |   |
| Convertible Debentures*                                          |   |        | 3,383  |   |        |   | 2,161  |        |   |   | - |   |
| Other                                                            |   |        | 6,981  |   |        |   | 2,436  |        |   |   | 2,256 |   |
|                                                             |   |        | 57,101 |   |        |   | 45,827 |        |   |   | 2,256 |   |
| Less: current maturities                                         |   |        | 1,172  |   |        |   | 2,349  |        |   |   | 12 |   |
|                                                             |   |        |   |   |        |   |   |        |   |   |   |   |
|                                                             |   |        | 55,929 |   |        |   | 43,478 |        |   |   | 2,244 |   |
|                                                             |   |        |   |   |        |   |   |        |   |   |   |   |
| B.    Classification of liabilities based on |   |        |   |   |        |   |   |        |   |   |   |   |
|  repayment period                                           |   |        |   |   |        |   |   |        |   |   |   |   |
| Current maturities                                               |   |        | 1,172  |   |        |   | 2,349  |        |   |   | 12 |   |
| During second year                                               |   |        | 54,455 |   |        |   | 2,319  |        |   |   | - |   |
| During third year                                                |   |        | 737    |   |        |   | 37,722 |        |   |   | 2,244 |   |
| During fourth year                                               |   |        | 737    |   |        |   | 2,897  |        |   |   | - |   |
| During fifth year                                                |   |        | -      |   |        |   | 540    |        |   |   | - |   |
|                                                             |   |        | 57,101 |   |        |   | 45,827 |        |   |   | 2,256 |   |

|   | * As for the issuance of Convertible Debentures by Starling, refer to Note 3 D.1. |
|--------|-----------------------------------------------------------------------------------|

|   | C. | Changes in the Company's long-term liabilities |
|--------|----|------------------------------------------------|

|   | 1. | On May 15, 2008, the Company signed an agreement ("the Agreement") with Israel Discount Bank Ltd. ("Discount Bank") whereby Discount Bank will provide the Company the aggregate amount of $30,000. During the credit period, the Company will be permitted to receive loans for periods of up to three years bearing interest at the three-month Libor rate + 1.3% per year for each loan. The Company will be permitted |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | C. | Changes in the Company's long-term liabilities (Cont.) |
|--------|----|--------------------------------------------------------|

|   | 1. | On October 30, 2008, a loan agreement was signed between the Company and DIC pursuant to which DIC provided the Company an NIS-denominated loan, in an amount equivalent to $6,000, linked to the CPI and bearing CPI-linked interest at the annual rate of 5.95%. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On January 15, 2009, a second loan agreement was signed between the Company and DIC, pursuant to which DIC provided the Company an NIS-denominated loan equivalent to $2,000 linked to the CPI and bearing CPI-linked interest at the annual rate of 5.5%. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On June 15, 2009, a third loan agreement was signed between the Company and DIC, pursuant to which DIC provided the Company an NIS-denominated loan equivalent to $7,000 linked to the CPI and bearing CPI-linked interest at the annual rate of 3.23%. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The loans from DIC are subordinated to the loan from Discount Bank and their repayment date falls on the same date (September 24, 2011). If the Company makes early repayment of the loan from Discount Bank, the loans from DIC will be repaid on the same date. If repayment of the loan from Discount Bank is extended, the repayment of the loan from DIC will be extended for the same period. The Company is entitled to make early repayment of all or part of the loan from DIC if Discount Bank provides its advance consent for the said repayment in writing. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| Composition                                                                     |   |        |   |    |        |   |
|---------------------------------------------------------------------------------|--------|-------------|--------|---------|-------------|--------|
|                                                                            |   | 2009        |   |    | 2008        |   |
|                                                                            |   | $ thousands |   |    | $ thousands |   |
|                                                                            |   |        |   |
| Balance as of January 1                                                         |   |        | 9,097  |    |        |   | 5,453 |   |
| Received grants during the year                                                 |   |        | 3,250  |    |        |   | 1,267 |   |
| Initial consolidation of a subsidiary                                           |   |        | -      |    |        |   | 3,737 |   |
| Royalties paid during the year                                                  |   |        | (266   | )       |        |   | (91 | ) |
| De-consolidation of a subsidiary                                                |   |        | (2,376 | )  |        |   | - |   |
|        Amounts charged to the statement of income |   |        | (589   | )       |        |   | (1,269 | ) |
|                                                                            |   |        | 9,116  |    |        |   | 9,097 |   |
|                                                                            |   |        |   |    |        |   |   |   |
| Presented in:                                                                   |   |        |   |    |        |   |   |   |
| Other current liabilities                                                       |   |        | 431    |    |        |   | 283 |   |
| Royalty bearing government grants                                               |   |        | 8,685  |    |        |   | 8,814 |   |

| A.           Post-employment benefit plans – defined contribution plan |   | 2009        |   |   | 2008        |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                                                                |   | $ thousands |   |   | $ thousands |   |
|                                                                                                                                |   |        |   |   |        |   |
| Expense in respect of defined contribution plan                                                                                     |   |        | 719    |   |        |   | 491 |   |
|                                                                                                                                |   |        |   |   |        |   |   |   |

|                                        |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|---------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                        |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                        |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| B.    Employee benefits |   |        |   |   |        |   |   |        |   |
| Present value of defined benefit obligation |   |        | 1,474  |   |        |   | 4,207  |        |   |   | 2,491 |   |
| Fair value of plan assets                   |   |        | 1,280  |   |        |   | 3,216  |        |   |   | 1,930 |   |
|                                        |   |        |   |   |        |   |   |        |   |   |   |   |
| Deficit in the plan                         |   |        | 194    |   |        |   | 991    |        |   |   | 561 |   |

----

----

|                                                                                     |   | December 31 |   |   | December 31 |   |
|------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                     |   | 2009        |   |   | 2008        |   |
|                                                                                     |   | $ thousands |   |   | $ thousands |   |
| C.    Post-retirement benefit plan – defined benefit plan |   |        |   |   |        |   |
| Changes in the present value of defined benefit obligation                               |   |        |   |   |        |   |
| Liability for defined benefit plan as of                                                 |   |        |   |   |        |   |
|  January 1                                                                          |   |        | 4,207  |   |        |   | 2,491 |   |
| Benefits paid by the plan                                                                |   |        | (2,489 | )      |        |   | (518 | ) |
| Current service cost and interest expenses                                               |   |        | 667    |   |        |   | 850 |   |
| Additions (reductions) as part of initial                                                |   |        |   |   |        |   |   |   |
| Consolidation (de-consolidation)                                                         |   |        | (1,008 | )      |        |   | 1,374 |   |
| Changes due to exchange rate differences                                                 |   |        | 9      |   |        |   | 10 |   |
| Net actuarial gain                                                                       |   |        | 88     |   |        |   | - |   |
| Liability for defined benefit plan as of                                                 |   |        |   |   |        |   |   |   |
| December 31                                                                              |   |        | 1,474  |   |        |   | 4,207 |   |
|                                                                                     |   |        |   |   |        |   |   |   |
| Changes in the fair value of the  plan assets                                  |   |        |   |   |        |   |   |   |
| Fair value of plan assets as of January 1                                                |   |        | 3,216  |   |        |   | 1,930 |   |
| Contribution by employer                                                                 |   |        | 678    |   |        |   | 465 |   |
| Benefits paid by the plan                                                                |   |        | (1,806 | )      |        |   | (498 | ) |
| Additions (reductions) as part of initial                                                |   |        |   |   |        |   |   |   |
|  consolidation (deconsolidation)                                                    |   |        | (975   | )      |        |   | 1,326 |   |
| Expected return on plan assets                                                           |   |        | 51     |   |        |   | 186 |   |
| Net actuarial gains (losses)                                                             |   |        | 103    |   |        |   | (69 | ) |
| Exchange rate differences and other                                                      |   |        | 13     |   |        |   | (124 | ) |
|                                                                                     |   |        |   |   |        |   |   |   |
| Fair value of plan assets as of December 31                                              |   |        | 1,280  |   |        |   | 3,216 |   |

----

----

|                                                                                        |   | December 31 |   |   | December 31 |   |
|---------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                        |   | 2009        |   |   | 2008        |   |
|                                                                                        |   | $ thousands |   |   | $ thousands |   |
| C.    Post-retirement benefit plan – defined benefit plan (Cont.) |   |        |   |   |        |   |
| Expense recognized in the statement of income                                               |   |        |   |   |        |   |
| Current service cost                                                                        |   |        | 1,254  |   |        |   | 626 |   |
| Interest expenses on benefit obligation                                                     |   |        | 40     |   |        |   | 225 |   |
| Expected return on plan assets                                                              |   |        | (34    | )      |        |   | (109 | ) |
|                                                                                        |   |        |   |   |        |   |   |   |
| Total employee benefit expenses                                                             |   |        | 1,260  |   |        |   | 742 |   |
|                                                                                        |   |        |   |   |        |   |   |   |
| Expense are presented in the following                                                      |   |        |   |   |        |   |   |   |
|  categories within statement of income:                                                |   |        |   |   |        |   |   |   |
| Cost of sales                                                                               |   |        | 31     |   |        |   | 206 |   |
| Selling and marketing expenses                                                              |   |        | 88     |   |        |   | 153 |   |
| Administrative and general expenses                                                         |   |        | 780    |   |        |   | 153 |   |
| Research and development expenses                                                           |   |        | 361    |   |        |   | 230 |   |
|                                                                                        |   |        |   |   |        |   |   |   |
|                                                                                        |   |        | 1,260  |   |        |   | 742 |   |
|                                                                                        |   |        |   |   |        |   |   |   |
| Actual return                                                                               |   |        |   |   |        |   |   |   |
| Actual return on plan assets                                                                |   |        | 137    |   |        |   | (38 | ) |
|                                                                                        |   |        |   |   |        |   |   |   |

| D.           Actuarial data                                           |   | 2009   |   |   | 2008   |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                                                         |   | %      |   |   | %      |   |
| Actuarial principal assumptions used in determining the obligation for the defined benefit plan as of the date of the report |   |   |   |   |   |   |
| Discount rate as of December 31*                                                                                             |   |   | 5.07   |   |   |   | 2.8-3.1 |   |
| Expected rate of return on plan assets as of January 1*                                                                      |   |   | 4.55   |   |   |   | 3.53-3.55 |   |
| Future salary increases                                                                                                      |   |   | 4.65   |   |   |   | 2-4 |   |

|   | * | The discount rate and anticipated yield are based on debentures of the Israeli government bearing fixed interest. |
|--------|---|-------------------------------------------------------------------------------------------------------------------|

----

----

| D.           Actuarial data (Cont.) |   | 2009        |   |   | 2008        |   |
|--------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                       |   | $ thousands |   |   | $ thousands |   |
| Actuarial gains and losses recorded directly to Other Comprehensive Income                 |   |        |   |   |        |   |
| Amount accrued as of January 1                                                             |   |        | (59    | )      |        |   | (128 | ) |
| Amounts recognized during the year                                                         |   |        | 15     |   |        |   | 69 |   |
|                                                                                       |   |        |   |   |        |   |   |   |
| Amount accrued as of December 31                                                           |   |        | (44    | )      |        |   | (59 | ) |

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

|                                             |   | December 31, 2009      |       |   | December 31, 2008 |   |       | January 1, 2008 |   |
|--------------------------------------------------|--------|------------------------|------------|--------|-------------------|--------|------------|-----------------|--------|
|                                             |   | Authorized             |       |   | Issued andpaid-up |   |       | Authorized      |   |   | Issued andpaid-up |   |   | Authorized |   |   | Issued andpaid-up |   |
|                                             |   |  Number of shares |       |
|                                             |   |                   |       |   |              |   |       |            |   |   |   |   |   |   |   |   |   |   |
| Ordinary shares of NIS 0.003 par value each |   |                   | 35,000,000 |   |              |   | 29,650,017 |            |   |   | 35,000,000 |   |   |   | 29,650,017 |   |   |   | 35,000,000 |   |   |   | 29,650,017 |   |

|   | B. | Rights conferred by shares |
|--------|----|----------------------------|

|   | 1. | Voting rights at the General Meetings, right to dividends, rights upon liquidation of the Company and right to appoint the Company’s directors. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Traded on the Tel-Aviv Stock Exchange and Over The Counter in the United States (see also Note 1, above). |
|--------|----|---------------------------------------------------------------------------------------------------------------------|

|   | C. | Capital Management |
|--------|----|--------------------|

|   | The policy of the management of the Company and the managements of its subsidiaries is to maintain a strong capital base in order to preserve their ability to continue operating so that they may provide a return on capital to their shareholders, benefits to other holders of interests in them such as their credit providers and employees, and sustain future development of the business. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Earnings (loss) per share |
|--------|----|---------------------------|

|   | 1. | Basic loss per share |
|--------|----|----------------------|

|   | Calculation of the basic loss per share for the year ended December 31, 2009 was based on the loss attributable to the holders of the ordinary shares in the amount of $14,254 (for the year ended December 31, 2008 – $71,920) divided by the weighted-average number of ordinary shares outstanding in the amount of 29,650,017 (2008 –29,650,017 as well), as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | D. | Earnings (loss) per share (Cont.) |
|--------|----|-----------------------------------|

|   | 1. | Basic loss per share (Cont.) |
|--------|----|------------------------------|

|   | a. | Loss attributable to the holders of the Company’s ordinary shares |
|--------|----|-------------------------------------------------------------------------|

|                                                                         |   | For the     |   |   | For the     |   |
|------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                         |   | year ended  |   |   | year ended  |   |
|                                                                         |   | December    |   |   | December    |   |
|                                                                         |   | 2009        |   |   | 2008        |   |
|                                                                         |   | $ thousands |   |   | $ thousands |   |
| Net loss                                                                     |   |        | 14,304 |   |        |   | 71,834 |   |
| Adjustment of Elron’s share in loss (profit) of associates*            |   |        | (50    | )      |        |   | 86 |   |
| Loss attributable to the holders of the Company’s ordinary shares |   |        | 14,254 |   |        |   | 71,920 |   |

|   | b. | Weighted-average number of ordinary shares in thousands of shares of NIS 0.003 par value |
|--------|----|-----------------------------------------------------------------------------------------------|

|                                             |   | 2009   |       |   | 2008   |   |
|--------------------------------------------------|--------|--------|------------|--------|--------|--------|
| Balance as of January 1                          |   |   | 29,650,017 |   |   |   | 29,650,017 |   |
| Impact of options                                |   |   | -          |   |   |   | - |   |
| Weighted-average number of ordinary shares       |   |   |       |   |   |   |   |   |
|  used to calculate basic earnings per share |   |   | 29,650,017 |   |   |   | 29,650,017 |   |

|   | 2. | Diluted loss per share |
|--------|----|------------------------|

|   | Calculation of the diluted loss per share for the year ended December 31, 2009 was based on the loss attributable to the holders of the ordinary shares in the amount of $14,592 (for the year ended December 31, 2008 – $72,380) divided by the weighted-average number of ordinary shares outstanding (no adjustment for potentially dilutive ordinary shares  was needed in 2009 and 2008), as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a. | Loss attributable to the holders of the Company’s ordinary shares (diluted) |
|--------|----|-----------------------------------------------------------------------------------|

|                                                                                               |   | For the     |   |   | For the     |   |
|----------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                               |   | year ended  |   |   | year ended  |   |
|                                                                                               |   | December    |   |   | December    |   |
|                                                                                               |   | 2009        |   |   | 2008        |   |
|                                                                                               |   | $ thousands |   |   | $ thousands |   |
| Loss used to calculate the basic earnings                                                          |   |        |   |   |        |   |
|  per share                                                                                    |   |        | 14,254 |   |        |   | 71,920 |   |
| Adjustment of Elron’s share in loss (profit)                                                 |   |        |   |   |        |   |   |   |
|  of associates (dilutive effects)*                                                            |   |        | 288    |   |        |   | 460 |   |
|  Loss attributable to the holders of the Company’s  ordinary shares (diluted) |   |        | 14,592 |   |        |   | 72,380 |   |
|                                                                                               |   |        |   |   |        |   |   |   |

|  *   |  Represent the adjustments for differences between the Company’s share in profit/loss of associates to earning/loss per share of associates multiplied by the number of shares held by the Company. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | D. | Loss per share (Cont.) |
|--------|----|------------------------|

|   | 2. | Diluted loss per share (Cont.) |
|--------|----|--------------------------------|

|   | b. | Weighted-average number of ordinary shares (diluted) |
|--------|----|------------------------------------------------------|

|                                                    |   | 2009   |       |   | 2008   |   |
|---------------------------------------------------------|--------|--------|------------|--------|--------|--------|
| Weighted-average number of ordinary shares              |   |   |       |   |   |   |
|  used to calculate basic earnings per share        |   |   | 29,650,017 |   |   |   | 29,650,017 |   |
| Impact of options exercisiable to shares of the Company |   |   | -          |   |   |   | - |   |
| Weighted-average number of ordinary shares              |   |   |       |   |   |   |   |   |
|  used to calculate diluted earnings per share      |   |   | 29,650,017 |   |   |   | 29,650,017 |   |

|   | E. | Non-controlling interests: |
|--------|----|----------------------------|

|   | Composition of non-controlling interests in the balance sheet: |
|--------|----------------------------------------------------------------|

|                                                                                                                                               |   | December 31, |   |   | January 1, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------|------------|--------|
|                                                                                                                                               |   | 2009         |   |   | 2008       |   |   | 2008 |   |
|                                                                                                                                               |   | $ thousands  |   |
|                                                                                                                                               |   |         |   |   |       |   |   |   |   |
|              Share of equity                                                      |   |         | (9,353 | )      |       |   | 3,224 |   |   |   | 1,698 |   |
|              Capital reserve for share-based payment transactions in subsidiaries |   |         | 4,977  |   |       |   | 3,321 |   |   |   | 1,345 |   |
|                                                                                                                                               |   |         |   |   |       |   |   |   |   |   |   |   |
|                                                                                                                                               |   |         | (4,376 | )      |       |   | 6,545 |   |   |   | 3,043 |   |

|   | F. | Share-based payments |
|--------|----|----------------------|

|   | 1. | Company's options plans |
|--------|----|-------------------------|

|   | The Company has various option plans intended to grant employees, directors and officers options for acquisition of the Company's shares or shares of the subsidiaries. The options are generally granted at exercise prices that are lower than the market value on the grant date. In most cases, the options are exercisable during a period of four years from the grant date in four equal annual portions, and expire after the passage of five to seven years from the grant date. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In May 2003, the Board of directors of the Company approved an option plan (the "2003 Option Plan") providing for the grant of 500,000 options to purchase 500,000 ordinary shares of the Company to eligible employees, directors and officers of the Company or of any subsidiaries of the Company. In March 2007 the 2003 option plan was increased by additional 500,000 options to purchase 500,000 ordinary shares of the Company. According to the option plan the exercise price is to be reduced in the event of a distribution of a dividend in the amount of the dividend distributed. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | F. | Share-based payments (Cont.) |
|--------|----|------------------------------|

|   | 1. | Company's options plans (Cont.) In May 2007, following approval of the Company's Audit Committee, Board of Directors and Shareholders the current chairman of the Board of Directors of the Company was granted options to purchase 120,000 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 weighted average fair value was $5.8 per share. The fair value was calculated using the Black & Scholes option pricing model. In March 2008, the Company's Board of Directors decided to extend the validity of certain options that were scheduled to expire in 2008 and 2009 based on their original terms (113,750 options that had not yet been paid as of that date), for a period of three additional years from the original expiration date. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009, 567,000 options were granted under the 2003 Plan at an average exercise price of $10.20 per share, after deduction of the amount of a dividend distributed post the initial grant date of the options. The options are exercisable during a period of four years in four equal annual portions and expire after five years from the grant date (except for options the validity of which was extended for a period of up to additional three years). In March 2009, the Board of Directors of the Company determined that with respect to prior option grants which would otherwise expire as a result of termination of employment in accordance with their terms in 2009 (relevant to 80,000 options then outstanding), the term of each such grant is extended for an additional 3.5 year period from its date of termination. In December 2009, the Board of Directors of the Company determined that with respect to prior option grants which would otherwise expire as a result of termination of employment in accordance with their terms in 2010 (relevant to 22,500 options then outstanding), the term of each such grant is extended for an additional 3 year period from its date of termination. The above-mentioned extensions did not have a significant impact on the results reported in the Company’s consolidated financial statements. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Changes during 2008 and 2009 |
|--------|----|------------------------------|

|   | The following table includes the number of options for shares, their weighted-average excercise price and the changes that were made in the options plans for employees during 2009 and 2008: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | F. | Share-based payments (Cont.) |
|--------|----|------------------------------|

|   | 2. | Changes during 2008 and 2009 (Cont.) |
|--------|----|--------------------------------------|

|                                             |   | 2009    |    |   | 2008      |   |
|--------------------------------------------------|--------|---------|---------|--------|-----------|--------|
|                                             |   |    |    |   | Weighted- |   |   |   |   |   | Weighted- |   |
|                                             |   | Number  |    |   | average   |   |   | Number |   |   | average |   |
|                                             |   | of      |    |   | exercise  |   |   | of |   |   | exercise |   |
|                                             |   | options |    |   | price     |   |   | options |   |   | price |   |
|                                             |   |    |    |   |  $   |   |   |   |   |   |   | $ |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |
|  Options for shares at beginning ofthe year |   |    | 358,750 |   |      |   | 10.24 |   |   |   | 352,750 |   |   | 10.74 |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |
| Granted during the year                          |   |    | -       |   |      |   | - |   |   |   | 55,000 |   |   | 10.30 |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |
| Expired during the year                          |   |    | (91,250 | )      |      |   | 9.11 |   |   |   | (49,000 | ) |   | 13.90 |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |
| Exercised during the year                        |   |    | -       |   |      |   | - |   |   |   | - |   |   | - |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of the year                   |   |    | 267,500 |   |      |   | 10.63 |   |   |   | 358,750 |   |   | 10.24 |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |
|  Exercisable at end of the year             |   |    | 206,250 |   |      |   | 9.21 |   |   |   | 195,000 |   |   | 7.96 |   |
|                                             |   |    |    |   |      |   |   |   |   |   |   |   |   |   |   |

|   | Compensation expense recorded during 2009 amounted to $127 (2008 - $ 378). The weighted average remaining contractual life for the share options outstanding as of December 31, 2009 was 2.4 years (2008 - 2.93 years). The range of exercise price for share options outstanding as of December 31, 2009 and 2008 was $5-$15.53. The fair value of share options for the Company was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 2008 (in 2009 no option were granted): |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                  |   | 2008   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                  |   |   |   |
|              Risk-free interest rate                 |   |   | 2.40   | % |
|                                                                                                                  |   |   |   |   |
|              Expected dividend yield1                |   |   | 0      | % |
|                                                                                                                  |   |   |   |   |
|              Expected volatility2                    |   |   | 31.1   | % |
|                                                                                                                  |   |   |   |   |
|              Expected lives                          |   |   | 3.69   |   |
|                                                                                                                  |   |   |   |   |
|              Weighted average exercised price (in $) |   |   | 10.30  |   |

----

----

|   | F. | Share-based payments (Cont.) |
|--------|----|------------------------------|

| 2  |   | Changes during 2009 and 2008 (Cont.) |
|---------|--------|--------------------------------------|

| 1   | According to the Company's 2003 option plan, the exercise price is to be reduced in the event of a distribution of a dividend in the amount of the dividend distributed per share. Accordingly, the Company, when calculating fair value of the options based on the Black-Scholes option-pricing model, assumes a 0% dividend yield. |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2 | The Company used its historical volatility over the period of the expected lives of the options. |
|---|--------------------------------------------------------------------------------------------------|

|   | A. | The Company operates in one segment, namely the "Holdings and Corporate Operations". This segment includes corporate headquarters and reflects the investments in group companies. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Revenues according to location of customers are as follows: |
|--------|----|-------------------------------------------------------------|

|                                                                                |   | 2009   |   |   | 2008   |   |
|-------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                |   |   |   |   |   |   |
|           Israel                  |   |   | 490    |   |   |   | 333 |   |
|           USA & North America |   |   | 1,416  |   |   |   | 1,606 |   |
|           Europe                  |   |   | 947    |   |   |   | 1,062 |   |
|           Asia                    |   |   | 3,821  |   |   |   | 1,669 |   |
|           South America           |   |   | 1,653  |   |   |   | 1,369 |   |
|           Other                   |   |   | 1,577  |   |   |   | 198 |   |
|                                                                                |   |   |   |   |   |   |   |   |
|                                                                                |   |   | 9,904  |   |   |   | 6,237 |   |

|   | C. | The Company had no major customer for the years ended December 31, 2009 and December 31, 2008. |
|--------|----|------------------------------------------------------------------------------------------------|

|   | D. | The majority of the long-lived assets are located in Israel. |
|--------|----|--------------------------------------------------------------|

----

----

|   | A. | In September 1999, a shareholder of Elscint Ltd. ("Elscint"), a subsidiary of Elbit Medical Imaging Ltd. ("Elbit Imaging"), which was a group company of Elron up to May 1999, filed a claim with the District Court of Tel-Aviv Jaffa, along with a request for certification thereof 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 million or alternatively about $123 million. On March 31, 2009, the court approved the defendants application to dismiss certain claims while others still remain. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | In November 1999, a number of institutional shareholders of Elscint filed a claim in the District Court of Haifa, together with a request for its certification in part as a class action on behalf of the public shareholders of Elscint and in part 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 that is not a class action rather a personal claim of the plaintiffs and in part a derivative action. In June 2007 the plaintiffs submitted to the Haifa District Court a revised statement of claim and a revised request to certify the claim as a class action. The revised claim requests relief of monetary compensation in respect of damages caused by the failure to make the tender offer for Elscint's shares and other matters as alleged by the plaintiffs, but does not request relief of enforcing the tender offer for Elscint's shares that was included in the original claim. The revised claim does not specify the amount demanded but includes various arguments regarding the method of determining the damages caused to the plaintiffs, which depends, inter alia, on the specific circumstances of each individual shareholder of Elscint and the nature of the alleged damages. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | C. | With respect to the two claims detailed in Paragraphs A and B above against Elron and various other defendants, with respect to Elscint, in September 2006 two additional claims were submitted in the Haifa District Court against the same defendants and on the basis of the same main facts of the claims from 1999, along with requests to certify the claims as class actions. The amount being claimed was not stated in these additional claims. The Court decided that at this stage the defendants are not required to reply to these additional claims. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | The Company rejects the allegations set forth against it in the claims described above in Paragraphs A, B and C above, and in the Company's estimation, based on the opinion of its legal counsels, it has good defenses against these claims, to the extent they are directed against it and, therefore, it is more likely than not that the said claims will be dismissed. Therefore, no provision in connection with the claims described above has been included in Elron's consolidated financial statements. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | E. | During January 2010, subsequent to the balance sheet date, a key employee of a subsidiary of the Company was dismissed from the subsidiary. The key employee asserts to certain rights he alleges to be entitled to as part of his employment agreement with the subsidiary, in connection with his termination compensation from the subsidiary. To date, The former key employee has not filed any claim in a court of law against the subsidiary. The subsidiary objects to and rejects all assertions in such matters made by the former key employee. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | F. | Various additional legal claims filed by various parties raising various allegations are pending in courts against the Company and its subsidiaries. The aggregate amount of these additional claims, if accepted, is estimated by the plaintiffs at approximately $600. No provision was included in these financial statements in respect of the aforementioned claims. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A. | The Company and the subsidiaries have signed agreements for lease of the offices and the manufacturing plant for a period running up to 2012. The minimum future non-cancellable lease payments under the above-mentioned lease agreements, as of December 31, are as follows: |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |        |   |
|--------|--------|-------------|--------|
|   |   |        |   |
|   |   | December 31 |   |
| 2010   |   |        | 808    |   |
| 2011   |   |        | 520    |   |
| 2012   |   |        | 68     |   |
|   |   |        |   |   |
| Total  |   |        | 1,396  |   |

----

----

|   | B. | The Company and the subsidiaries have signed operating lease agreements for motor vehicles for a period of 36 months. The lease payments are linked to the CPI. The Company and the subsidiaries have deposited the amount of $305 as a deposit that will serve as the lease payments for the final three months. The deposit is linked to the CPI and does not bear interest. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A. | Regarding a lien on the Company’s holdings in Given in favor of Discount Bank – see Note 16 C.1 above. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------|

|   | B. | Regarding a fixed, first priority lien on shares of Given held by RDC – see Note 16 C.3 above. |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|   | C. | As for guarantees granted in favor of Teledata – see Note 3 D.12. |
|--------|----|-------------------------------------------------------------------------|

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

|                                                                        |   | For the     |   |   | For the     |   |
|-----------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                        |   | year ended  |   |   | year ended  |   |
|                                                                        |   | December 31 |   |   | December 31 |   |
|                                                                        |   | 2009        |   |   | 2008        |   |
|                                                                        |   | $ thousands |   |   | $ thousands |   |
| Company's share in losses of associates, net (1) (2)                        |   |        | 4,614  |   |        |   | 35,142 |   |
| Amortization of excess of fair value over share in net equity of associates |   |        | 5,900  |   |        |   | 5,004 |   |
| Equity in losses of associates, net                                         |   |        | 10,514 |   |        |   | 40,146 |   |
|                                                                        |   |        |   |   |        |   |   |   |

|  (1) |  Including equity in net losses of consolidated entities through the dates of commencement of consolidation and of previously consolidated entities from the date they ceased to be consolidated and started to be accounted for as equity method investees.  |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  (2) |  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 such as loans) 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. As of December 31, 2009, the aggregate equity in losses not recognized by the Company amounted to a total of $ 3,650 ($ 4,310 as of December 31, 2008 and none as of January 1, 2008). |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Income (loss) from disposal of business and associates and changes in holdings in associates, net |
|--------|----|---------------------------------------------------------------------------------------------------|

|                           |   | For the     |   |   | For the     |   |
|--------------------------------|--------|-------------|--------|--------|-------------|--------|
|                           |   | year ended  |   |   | year ended  |   |
|                           |   | December 31 |   |   | December 31 |   |
|                           |   | 2009        |   |   | 2008        |   |
|                           |   | $ thousands |   |   | $ thousands |   |
|                           |   |        |   |   |        |   |   |   |
| Given Imaging (See Note 3.C.9) |   |        | (70    | )      |        |   | 55 |   |
| NetVision (See Note 3.C.8)     |   |        | 22,301 |   |        |   | 595 |   |
| 3DV (See Note 3.C.7)           |   |        | 6,090  |   |        |   | - |   |
| ChipX (See Note 3.C.10)        |   |        | 1,548  |   |        |   | - |   |
| Sela (See Note 3.C.5)          |   |        | 1,115  |   |        |   | - |   |
| Impliant (See Note 3.C.3)      |   |        | 459    |   |        |   | - |   |
| Other                          |   |        | 359    |   |        |   | 133 |   |
|                           |   |        | 31,802 |   |        |   | 783 |   |

|   | C. | Other expenses, net |
|--------|----|---------------------|

|                                                    |   | For the     |   |   | For the     |   |
|---------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                    |   | year ended  |   |   | year ended  |   |
|                                                    |   | December 31 |   |   | December 31 |   |
|                                                    |   | 2009        |   |   | 2008        |   |
|                                                    |   | $ thousands |   |   | $ thousands |   |
|                                                    |   |        |   |   |        |   |   |   |
| Other companies, net  - Mwise                      |   |        | 84     |   |        |   | 87 |   |
| Other than temporary decline in value of investments(*) |   |        | (1,853 | )      |        |   | (909 | ) |
| Equity in losses of partnerships- Innomed               |   |        | (234   | )      |        |   | (818 | ) |
| Sale of KIT                                             |   |        | -      |   |        |   | 1,393 |   |
| Gain (loss) on property and equipment                   |   |        | (64    | )      |        |   | (8 | ) |
| Other                                                   |   |        | (163   | )      |        |   | (2 | ) |
|                                                    |   |        | (2,230 | )      |        |   | (257 | ) |

|   | * | Impairment losses in 2009 resulted mainly from investments in Radlive Ltd. and Kyma Medical Technologies Ltd. in which Elron recorded an impairment charge of approximately $900 and $400, respectively following the Company's decision to cease its investment in those companies. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | D. | Financial income and expenses |
|--------|----|-------------------------------|

|   | 1. | Financial income |
|--------|----|------------------|

|                                                               |   | For the     |   |   | For the     |   |
|--------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                               |   | year ended  |   |   | year ended  |   |
|                                                               |   | December 31 |   |   | December 31 |   |
|                                                               |   | 2009        |   |   | 2008        |   |
|                                                               |   | $ thousands |   |   | $ thousands |   |
|                                                               |   |        |   |   |        |   |   |   |
| Interest income from loans, deposits and other debit balances |   |        | 782    |   |        |   | 333 |   |
| Interest income from bank deposits                                 |   |        | 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                         |   |        | -      |   |        |   | 349 |   |
| Other                                                              |   |        | 520    |   |        |   | 341 |   |
| Total financial income                                        |   |        | 1,413  |   |        |   | 6,259 |   |

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

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

----

----

|   | D. | Financial income and expenses (Cont.) |
|--------|----|---------------------------------------|

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

|                                                                                  |   | For the     |   |   | For the     |   |
|---------------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                                                  |   | year ended  |   |   | year ended  |   |
|                                                                                  |   | December 31 |   |   | December 31 |   |
|                                                                                  |   | 2009        |   |   | 2008        |   |
|                                                                                  |   | $ thousands |   |   | $ thousands |   |
|                                                                                  |   |        |   |   |        |   |
| Deposits and receivables                                                              |   |        |   |   |        |   |
| Deposits in Banks                                                                     |   |        | 111    |   |        |   | 1,114 |   |
| Other deposits and other receivables                                                  |   |        | 782    |   |        |   | 333 |   |
| Available for sale                                                                    |   |        | -      |   |        |   | 265 |   |
|                                                                                  |   |        |   |   |        |   |   |   |
|                                                                                  |   |        |   |   |        |   |   |   |
|                                                                                  |   |        |   |   |        |   |   |   |
| Financial liabilities                                                                 |   |        |   |   |        |   |   |   |
| Convertible Debentures                                                                |   |        | (1,217 | )      |        |   | 1,518 |   |
| Loans from banks – current                                                      |   |        | (891   | )      |        |   | (344 | ) |
| Loans from banks – non-current                                                  |   |        | (2,806 | )      |        |   | (1,427 | ) |
|                                                                                  |   |        |   |   |        |   |   |   |
|        Total financial income (expenses), net |   |        | (4,021 | )      |        |   | 1,459 |   |

|   | E. | Cost of sales |
|--------|----|---------------|

|                          |   | For the     |   |   | For the     |   |
|-------------------------------|--------|-------------|--------|--------|-------------|--------|
|                          |   | year ended  |   |   | year ended  |   |
|                          |   | December 31 |   |   | December 31 |   |
|                          |   | 2009        |   |   | 2008        |   |
|                          |   | $ thousands |   |   | $ thousands |   |
|                          |   |        |   |   |        |   |   |   |
| Materials consumption         |   |        | 4,023  |   |        |   | 1,527 |   |
| Depreciation and amortization |   |        | 74     |   |        |   | 22 |   |
| Salaries and wages            |   |        | 507    |   |        |   | 656 |   |
| Other                         |   |        | 220    |   |        |   | 995 |   |
|                          |   |        | 4,824  |   |        |   | 3,200 |   |
|                          |   |        |   |   |        |   |   |   |

|   | F. | Research and development expenses |
|--------|----|-----------------------------------|

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

----

----

|   | G. | Selling and marketing expenses |
|--------|----|--------------------------------|

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

|   | H. | General and administrative expenses |
|--------|----|-------------------------------------|

|                                 |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |
|                                 |   | 2009        |   |   | 2008        |   |
|                                 |   | $ thousands |   |   | $ thousands |   |
|                                 |   |        |   |   |        |   |   |   |
| Salaries, wages and related expenses |   |        | 9,791  |   |        |   | 12,144 |   |
| Depreciation and amortization        |   |        | 141    |   |        |   | 99 |   |
| Rent and building maintenance        |   |        | 1,658  |   |        |   | 902 |   |
| Professional services                |   |        | 2,182  |   |        |   | 2,572 |   |
| Other                                |   |        | 2,093  |   |        |   | 3,348 |   |
|                                 |   |        |   |   |        |   |   |   |
|                                 |   |        | 15,865 |   |        |   | 19,065 |   |

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

|                                       |   | For the     |   |   | For the     |   |
|--------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                       |   | year ended  |   |   | year ended  |   |
|                                       |   | December 31 |   |   | December 31 |   |
|                                       |   | 2009        |   |   | 2008        |   |
|                                       |   | $ thousands |   |   | $ thousands |   |
|                                       |   |        |   |   |        |   |
| Current tax expenses (benefit)             |   |        |   |   |        |   |
| Taxes in respect of current period         |   |        | -      |   |        |   | (32 | ) |
| Adjustments in respect of prior years, net |   |        | (2,453 | )      |        |   | - |   |
| Total current taxes – tax benefit    |   |        | (2,453 | )      |        |   | (32 | ) |

----

----

|   | B. | Adjustment between the theoretical tax on the loss before taxes on income and the taxes on income expense |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|                                                   |   | For the     |    |   | For the     |   |
|--------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                                   |   | year ended  |    |   | year ended  |   |
|                                                   |   | December 31 |    |   | December 31 |   |
|                                                   |   | 2009        |    |   | 2008        |   |
|                                                   |   | $ thousands |    |   | $ thousands |   |
| Loss before taxes on income                            |   |        | (31,848 | )      |        |   | (92,686 | ) |
| Main tax rate applicable to the Company                |   |        | 26      | %      |        |   | 27 | % |
| Tax benefit calculated based on the main tax rate      |   |        |    |   |        |   |   |   |
|  applicable to the Company                        |   |        | (8,280  | )      |        |   | (25,025 | ) |
| Tax (tax savings) in respect of:                       |   |        |    |   |        |   |   |   |
| Equity in losses of associates                         |   |        | 2,734   |   |        |   | 10,839 |   |
| Change in temporary differences with respect to which  |   |        |    |   |        |   |   |   |
|  deferred taxes that were not recognized          |   |        | (1,632  | )      |        |   | 6,025 |   |
| Losses and tax benefits with respect to which          |   |        |    |   |        |   |   |   |
|  deferred taxes were not recognized               |   |        | 7,035   |   |        |   | 7,942 |   |
| Non-deductible expenses                                |   |        | 143     |   |        |   | 187 |   |
| Taxes in respect of prior years (release of provision) |   |        | (2,453  | )      |        |   | - |   |
|                                                   |   |        |    |   |        |   |   |   |
| Total taxes on income                                  |   |        | (2,453  | )      |        |   | (32 | ) |

|   | C. | Deferred tax assets not recognized |
|--------|----|------------------------------------|

|   | D. | In July 2005, the Law for Amendment of the Income Tax Ordinance (No. 147 and Temporary Order), 2005 ("Amendment 147") was approved by the Israeli Parliament (the "Knesset"). Amendment 147 provides for a gradual reduction in the Companies Tax rate, in the following manner: in 2007 a tax rate of 29% will apply; in 2008 a tax rate of 27% will apply; in 2009 a tax rate of 26% will apply; in 2010 and thereafter a tax rate of 25% will apply. In addition, commencing from 2010, upon reduction of the Companies Tax rate to 25%, every real capital gain will be subject to tax at the rate of 25%. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | E. | In July 2009, the Economic Efficiency Law (Legislative Amendments for Application of the Economic Plan for the years 2009 and 2010), 2009, was approved by the Knesset, which provides, among other things, for an additional gradual reduction of the Companies Tax rate and the tax rate on real capital gains in Israel – for years commencing from 2011 the tax rates are as follows: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and thereafter – 18%. The current taxes and the balances of the deferred taxes are calculated in accordance with the new tax rates as approved in July 2009 by the Knesset. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | F. | Taxation under inflationary conditions |
|--------|----|----------------------------------------|

|   | In February 2008, the Knesset enacted the Income Tax Law (Adjustments for Inflation) (Amendment No. 20) (Restriction of the Effective Period), 2008 ("Amendment 20"). In accordance with Amendment 20, the effective period of the Income Tax Law (Adjustments for Inflation) terminated in 2007 and from the 2008 tax year, the provisions of the Adjustments Law will no longer apply, except for certain transitional provisions intended at preventing distortions in the tax calculations. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pursuant to Amendment 20, commencing from the 2008 tax year and thereafter an adjustment of the income for tax purposes to a "real" measurement basis will no longer be calculated. Furthermore, the depreciation of property, plant and equipment and carried forward tax losses will no longer be linked to the CPI, so that these amounts will be adjusted until the end of the 2007 tax year after which they will cease to be linked to the CPI. The impact of Amendment 20 is reflected in calculation of the deferred taxes staring from the 2008 tax year. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | G. | Encouragement laws in Israel |
|--------|----|------------------------------|

|   | 1. | Certain of the Company's subsidiaries in Israel are "industrial companies", as defined by the Law for the Encouragement of Industry (Taxation), 1969, and as such, are entitled to certain tax benefits, mainly accelerated depreciation and the right to claim public issuance expenses and amortization of costs relating to intangible assets and patents as deductible expenses for tax purposes. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Certain of the Company's subsidiaries have a number of approved investment plans that were recognized as Approved Enterprises pursuant to the Law for Encouragement of Capital Investments, 1959, and that were completed and have received approval from the Investments Center. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | A subsidiary has an investment plan that was recognized as a Benefited Enterprise pursuant to Section 51 of the Law for Encouragement of Capital Investments, 1959. The revenues from this factory are exempt from tax during 10 years commencing from 2006. The entitlement to receive benefits is contingent on compliance with the conditions of the Law. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | H. | As of December 31, 2009 the Company has tax losses carryforward of approximately $114,000 and its Israeli subsidiaries had an aggregate tax losses carryforward of approximately $155,000. Carryforward tax losses in Israel may be carryforward indefinitely and may be set against future taxable income. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | I. |  The Company has final tax assesments to and including the 2003 tax year. |
|--------|----|--------------------------------------------------------------------------------|

----

----

|   | A. | Identity of related parties |
|--------|----|-----------------------------|

|   | The parties related to the Company are DIC, parties related to DIC and associates. For details regarding holdings in group companies – see annex to consolidated the financial statements. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Details of transactions with related and interested parties |
|--------|----|-------------------------------------------------------------|

|   | 1. | Management services agreement with DIC |
|--------|----|----------------------------------------|

|   | On March 19, 2009, a services agreement was signed between the Company and DIC, which was approved by the Company's Audit Committee and Board of Directors and thereafter by the General Meeting of the Company's shareholders. Under the agreement, which entered into effect on May 1, 2009, the Company receives overall management and administrative services from DIC in exchange for an amount of  approximatly NIS 4,700 thousand linked to the CPI (equivalent to aproximately $1,240) per year. As part of the agreement, it was provided that aside from the Company's CEO and CFO, who will be proposed and appointed by Elron subject to receipt of approval from DIC and the Company's Board of Directors, the management services will be provided by position holders that will be appointed by DIC subject to receipt of the Company's approval, and who will be employed or hired by DIC. The period of the agreement is three years, where each party is permitted to bring the agreement to an end subject to provision of advance notice of one hundred and twenty days, provided DIC ceases to be the main shareholder of Elron. As a result of the above-mentioned changes, all the employees of Elron, except for the Chairman, completed their employment with the Company, and some of them were taken on by DIC immediately thereafter. As of December 31, 2009, all the Company's liabilities in respect of completion of employment of the said employees were paid in full. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Classification of related party transactions as negligible transactions |
|--------|----|-------------------------------------------------------------------------|

----

----

|   | B. | Details of transactions with related and interested parties (Cont.) |
|--------|----|---------------------------------------------------------------------|

|   | 2. | Classification of related party transactions as negligible transactions (Cont.) |
|--------|----|---------------------------------------------------------------------------------|

|   | 3. | Balances |
|--------|----|----------|

|                                       |   |   |  Interestrate |   |   | December 312009   |   | December 312008 |   |   | January 12008 |   |
|--------------------------------------------|--------|--------|--------------------|--------|--------|-------------------|--------|-----------------|--------|--------|---------------|--------|
|                                       |   |   | %                  |   |   |  $ thousands |   | $ thousands     |   |   | $ thousands   |   |
|                                       |   |   |               |   |   |              |   |            |   |   |          |   |
| Other receivables and debit balances: |   |   |               |   |   |              |   |            |   |   |          |   |
|  Associates                           |   |   |               |   |   | 11                |   |            | 44     |   |          |   | 69 |   |
|  Other related parties                |   |   |               |   |   | 30                |   |            | 16     |   |          |   | 27 |   |
|                                       |   |   |               |   |   |              |   |            |   |   |          |   |   |   |
| Other long-term loans:                     |   |   |               |   |   |              |   |            |   |   |          |   |   |   |
|  Loan from DIC*                       |   |   | 3.23-5.95          |   |   | 16,737            |   |            | 6,176  |   |          |   | - |   |

|   | * | See details in Note 16 above. |
|--------|---|-------------------------------|

----

----

|   | B. | Details of transactions with related and interested parties (Cont.) |
|--------|----|---------------------------------------------------------------------|

|   | 4. | Revenues and expenses |
|--------|----|-----------------------|

|                                              |   | For the     |   |   | For the     |   |
|---------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                              |   | year ended  |   |   | year ended  |   |
|                                              |   | December 31 |   |   | December 31 |   |
|                                              |   | 2009        |   |   | 2008        |   |
|                                              |   | $ thousands |   |   | $ thousands |   |
|                                              |   |        |   |   |        |   |
| Revenues                                          |   |        |   |   |        |   |
| Interest and commissions in respect of guarantees |   |        | 750    |   |        |   | 266 |   |
| Participation in salaries of directors            |   |        | 80     |   |        |   | 98 |   |
| Participation in expenses                         |   |        | 102    |   |        |   | 40 |   |
| Proceeds from sale of NetVision*                  |   |        | 60,770 |   |        |   | - |   |
|                                              |   |        |   |   |        |   |   |   |
| Expenses                                          |   |        |   |   |        |   |   |   |
| Management fees to DIC**                          |   |        | 848    |   |        |   | - |   |
| Participation in expenses                         |   |        | 32     |   |        |   | 28 |   |
| Salaries of directors                             |   |        | 102    |   |        |   | 154 |   |
| Interest expenses                                 |   |        | 1,843  |   |        |   | 176 |   |
| Other expenses                                    |   |        | 2,648  |   |        |   | 1,276 |   |
|                                              |   |        |   |   |        |   |   |   |

|   | * | See details in Note 3 D. 8 above. |
|--------|---|-----------------------------------|

|   | ** | See details in section B.1 above. |
|--------|----|-----------------------------------|

|   | 5. | Compensation of key management personnel of the Copmany |
|--------|----|---------------------------------------------------------|

|   |                                                           |   |         |   |   | For the      |   |   |         |   |   | For the      |   |
|--------|----------------------------------------------------------------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|
|   |                                                           |   | No. of key   |   |   | year ended   |   |   | No. of key   |   |   | year ended   |   |
|   |                                                           |   | management   |   |   | December 31, |   |   | management   |   |   | December 31, |   |
|   |                                                           |   | personnel at |   |   | 2009         |   |   | personnel at |   |   | 2008         |   |
|   |                                                           |   | 2009         |   |   | $ thousands  |   |   | 2008         |   |   | $ thousands  |   |
|   |                                                           |   |         |   |   |         |   |   |         |   |   |         |   |   |   |   |   |
|   | Short-term employee benefits                                   |   |         | 8      |   |         |   | 2,073  |         |   |   | 7            |   |   |   | 3,483 |   |
|   | Post-employment pension benefits                               |   |         | 7      |   |         |   | 93     |         |   |   | 7            |   |   |   | 203 |   |
|   | Share-based payment transactions                               |   |         | 5      |   |         |   | 144    |         |   |   | 5            |   |   |   | 403 |   |
|   | Total compensation paid to key  management personnel |   |         |   |   |         |   | 2,310  |         |   |   |         |   |   |   | 4,089 |   |

----

----

|   | B. | Details of transactions with related and interested parties (Cont.) |
|--------|----|---------------------------------------------------------------------|

|   | 5. | Compensation of key management personal of the Company (Cont.) |
|--------|----|----------------------------------------------------------------|

|   | 1. | Options to purchase 35,000 ordinary shares at an exercise price per share of $29.42 exercisable until July, 2014. |
|--------|----|-------------------------------------------------------------------------------------------------------------------|

|   | 2. | Options to purchase 10,000 ordinary shares at an exercise price per share of $16 exercisable until June,  2015. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Options to purchase 10,000 ordinary shares at an exercise price per share of $11.55 exercisable until August, 2014. |
|--------|----|---------------------------------------------------------------------------------------------------------------------|

|   | C. | The Company holds certain investments together with DIC and Clal as of December 31, 2009, the significant of which are as follows: |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Clal   |   |   | DIC    |   |   | % holding byElron and RDC |   |
|--------|--------|--------|--------|--------|--------|--------|--------|---------------------------|--------|
| Given  |   |   | 0.62   | %      |   |   | 16.07  | %                         |   |   | 32.23 | % |
| Galil  |   |   | -      |   |   |   | 12.08  | %                         |   |   | 29.10 | % |

|   | D. | For detail of the Company's subsidiaries and associates – see appendix to the consolidated financial statements. |
|--------|----|------------------------------------------------------------------------------------------------------------------------|

|   | E. | See Note 19 above regarding a grant of options to the present Chairman of the Board of Directors. |
|--------|----|---------------------------------------------------------------------------------------------------|

|   | F. | See Note 16 above regarding a loan from DIC. |
|--------|----|----------------------------------------------|

|   | G. | See Note 3 D. 8 above regarding the sale of the Company’s holding in Netvision. |
|--------|----|---------------------------------------------------------------------------------------|

|   | I. | Galil |
|--------|----|-------|

----

----

|   | I. | Galil (Cont.) |
|--------|----|---------------|

----

----

|   | A. | Financial assets and financial liabilities |
|--------|----|--------------------------------------------|

|   | The financial assets and financial liabilities in the balance sheet are classified by groups of financial instruments pursuant to IAS 39: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                    |   | December 31, |   |   | January 1, |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------|------------|--------|
|                                                                                                                    |   | 2009         |   |   | 2008       |   |   | 2008 |   |
|                                                                                                                    |   | $ thousands  |   |
|           Financial assets:                                           |   |         |   |   |       |   |   |   |   |
|                                                                                                                    |   |         |   |   |       |   |   |   |   |
|           Trade and other receivables                                 |   |         | 3,585  |   |       |   | 2,732 |   |   |   | 5,434 |   |
|                                                                                                                    |   |         |   |   |       |   |   |   |   |   |   |   |
|           Available-for-sale financial assets                         |   |         | 14,527 |   |       |   | 7,511 |   |   |   | 42,832 |   |
|                                                                                                                    |   |         |   |   |       |   |   |   |   |   |   |   |
|           Financial liabilities:                                      |   |         |   |   |       |   |   |   |   |   |   |   |
|                                                                                                                    |   |         |   |   |       |   |   |   |   |   |   |   |
|           Financial liabilities measured at amortized cost:           |   |         |   |   |       |   |   |   |   |   |   |   |
|           Loans from bank and others                                  |   |         | 47,846 |   |       |   | 38,921 |   |   |   | 5,569 |   |
|           Loan from shareholders                                      |   |         | 16,737 |   |       |   | 6,176 |   |   |   | - |   |
|           Trade payables and other liabilities                        |   |         | 12,640 |   |       |   | 15,852 |   |   |   | 12,143 |   |
|           Royalty bearing government grants                           |   |         | 9,116  |   |       |   | 9,097 |   |   |   | 5,662 |   |
|                                                                                                                    |   |         |   |   |       |   |   |   |   |   |   |   |
|           Financial liabilities at fair value through profit or loss: |   |         |   |   |       |   |   |   |   |   |   |   |
|           Designated as such upon initial recognition                 |   |         | 3,383  |   |       |   | 2,161 |   |   |   | 6,379 |   |

|   | B. | Management of financial risks |
|--------|----|-------------------------------|

|   | The Company is exposed to various risks stemming from use of financial instruments, such as: |
|--------|----------------------------------------------------------------------------------------------|

|   | – | Credit risk. |
|--------|---------|--------------|

|   | – | Market risk (includes currency risk, interest risk and other price risk). |
|--------|---------|---------------------------------------------------------------------------|

|   | – | Liquidity risk. |
|--------|---------|-----------------|

|   | The officer responsible of management of the Company's risks is Mr. Yaron Elad, the Company's CFO. |
|--------|---------------------------------------------------------------------------------------------------------|

|   | The treatment of the matter of the financial exposures, formulation of the hedging strategy, supervision over execution and provision of an immediate response to extraordinary developments in the various markets, is under the responsibilty of the officer responsible for the Company's risk management, who acts in consultation with the Company's Co-Chief Executive Officers and members of the Audit Committee. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Management of financial risks (Cont.) |
|--------|----|---------------------------------------|

|   | The Company’s principal financial liabilities, other than derivatives, comprise of loans and borrowings, trade and other payables, and financial guarantee contracts. The main purpose of these financial liabilities is to raise finances for the Company’s and group companies operations. The Company has loan and other receivables, trade and other receivables, 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). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company does not determine the risk management policy for its group companies. |
|--------|------------------------------------------------------------------------------------|

|   | 1. | 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 three types of risk: interest rate risk, currency risk and other price risk, such as equity risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments and derivative financial instruments. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | I. | Foreign currency risk – Since most of the group companies are Israeli-related the main exposure results from changes in the exchange rate between the New Israeli Shekel and the U.S. dollar. Elron’s functional currency, as well as that of most of its principal subsidiaries and associates, is the U.S. dollar. The Company’s policy is to reduce exposure to exchange rate fluctuations by having most of assets and liabilities, as well as most of the revenues and expenditures in U.S. dollars, or U.S. dollar linked. However, salaries and related expenses as well as expenses related to the DIC Service Agreement (see Note 26), are denominated in NIS and the loans received from DIC are denominated in NIS. Group companies policy is to use derivative financial instruments, from time to time, to limit exposure to changes in the exchange rate between the NIS and the U.S. dollar or to keep a portion of its resources in NIS against portion of its future NIS expenses and liabilities dominated in NIS. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 U.S. 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | II. | CPI risk – as detailed in Note 16 above, the Company recieved a loan from DIC which is linked to the Israeli CPI. As of December 31, 2009, the liability in respect of this loan totaled to $16,737. In addition, the Company and the subsidiaries, have signed a number of lease agreements that are linked to the CPI for various time periods, which are also impacted by changes in the CPI. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Management of financial risks (Cont.) |
|--------|----|---------------------------------------|

|   | III. | Equity 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, 2009 is $ 2,013 (December 31, 2008 and January 1, 2008 – $808 and $2,965, respectively). The Company is also exposed to fluctuations in the equity price of its holdings in publicly traded companies. At December 31, 2009 the Company held directly and indirectly shares of publicly traded companies, primarily Given Imaging. Share prices in the industries of these companies, and of these companies themselves, have historically experienced significant volatility. Changes in the market value of the Company’s publicly traded holdings, including holdings through its associates, which are accounted under the equity method of accounting or as available-for-sale securities will not affect its results of operations unless decline in value will be concluded to be  other than temporary. The Company does not enter into hedge contracts against these exposures. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | IV. | Interest risk – the Company's interest rate risk derives mainly from a long-term liabilities (mainly loans from bank and others), that is linked to the change in the LIBOR interest rate. The Company has another long-term loan where the interest in respect thereof is fixed and, therefore, it is not exposed to risk arising from a change in the interest rate in connection with this loan. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Credit risk – the Company 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, 2009, the cash and cash equivalents amounted to $64,747. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Liquidity risk – the Company'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. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | C. | Credit risk |
|--------|----|-------------|

|   | Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, 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. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009, 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. | Market risks |
|--------|----|--------------|

|   | 1. | Interest risks |
|--------|----|----------------|

|   | The Company’s interest rate risk stems mainly from the long-term liabilities. Some of the long-term loans bear variable interest. In such a case, the Company's exposure to cash flow risk relates to a change in the interest, as detailed below: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Set forth below are details regarding the type of interest on the Company's interest-bearing financial instruments : |
|--------|----------------------------------------------------------------------------------------------------------------------|

|                                  |   | December 31     |    |   | December 31     |   |    | January 1       |   |
|---------------------------------------|--------|-----------------|---------|--------|-----------------|--------|---------|-----------------|--------|
|                                  |   | 2009            |    |   | 2008            |   |    | 2008            |   |
|                                  |   | Carrying amount |    |   | Carrying amount |   |    | Carrying amount |   |
|                                  |   | $ thousands     |    |   | $ thousands     |   |    | $ thousands     |   |
| Instruments bearing fixed interest    |   |            |    |   |            |   |    |            |   |
| Financial assets                      |   |            | 60,298  |   |            |   | 4,407   |            |   |   | 56,629 |   |
| Financial liabilities                 |   |            | (17,530 | )      |            |   | (10,224 | )               |   |   | (2,463 | ) |
|                                  |   |            |    |   |            |   |    |            |   |   |   |   |
|                                  |   |            | 42,768  |   |            |   | (5,817  | )               |   |   | 54,166 |   |
|                                  |   |            |    |   |            |   |    |            |   |   |   |   |
| Instruments bearing variable interest |   |            |    |   |            |   |    |            |   |   |   |   |
|                                  |   |            |    |   |            |   |    |            |   |   |   |   |
| Financial assets                      |   |            | 493     |   |            |   | 3,953   |            |   |   | 5,945 |   |
| Financial liabilities                 |   |            | (56,133 | )      |            |   | (43,004 | )               |   |   | (8,547 | ) |
|                                  |   |            |    |   |            |   |    |            |   |   |   |   |
|                                  |   |            | (55,640 | )      |            |   | (39,051 | )               |   |   | (2,602 | ) |

----

----

|   | D. | Market risks (Cont.) |
|--------|----|----------------------|

|   | 1. | Interest risks (Cont.) |
|--------|----|------------------------|

|   | Sensitivity analysis of the cash flows relating to instruments bearing variable interest: |
|--------|-------------------------------------------------------------------------------------------|

|   | A change in the interest rates on the balance sheet 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 of December 31, 2008 and January 1, 2008 was prepared under the same assumptions. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                       |   | Change of 0.5% in the interest rate as of |   |
|--------------------------------------------|--------|-------------------------------------------|--------|
|                                       |   | December 31,                              |   |   | January 1, |   |
|                                       |   | 2009                                      |   |   | 2008 |   |   | 2008 |   |
|                                       |   | Increase of0.5%                           |   |   | Decreaseof0.5% |   |   | Increaseof0.5% |   |   | Decreaseof0.5% |   |   | Increaseof0.5% |   |   | Decreaseof0.5% |   |
|                                       |   | $ thousands                               |   |
|                                       |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments bearing variable interest |   |                                      | 26     |   |   |   | (26 | ) |   |   | 171 |   |   |   | (171 | ) |   |   | 37 |   |   |   | (37 | ) |

|                                       |   | Change of 1% in the interest rate as of |   |
|--------------------------------------------|--------|-----------------------------------------|--------|
|                                       |   | December 31,                            |   |   | January 1, |   |
|                                       |   | 2009                                    |   |   | 2008 |   |   | 2008 |   |
|                                       |   | Increase of1%                           |   |   | Decreaseof1% |   |   | Increase of1% |   |   | Decreaseof1% |   |   | Increase of1% |   |   | Decreaseof1% |   |
|                                       |   |  $ thousands                       |   |
|                                       |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments bearing variable interest |   |                                    | 52     |   |   |   | (52 | ) |   |   | 344 |   |   |   | (344 | ) |   |   | 77 |   |   |   | (77 | ) |

|   | 2. | CPI and foreign currency risks |
|--------|----|--------------------------------|

|   | The Company is exposed to foreign currency risks. This exposure derives from the fact that part of the assets and liabilities are denominated in foreign currency (mainly the NIS), and due to the fact that the functional currency of some of the Group companies is a foreign currency (mainly NIS). Some of the Group companies take measures to reduce the exposure by means of acquisition of future contracts (even if they are not recognized as hedges for accounting purposes). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | D. | Market risks (Cont.) |
|--------|----|----------------------|

|   | 2. | CPI and foreign currency risks (Cont.) |
|--------|----|----------------------------------------|

|   | Sensitivity analysis |
|--------|----------------------|

|   | A change in the exchange rate of the following currencies as of December 31, 2009 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, 2008 and January 1, 2008 was prepared under the same assumptions. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                           |   | Change in      |   |   | December 31 |   |   | December 31 |   |   | January 1   |   |
|------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                                                           |   | the currency   |   |   | 2009        |   |   | 2008        |   |   | 2008        |   |
|                                                                                           |   | exchange rate/ |   |   |        |   |   |        |   |   |        |   |
|                                                                                           |   | change in      |   |   | Gain (loss) |   |   | Gain (loss) |   |   | Gain (loss) |   |
|                                                                                           |   | the CPI        |   |   | $ thousands |   |
|                                                                                           |   |           |   |   |        |   |   |        |   |   |        |   |
|              CPI              |   |           | 1      | %      |        |   | (164   | )           |   |   | (27         | )      |   |   | (1 | ) |
|              NIS              |   |           | 5      | %      |        |   | 290    |        |   |   | (573        | )      |   |   | (240 | ) |
|              Other currencies |   |           | 5      | %      |        |   | -      |        |   |   | 6           |   |   |   | - |   |
|                                                                                           |   |           |   |   |        |   |   |        |   |   |        |   |   |   |   |   |
|              CPI              |   |           | 2      | %      |        |   | (329   | )           |   |   | (87         | )      |   |   | (2 | ) |
|              NIS              |   |           | 10     | %      |        |   | 578    |        |   |   | (1,144      | )      |   |   | (482 | ) |
|              Other currencies |   |           | 10     | %      |        |   | -      |        |   |   | 9           |   |   |   | - |   |
|                                                                                           |   |           |   |   |        |   |   |        |   |   |        |   |   |   |   |   |
|              CPI              |   |           | (1     | %)     |        |   | 164    |        |   |   | -           |   |   |   | 1 |   |
|              NIS              |   |           | (5     | %)     |        |   | (290   | )           |   |   | 573         |   |   |   | 240 |   |
|              Other currencies |   |           | (5     | %)     |        |   | -      |        |   |   | 6           |   |   |   | - |   |
|                                                                                           |   |           |   |   |        |   |   |        |   |   |        |   |   |   |   |   |
|              CPI              |   |           | (2     | %)     |        |   | 329    |        |   |   | (1          | )      |   |   | 2 |   |
|              NIS              |   |           | (10    | %)     |        |   | (578   | )           |   |   | 1,144       |   |   |   | 482 |   |
|              Other currencies |   |           | (10    | %)     |        |   | -      |        |   |   | 9           |   |   |   | - |   |

|   | E. | Fair value of financial instruments |
|--------|----|-------------------------------------|

|   | The carrying amount of certain financial assets and liabilities, including cash and cash equivalents, trade receivables, other receivables and debt balances, available for sale marketable securities, other investments, short-term credit and loans, Other current liabilities, trade payables, Convertible Debentuures, Option to Convertible Debentuures, royalty bearing goverment grants and certain of the long term loans conforms to or approximates their fair values. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The fair value and carrying amount of all other financial assets and liabilities presented in the balance sheet are presented below: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | E. | Fair value of financial instruments (Cont.) |
|--------|----|---------------------------------------------|

|                                   |   | December 31, 2009 |   |   | December 31, 2008 |   |
|----------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                   |   |              |   |   |              |   |   | 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       |   |
|                                   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term loans from bank and others*  |   |              | 36,981 |   |              |   | 36,141 |   |   |   | 2.85% - 3.99 | % |   |   | 35,141 |   |   |   | 34,912 |   |   |   | 3.19 | % |
| Long-term loans from a shareholder*,** |   |              | 16,737 |   |              |   | 18,229 |   |   |   | 2.5 | % |   |   |   |   |   |   |   |   |   |   |   |   |
|                                   |   |              | 53,718 |   |              |   | 54,370 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| 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). |

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

|                                                                                                 |   | Level 1     |   |   | Level 2 |   |   | Level 3 |   |
|------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                                 |   | $ thousands |   |
|              Other investments      |   |        | 2,013  |   |    |   | -      |    |   |   | 12,514 |   |
|                                                                                                 |   |        |   |   |    |   |   |    |   |   |   |   |
|              Convertible Debentures |   |        | (3,383 | )      |    |   | -      |    |   |   | - |   |
|                                                                                                 |   |        |   |   |    |   |   |    |   |   |   |   |

|   | During 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | E. | Fair value of financial instruments (Cont.) |
|--------|----|---------------------------------------------|

|                                                                                                                                                                    |   | 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  |   |
|           Addition resulted from loss of significant influence in associate                                           |   |                                | 1,472  |   |
|                                                                                                                                                                    |   |                                |   |   |
|           Balance as of December 31, 2009                                                                             |   |                                | 12,514 |   |
|                                                                                                                                                                    |   |                                |   |   |
|           Total loss for the year included in profit or loss relating to assets held at the end of the reporting year |   |                                | (567   | ) |

|   | F. | 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, 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 financial payables and credit balances |   |              | 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 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| A loan from Shareholder                      |   |              | 18,111 |   |   |   | - |   |   |   | 18,111 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |              | 9,116  |   |   |   | 431 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,685 |   |
|                                         |   |              | 94,926 |   |   |   | 26,524 |   |   |   | 56,580 |   |   |   | 1,383 |   |   |   | 1,242 |   |   |   | - |   |   |   | - |   |   |   | 8,927 |   |

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

----

----

|   | F. | Liquidity risk (Cont.) |
|--------|----|------------------------|

|                                         |   | December 31, 2008 |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | 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                               |   |              | 3,829  |   |   |   | 3,829 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other financial payables and credit balances |   |              | 11,904 |   |   |   | 11,754 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 150 |   |
| Convertible Debentures                       |   |              | 5,426  |   |   |   | 269 |   |   |   | 1,390 |   |   |   | 1,323 |   |   |   | 1,256 |   |   |   | 1,188 |   |   |   | - |   |   |   | - |   |
| Loans from banks and others                  |   |              | 36,274 |   |   |   | 2,482 |   |   |   | 1,425 |   |   |   | 32,367 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| A loan from Shareholder                      |   |              | 7,232  |   |   |   | - |   |   |   | - |   |   |   | 7,232 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |              | 9,097  |   |   |   | 283 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,814 |   |
|                                         |   |              | 73,762 |   |   |   | 18,617 |   |   |   | 2,815 |   |   |   | 40,922 |   |   |   | 1,256 |   |   |   | 1,188 |   |   |   | - |   |   |   | 8,964 |   |

|   | * | The anticipated cash flows were calculated on the basis of the CPI and the exchange rates that were known on December 31, 2008. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------|

|                                         |   | January 1, 2008 |   |
|----------------------------------------------|--------|-----------------|--------|
|                                         |   | 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                               |   |            | 3,236  |   |   |   | 3,236 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other financial payables and credit balances |   |            | 8,907  |   |   |   | 8,907 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Convertible Debentures                       |   |            | 7,551  |   |   |   | 350 |   |   |   | 357 |   |   |   | 1,845 |   |   |   | 1,755 |   |   |   | 1,667 |   |   |   | 1,577 |   |   |   | - |   |
| Loans from banks and others                  |   |            | 5,717  |   |   |   | 3,431 |   |   |   | 224 |   |   |   | 48 |   |   |   | 2,014 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |            | 5,453  |   |   |   | 209 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 5,244 |   |
|                                         |   |            | 30,864 |   |   |   | 16,133 |   |   |   | 581 |   |   |   | 1,893 |   |   |   | 3,769 |   |   |   | 1,667 |   |   |   | 1,577 |   |   |   | 5,244 |   |

|   | * | The anticipated cash flows were calculated on the basis of the CPI and the exchange rates that were known on January 1, 2008. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | G. | Derivatives and hedging |
|--------|----|-------------------------|

|   | H. | Equity price risk – sensitivity analysis |
|--------|----|------------------------------------------------|

|   | A change in the fair value of financial assets available-for-sale would increase (decrease) the equity and the anticipated annual income or loss by the theoretical amounts presented below: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                    |   |        |   |   |        |   |   |        |   |
|-----------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                    |   | 2009        |   |   | 2008        |   |   | 2007        |   |
|                                    |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
|                                    |   |        |   |   |        |   |   |        |   |
|     Increase of 5%  |   |        | 837    |   |        |   | 309    |        |   |   | 2,142 |   |
|     Increase of 10% |   |        | 1,674  |   |        |   | 618    |        |   |   | 4,283 |   |
|     Decrease of 5%  |   |        | (837   | )      |        |   | (309   | )           |   |   | (2,142 | ) |
|     Decrease of 10% |   |        | (1,674 | )      |        |   | (618   | )           |   |   | (4,283 | ) |

|   | A change in the market price of the Convertible Debentures issued by Starling would increase (decrease) the equity and the anticipated annual income or loss by the theoretical amounts presented below: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                    |   |        |   |   |        |   |   |        |   |
|-----------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                    |   | 2009        |   |   | 2008        |   |   | 2007        |   |
|                                    |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
|                                    |   |        |   |   |        |   |   |        |   |
|     Increase of 30% |   |        | (1,062 | )      |        |   | (768   | )           |   |   | (1,665 | ) |
|     Decrease of 30% |   |        | 1,062  |   |        |   | 768    |        |   |   | 1,665 |   |

----

----

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

|   | As stated in Note 1, these consolidated financial statements are the first annual consolidated financial statements in accordance with IFRS. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Reconciliation from US GAAP to IFRS |
|--------|----|-------------------------------------|

|   | Set forth below is a reconciliation note which presents the material effects of application of IFRS on the Company's consolidated balance sheet and equity as of December 31, 2008 and January 1, 2008, and on the Company's consolidated statement of income for 2008. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In addition, presented below is an explanation of the material adjustments in the Company's consolidated statement of cash flows for 2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|                      |   |   |   |   |        |   |   | Effect of   |   |   |        |   |
|---------------------------|--------|--------|--------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                      |   |   |   |   |        |   |   | transition  |   |   |        |   |
|                      |   |   |   |   | US GAAP     |   |   | to IFRS     |   |   | IFRS        |   |
|                      |   | Item   |   |   | $ thousands |   |   | $ thousands |   |   | $ thousands |   |
| Current assets            |   |   |   |   |        |   |   |        |   |   |        |   |
|                      |   |   |   |   |        |   |   |        |   |   |        |   |
| Cash and cash equivalents |   |   |   |   |        | 17,364 |   |        |   | -      |        |   |   | 17,364 |   |
| Restricted cash           |   |   |   |   |        | 143    |   |        |   | -      |        |   |   | 143 |   |
| Trade receivables         |   |   |   |   |        | 1,150  |   |        |   | -      |        |   |   | 1,150 |   |
| Other current assets      |   |   | 11     |   |        |   | 5,772  |        |   |   | 15          |   |   |   | 5,787 |   |
| Inventories               |   |   | 11     |   |        |   | 1,999  |        |   |   | 3           |   |   |   | 2,002 |   |
|                      |   |   |   |   |        |   | 26,428 |        |   |   | 18          |   |   |   | 26,446 |   |

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|                                  |   |   |                         |   |        |   |    | Effect of   |   |   |        |   |
|---------------------------------------|--------|--------|------------------------------|--------|-------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                  |   |   |                         |   |        |   |    | transition  |   |   |        |   |
|                                  |   |   |                         |   | US GAAP     |   |    | to IFRS     |   |   | IFRS        |   |
|                                  |   | Item   |                         |   | $ thousands |   |    | $ thousands |   |   | $ thousands |   |
| Non-current assets                    |   |   |                         |   |        |   |    |        |   |   |        |   |
|                                  |   |   | 1, 4, 5, 6, 9, 10, 12        |   |        |   |    |        |   |   |        |   |   |
| Investments in associates             |   |   | 14, 13                       |   |        |   | 151,539 |        |   |   | 16,827      |   |   |   | 168,366 |   |
| Other investments                     |   |   | 4, 5, 9, 10, 14, 13          |   |        |   | 64,088  |        |   |   | (56,577     | )      |   |   | 7,511 |   |
| Property, plant and equipment         |   |   | 2, 11                        |   |        |   | 4,582   |        |   |   | (124        | )      |   |   | 4,458 |   |
| Severance pay funds                   |   |   | 9                            |   |        |   | 2,942   |        |   |   | (2,942      | )      |   |   | - |   |
| Intangible assets, net                |   |   | 1, 2, 6, 13                  |   |        |   | 7,457   |        |   |   | 5,341       |   |   |   | 12,798 |   |
|                                  |   |   |                         |   |        |   | 230,608 |        |   |   | (37,475     | )      |   |   | 193,133 |   |
|                                  |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                  |   |   |                         |   |        |   | 257,036 |        |   |   | (37,457     | )      |   |   | 219,579 |   |
| Current liabilities                   |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Short terms credit and loans          |   |   | 4                            |   |        |   | 3,491   |        |   |   | 289         |   |   |   | 3,780 |   |
| Trade payables                        |   |   |                         |   |        |   | 3,829   |        |   |   | -           |   |   |   | 3,829 |   |
| Other current liabilities             |   |   | 5, 9, 10, 11                 |   |        |   | *11,696 |        |   |   | 790         |   |   |   | 12,486 |   |
|                                  |   |   |                         |   |        |   | 19,016  |        |   |   | 1,079       |   |   |   | 20,095 |   |
|                                  |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Non-current liabilities               |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Long term loans from banks and others |   |   | 4                            |   |        |   | 35,062  |        |   |   | 79          |   |   |   | 35,141 |   |
| Long term loans from shareholders     |   |   |                         |   |        |   | 6,176   |        |   |   | -           |   |   |   | 6,176 |   |
| Convertible Debentures                |   |   |                         |   |        |   | 2,161   |        |   |   | -           |   |   |   | 2,161 |   |
| Royalty bearing government grants     |   |   | 5                            |   |        |   | -       |        |   |   | 8,814       |   |   |   | 8,814 |   |
| Employee benefits                     |   |   | 9                            |   |        |   | 4,137   |        |   |   | (3,146      | )      |   |   | 991 |   |
| Other long term liabilities           |   |   | 9                            |   |        |   | *150    |        |   |   | -           |   |   |   | 150 |   |
|                                  |   |   |                         |   |        |   | 47,686  |        |   |   | 5,747       |   |   |   | 53,433 |   |
|                                  |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Equity                                |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Equity attributable to the Company's  |   |   | 1, 2, 3, 4, 5, 8, 9, 10 |   |        |   |    |        |   |   |        |   |   |   |   |   |
|  shareholders                    |   |   | 11, 12, 13, 14               |   |        |   | 173,804 |        |   |   | (34,298     | )      |   |   | 139,506 |   |
| Non-controlling interest              |   |   | 1, 2, 5, 9, 10, 13, 14       |   |        |   | 16,530  |        |   |   | (9,985      | )      |   |   | 6,545 |   |
|                                  |   |   |                         |   |        |   | 190,334 |        |   |   | (44,283     | )      |   |   | 146,051 |   |
|                                  |   |   |                         |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                  |   |   |                         |   |        |   | 257,036 |        |   |   | (37,457     | )      |   |   | 219,579 |   |

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|                                                                                               |   |   |                         |                             |        |   |     | Effect of   |   |   |        |    |
|----------------------------------------------------------------------------------------------------|--------|--------|------------------------------|----------------------------------|-------------|--------|----------|-------------|--------|--------|-------------|---------|
|                                                                                               |   |   |                         |                             |        |   |     | transition  |   |   |        |    |
|                                                                                               |   |   |                         |                             | US GAAP     |   |     | to IFRS     |   |   | IFRS        |    |
|                                                                                               |   | Item   |                         |                             | $ thousands |   |     | $ thousands |   |   | $ thousands |    |
|                                                                                               |   |   |                         | (except for loss per share data) |        |
| Income                                                                                             |   |   |                         |                             |        |   |     |        |   |   |        |    |
| Sales of goods                                                                                     |   |   |                         |                             |        | 6,237  |     |        |   | -      |        |    |   | 6,237 |   |
| Income (loss) from disposal of businesses and associates and changes in holding in associates, net |   |   | 4, 5, 10                     |                             |        |   | (44      | )           |   |   | 827         |    |   |   | 783 |   |
| Financial income                                                                                   |   |   | 7                            |                             |        |   | 1,678    |        |   |   | 4,581       |    |   |   | 6,259 |   |
|                                                                                               |   |   |                         |                             |        |   | 7,871    |        |   |   | 5,408       |    |   |   | 13,279 |   |
| Cost and Expenses                                                                                  |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Cost of sales                                                                                      |   |   | 5                            |                             |        |   | (3,646   | )           |   |   | 446         |    |   |   | (3,200 | ) |
| Selling and Marketing expenses                                                                     |   |   |                         |                             |        |   | (7,525   | )           |   |   | -           |    |   |   | (7,525 | ) |
| General and administrative expenses                                                                |   |   | 9, 10                        |                             |        |   | (18,832  | )           |   |   | (233        | )       |   |   | (19,065 | ) |
| Research and development expenses, net                                                             |   |   | 5, 9, 10                     |                             |        |   | (29,194  | )           |   |   | (717        | )       |   |   | (29,911 | )  |
| Equity in losses of associates, net                                                                |   |   | 1, 4, 5, 6, 9, 10, 12 13, 14 |                             |        |   | (19,866  | )           |   |   | (20,280     | )       |   |   | (40,146 | ) |
| Amortization of intangible assets                                                                  |   |   | 6, 13                        |                             |        |   | (4,801   | )           |   |   | 3,740       |    |   |   | (1,061 | ) |
| Other expenses, net                                                                                |   |   | 14                           |                             |        |   | (21,042  | )           |   |   | 20,785      |    |   |   | (257 | ) |
| Financial expenses                                                                                 |   |   | 4, 7, 11                     |                             |        |   | -        |        |   |   | (4,800      | )       |   |   | (4,800 | ) |
|                                                                                               |   |   |                         |                             |        |   | (104,906 | )           |   |   | (1,059      | )  |   |   | (105,965 | ) |
|                                                                                               |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Loss before taxes on income                                                                        |   |   |                         |                             |        |   | (97,035  | )           |   |   | 4,349       |    |   |   | (92,686 | ) |
| Taxes on income                                                                                    |   |   | 6                            |                             |        |   | (1,269   | )           |   |   | 1,301       |    |   |   | 32 |   |
|                                                                                               |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Loss for the period                                                                                |   |   |                         |                             |        |   | (98,304  | )           |   |   | 5,650       |    |   |   | (92,654 | ) |
|                                                                                               |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Attributable to:                                                                                   |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| The Company's shareholders                                                                         |   |   | 1, 2, 5, 8, 9, 10, 13, 14    |                             |        |   | (83,137  | )           |   |   | 11,303      |    |   |   | (71,834 | ) |
| Non-controlling interest                                                                           |   |   | 1, 2, 5, 9, 10, 13, 14       |                             |        |   | (15,167  | )           |   |   | (5,653      | )       |   |   | (20,820 | ) |
|                                                                                               |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
|                                                                                               |   |   |                         |                             |        |   | (98,304  | )           |   |   | 5,650       |    |   |   | (92,654 | ) |
|                                                                                               |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Loss per ordinary share of                                                                         |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
|  $1 par value:                                                                                |   |   |                         |                             |        |   |     |        |   |   |        |    |   |   |   |   |
| Basic loss per share                                                                               |   |   |                         |                             |        |   | (2.80    | )           |   |   | 0.37        |    |   |   | (2.43 | ) |
| Diluted loss per share                                                                             |   |   |                         |                             |        |   | (2.84    | )           |   |   | 0.40        |    |   |   | (2.44 | ) |

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|                                     |   |   |                   |   |        |   |    | Effect of   |   |   |        |   |
|------------------------------------------|--------|--------|------------------------|--------|-------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                     |   |   |                   |   |        |   |    | transition  |   |   |        |   |
|                                     |   |   |                   |   | US GAAP     |   |    | to IFRS     |   |   | IFRS        |   |
|                                     |   | Item   |                   |   | $ thousands |   |    | $ thousands |   |   | $ thousands |   |
| Current assets                           |   |   |                   |   |        |   |    |        |   |   |        |   |
| Cash and cash equivalents                |   |   |                   |   |        | 20,090 |    |        |   | -      |        |   |   | 20,090 |   |
| Short term financial investments         |   |   |                   |   |        | 16,900 |    |        |   | -      |        |   |   | 16,900 |   |
| Restricted cash                          |   |   |                   |   |        | 7,642  |    |        |   | -      |        |   |   | 7,642 |   |
| Available for sale marketable securities |   |   |                   |   |        | 29,730 |    |        |   | -      |        |   |   | 29,730 |   |
| Trade receivables                        |   |   |                   |   |        | 1,043  |    |        |   | -      |        |   |   | 1,043 |   |
| Other current assets                     |   |   | 11                     |   |        |   | 5,269   |        |   |   | -           |   |   |   | 5,269 |   |
| Inventories                              |   |   | 11                     |   |        |   | 1,732   |        |   |   | -           |   |   |   | 1,732 |   |
|                                     |   |   |                   |   |        |   | 82,406  |        |   |   | -           |   |   |   | 82,406 |   |
|                                     |   |   |                   |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Non-current assets                       |   |   |                   |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Investments in associates                |   |   | 4, 5, 6, 9, 10, 12, 14 |   |        |   | 135,675 |        |   |   | 9,282       |   |   |   | 144,957 |   |
| Other investments                        |   |   | 3, 5, 14               |   |        |   | 62,764  |        |   |   | (49,662     | )      |   |   | 13,102 |   |
| Property, plant and equipment, net       |   |   | 2, 11                  |   |        |   | 1,936   |        |   |   | (140        | )      |   |   | 1,796 |   |
| Severance pay funds                      |   |   | 9                      |   |        |   | 1,808   |        |   |   | (1,808      | )      |   |   | - |   |
| Deferred tax assets                      |   |   | 6                      |   |        |   | 2,204   |        |   |   | (2,148      | )      |   |   | 56 |   |
| Intangible assets, net                   |   |   | 1, 2, 6, 13            |   |        |   | 5,524   |        |   |   | (4,415      | )      |   |   | 1,109 |   |
|                                     |   |   |                   |   |        |   | 209,911 |        |   |   | (48,891     | )      |   |   | 161,020 |   |
|                                     |   |   |                   |   |        |   |    |        |   |   |        |   |   |   |   |   |
|                                     |   |   |                   |   |        |   | 292,317 |        |   |   | (48,891     | )      |   |   | 243,426 |   |

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|                                  |   |   |                 |   |        |   |    | Effect of   |   |   |        |   |
|---------------------------------------|--------|--------|----------------------|--------|-------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                  |   |   |                 |   |        |   |    | transition  |   |   |        |   |
|                                  |   |   |                 |   | US GAAP     |   |    | to IFRS     |   |   | IFRS        |   |
|                                  |   | Item   |                 |   | $ thousands |   |    | $ thousands |   |   | $ thousands |   |
| Current liabilities                   |   |   |                 |   |        |   |    |        |   |   |        |   |
| Short terms credit and loans          |   |   |                 |   |        | 3,325  |    |        |   | -      |        |   |   | 3,325 |   |
| Trade payables                        |   |   |                 |   |        | 3,236  |    |        |   | -      |        |   |   | 3,236 |   |
| Other current liabilities             |   |   | 5                    |   |        |   | 8,508   |        |   |   | 608         |   |   |   | 9,116 |   |
| Convertible Debentures                |   |   |                 |   |        |   | 5,549   |        |   |   | -           |   |   |   | 5,549 |   |
| Options to Convertible Debentures     |   |   |                 |   |        |   | 830     |        |   |   | -           |   |   |   | 830 |   |
|                                  |   |   |                 |   |        |   | 21,448  |        |   |   | 608         |   |   |   | 22,056 |   |
|                                  |   |   |                 |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Non-current liabilities               |   |   |                 |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Long term loans from banks and others |   |   |                 |   |        |   | 2,244   |        |   |   | -           |   |   |   | 2,244 |   |
| Royalty bearing government grants     |   |   | 5                    |   |        |   | -       |        |   |   | 5,453       |   |   |   | 5,453 |   |
| Deferred taxes                        |   |   | 13                   |   |        |   | 373     |        |   |   | 83          |   |   |   | 456 |   |
| Employee benefits                     |   |   | 9                    |   |        |   | 2,451   |        |   |   | (1,890      | )      |   |   | 561 |   |
|                                  |   |   |                 |   |        |   | 5,068   |        |   |   | 3,646       |   |   |   | 8,714 |   |
| Equity                                |   |   |                 |   |        |   |    |        |   |   |        |   |   |   |   |   |
| Equity attributable to the Company's  |   |   | 1, 2, 4, 5, 6, 9, 10 |   |        |   |    |        |   |   |        |   |   |   |   |   |
|  shareholders                    |   |   | 11, 12, 14           |   |        |   | 259,187 |        |   |   | (49,574     | )      |   |   | 209,613 |   |
| Non-controlling interest              |   |   | 5, 9, 10, 11, 14     |   |        |   | 6,614   |        |   |   | (3,571      | )      |   |   | 3,043 |   |
|                                  |   |   |                 |   |        |   | 265,801 |        |   |   | (53,145     | )      |   |   | 212,656 |   |
|                                  |   |   |                 |   |        |   | 292,317 |        |   |   | (48,891     | )      |   |   | 243,426 |   |

|   | 1. | Capitalization of development costs – in accordance with US GAAP, development costs were charged to the statement of income as incurred. According to IFRS, development costs are recorded as an asset if, and only if, the entity can demonstrate: the technical feasibility of completing the intangible asset so that it will be available for use or sale, an intention and the ability to complete the intangible asset and to use it or sell it, how the intangible asset will generate probable future economic benefits, the existence of available economic resources to complete the development and to use the intangible asset or to sell it and the ability to measure reliably the expenditure attributable to the intangible asset during its development, (see also section 13 below regarding acquired IPR&D). |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Classification of capitalized computer software and software development costs – Under US GAAP, computer software and capitalized software development costs were classified as part of property, plant and equipment. According to IFRS, computer software and capitalized software development costs that do not constitute an integral part of the related hardware, are accounted for as an intangible asset. Therefore, upon the transition to reporting according to IFRS, computer software and capitalized software development costs were reclassified from property, plant and equipment to intangible assets. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|   | 3. | Valuation of available for sale financial instruments according to fair value and balance sheet reclassification – in accordance with US GAAP, the Company classified its investments in companies which the Company does not have significant influence over their financial affairs, as investments measured at cost, net of other than temporary impairments. According to IFRS, the Company classifies these investments as available-for-sale financial assets, and they are measured at fair value on every balance sheet date. Changes in the fair value are recorded directly in equity as a capital reserve in respect of available for sale financial assets, except for other than temporary impairments that are included in the statement of income. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Change in classification of financial derivatives from liability to equity – in accordance with US GAAP, liabilities convertible into ordinary shares that are denominated in foreign currency (which is different than the investees's functional currency) and/or that are linked to the CPI or to foreign currency, were accounted for in the investee's financial statements as a liability, net of amount allocated as a discount. The discount is amortized over the repayement period of the Convertible Debentures using the effective interest rate method. According to IFRS, these convertible liabilities are classifed as a liability and are recorded in their entirety at their fair values, where changes in the fair value are recorded in the statement of income. Upon modification to the terms of some of the debentures and elimination of the terms that sets the linkage of the conversion price to the CPI, these liabilities were classified as a liabilities including an embedded derivative. For measurement purposes, the amount of the liability is to be separated into two components: the liability component having no conversion right, which is measured at amortized cost on the date of the modification to fair value net of the discount, which is amortized using the effective interest rate method, and the conversion option, which was classified as equity. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Liability to the Office of the Chief Scientist in respect of government grants – in accordance with US GAAP, grants from the Chief Scientist in respect of research and development which embed a commitment for royalty payments to the State of Israel that are contingent on execution of future sales deriving from the development, were recorded as an offset from the related research and development expenses when the Company or its invetees where entitled to such grants. The liability for repayment with a corresponding charge to  expense that is included in the cost of sales is recorded when the payment of royalties to the Chief Scientist is triggered by the respective revenues. According to IFRS, up to December 31, 2008, government grants received from the Office of the Chief Scientist were recognized as a liability upon their receipt if it was reasonably assured that the economic benefits stemming from the research and development activities will lead to sales entitling the State to royalties. Amounts paid as royalties were recorded as repayment of the respective liability. Where economic benefits were not reasonably assumed, the grant receipts were recognized as a reduction of the research and development expenses in the statement of income. In such a case, the liability to pay royalties was accounted for as a contingent liability in accordance with IAS 37. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|   | 5. | Liability to the Office of the Chief Scientist in respect of government grants (cont.) |
|--------|----|----------------------------------------------------------------------------------------|

|   | 6. | Business combinations – Under IFRS 1, the Company elected not to restate to past business combinations. Accordingly, certain past transactions differed in their accounting and date of transaction for US GAAP and for IFRS as upon transition to IFRS the Company did not reassess transaction that occurred prior to transition date. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result, as of January 1, 2008, the balance of the investments in associates increased by approximately $5,321 and the balance of the intangible assets declined by approximately $5,617 against the balance of the retained earnings (accumulated deficit). In addition, during 2008, the investments in associates decreased by about $4,289, the balance of the intangible assets declined by approximately $2,636, the Company's share in the net loss of associates decreased by approximately $625, the other expenses declined by approximately $2,513 and the amortization of intangible assets declined by approximately $18. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | Presentation of financial income and expenses on a gross basis – in accordance with US GAAP, the financial income and expenses were presented on a net basis in the statement of income. According to IFRS, The Company separatly presented the financial income and the financial expenses (gross presentation). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Recording the balance of the capital reserves from translation differences at the transition date to retained earnings – pursuant to the relief provision provided in IFRS 1, the Company elected to record the balance of the capital reserves derived from translation of financial statements of foreign currency investees as of January 1, 2007 to the retained earnings. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|   | 9. | Use of actuarial calculations in recording the assets and liabilities in respect of employee benefits – in accordance with US GAAP, liabilities for employee post-employment severance benefits were recognized on the basis of the full liability, on the assumption that all the employees will be terminated under conditions entitling them to full severance benefits (shut- down method), without taking into account discount rates, rates of future wage increases and future employee turnover. The employee benefits liability was presented seperately of the severance pay deposits. The severance pay deposits accrued against the liabilities were measured based on their redemption values at every balance sheet date. In addition, liabilities in respect of vacation and sick leave pay were calculated based on estimates of utilization and redemption, respectively. According to IFRS, all the net liabilities in respect of post-employment employee benefits and long-term other benefit plans are measured based on the provisions of IAS 19 (amended) regarding employee benefits. Post-employment benefits relating to defined benefit plans are measured, inter alia, based on actuarial estimates and capitalized amounts. Deposits that constitutes a plan asset are measured at fair value. In addition, the employee severance benefits are presented net of severance pay deposits. Amounts deposited with a related party in respect of employee severance benefits do not constitute plan assets and are presented as a separate asset. The Company elected under IAS 19 regarding employee benefits, the alternative whereby actuarial gains and losses deriving from changes in actuarial assumptions are recorded to retained earnings (accumulated deficit). |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10. | Share-based payment – in accordance with US GAAP, the Company records the share based compensation as payroll expense against a corresponding  increase in additional paid in capital. Absent a specific instruction, according to IFRS, the Company elected to record the share based payment payrol expenses against  a corresponding increase in retained earnings instead of in a capital reserve or additional paid in capital. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 11. | Functional currency – in accordance with US GAAP, the functional currency of a certain subsidiary is the U.S. dollar. According to IFRS, based on the provisions of IAS 21 – "Impact of Changes in Foreign Currency Exchange Rates", the subsidiary's functional currency is the NIS. Due to the difference of the functional currency of the subsidiary from the functional currency of Elron under IFRS, the subsidiary was defined as a foreign operation. Accordingly, the assets and liabilities of the subsidiary were translated into dollars based on the exchange rates on the balance sheet date. The revenues and expenses of the subsidiary were translated into dollars based on the the exchange rates in effect on the transaction dates or using average exchange rates for the period. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result of the difference in the functional currency of the subsidiary, the Company recorded a reserve for translation differences in the amount of approximately $2,212 and approximately $3,887 as of January 1, 2008 and December 31, 2008, respectively, which were accrued commencing from January 1, 2007 (see also Section B.8 above). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|   | 12. | Change in the accounting treatment of affiliated companies – in accordance with US GAAP, investments in companies in which the Company does not hold "in-substance-common stocks" as defined in ASC 323-10-15-13, are accounted for at cost subject to an examination of impairment in value, despite the Company's ability to significantly influence the investee's financial results or its financial policy. According to IFRS, if the Company has significant influence over the investee’s financial and operational affairs and results or its financial policy, the equity method of accounting is applied. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result, as of January 1, 2008, the investments in associates, net, increased by about $4,837, and the balance of the other investments decreased by about $47,995, against a corresponding decrease in the retained earnings. In addition, during 2008, the Company's share in the net losses of associates increased by about $21,755, the other expenses decreased by about $18,272, the investments in associates increased by about $8,200 and the balance of the other investments decreased by about $55,644. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 13. | Measurment of assets and liabilities upon initial consolidation – in accordance with US GAAP, (see also Note 3.C.4) Wavion was initially consolidated in 2008 based on fair value in accordance with the provisions codified within ASC 810, regarding Variable Interests Entities. As a result, the excess of Elron's share in the fair value of Wavion over its reported amount of previously held interest, in the amount of approximately $3,434, was adjusted to reduce the excess cost allocated to technology. According to IFRS 3, the excess of Elron's portion in the fair value of Wavion's equity over its reported amount of previously held interest was recorded to shareholders' equity as a revaluation reserve in the amount of approximately $3,000 and will be amortized over a period of 5 years against retained earnings (accumulated deficit). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In addition, in accordance with US GAAP, (see also Note 3.C.3) Impliant was initially consolidated in 2008 based on fair value in accordance with the provisions codified within ASC 810 regarding Variable Interest Entites. As a result, the excess of Elron's reported amount of previously held interest over its portion in the fair value of Implaint's equity and loans in the amount of approximately $4,500 was allocated to IPR&D and as a result, was charged immediately to the Company’s results of operations. According to IFRS, upon consolidation the excess of the fair value of Elron's share in the capital of Impliant over carrying amount of the investment in the capital and in loans (which was prior to consolidation accounted for using the equity method of accounting), in the amount of  approximately $2,300, was recorded in a shareholders equity as a revaluation reserve. In addition, excess cost, in the amount of approximately $3,300, which was allocated to IPR&D, was not charged directly to the statement of income as required under US GAAP, but rather, was recognized as an asset in accordance with the provisions of IAS 38. The capital reserve derived upon initial consolidation will be classified to retained earnings (accumulated deficit) upon amortization of the intangible asset allocatd to the IPR&D. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | B. | Reconciliation from US GAAP to IFRS (Cont.) |
|--------|----|---------------------------------------------|

|   | 14. | Allocation of losses to the Non-controlling interest – in accordance with US GAAP prior to adoption of ASC 810 guidance with respect to non-controlling interest (originally issued as FAS 160 on January 1, 2009),  where the equity or ownership structure of a subsidiary is complex, for example when the non-controlling interest holds preferred shares or other senior debt that confers preference to the holder upon liquidation or distribution of a dividend, losses were not to be allocated to the non-controlling if such allocation will reduce the non-controlling interest below the lower of the non-controlling's investment and the value of the non-controlling interest's rights upon liquidation. According to IFRS, losses may be allocated to the non-controlling interest up to the amount of the non-controlling's investment, or further up to the amount of a guarantee provided by the non-controlling. As a result, as of January 1, 2008, the non-controlling interest under IFRS decreased by approximately $1,700 against a corresponding decrease in the retained earnings (increase of accumulated deficit). In addition, during 2008, the net loss attributable to the Company's shareholders declined by approximately $3,500 against an increase in the non-controlling interest in the loss. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Elron 

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|                                     |   | Rate of  |         |   | Fully    |   |   |        |   |   |            |     |   |   |    |
|------------------------------------------|--------|----------|--------------|--------|----------|--------|--------|-------------|--------|--------|-----------------|----------|--------|--------|---------|
|                                     |   | holdings |         |   | diluted  |   |   | Carrying    |   |   | Market value of |     |
|                                     |   | in       |         |   | rate of  |   |   | value of    |   |   | traded shares   |     |
|                                     |   | equity   |         |   | holdings |   |   | investments |   |   |            | 31.12.09 |   |   |    | 27.03.10 |   |
|                                     |   | %        |         |   |     |   |   |        |   |   |            |     |   |   |
|                                     |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |
| Investments in group companies           |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |
|                                     |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |
| Subsidiaries:                            |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |
| Starling Advanced Communication Ltd. (*) |   |     | 68.05(49.86  | )      |     |   | 59.58  |        |   |   | (6,282          | )        |   |   | 8,899   |   |   |   | 11,344 |   |
| Medingo Ltd. (*)                         |   |     | 92.04(50.32  | )      |     |   | 76.00  |        |   |   | (1,471          | )        |   |   |    |   |   |   |   |   |
| SyncRx Ltd. (*)                          |   |     | 84.00(42.08  | )      |     |   | 74.85  |        |   |   | 366             |     |   |   |    |   |   |   |   |   |
| Actysafe(*)                              |   |     | 100.00(50.10 | )      |     |   | 85.00  |        |   |   | (66             | )        |   |   |    |   |   |   |   |   |
| Xsights Ltd. (formerly: PaperLynx) (*)   |   |     | 100.00(50.10 | )      |     |   | 81.50  |        |   |   | (488            | )        |   |   |    |   |   |   |   |   |
| Wavion Inc.                              |   |     | 65.67        |   |     |   | 56.30  |        |   |   | (26             | )        |   |   |    |   |   |   |   |   |
|                                     |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |   |   |   |
| Associates:                              |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |   |   |   |
| Impliant Inc.                            |   |     | 47.64        |   |     |   | 40.02  |        |   |   | 2,803           |     |   |   |    |   |   |   |   |   |
| Given Imaging Ltd. (Nasdaq: GIVN) (*)    |   |     | 32.23(27.70  | )      |     |   | 26.35  |        |   |   | 104,501         |     |   |   | 165,256 |   |   |   | 209,173 |   |
| Galil Medical Ltd.  (*)        |   |     | 29.10(20.52  | )      |     |   | 24.74  |        |   |   | 154             |     |   |   |    |   |   |   |   |   |
| Notal Vision Inc.                        |   |     | 27.09        |   |     |   | 20.19  |        |   |   | 998             |     |   |   |    |   |   |   |   |   |
| Aqwise Ltd.                              |   |     | 34.03        |   |     |   | 29.95  |        |   |   | 3,154           |     |   |   |    |   |   |   |   |   |
| Teledata Ltd.                            |   |     | 21.05        |   |     |   | 20.85  |        |   |   | (2,700          | )        |   |   |    |   |   |   |   |   |
| NuLens Ltd.                              |   |     | 33.71        |   |     |   | 28.92  |        |   |   | 1,160           |     |   |   |    |   |   |   |   |   |
| BrainsGate Ltd.                          |   |     | 23.28        |   |     |   | 20.83  |        |   |   | 2,741           |     |   |   |    |   |   |   |   |   |
| Safend Ltd.                              |   |     | 26.97        |   |     |   | 21.83  |        |   |   | (325            | )        |   |   |    |   |   |   |   |   |
| Atlantium Inc.                           |   |     | 23.44        |   |     |   | 20.22  |        |   |   | 10              |     |   |   |    |   |   |   |   |   |
| Pocared Ltd.                             |   |     | 31.51        |   |     |   | 30.32  |        |   |   | 705             |     |   |   |    |   |   |   |   |   |
| Plymedia Inc.                            |   |     | 27.55        |   |     |   | 21.84  |        |   |   | 10              |     |   |   |    |   |   |   |   |   |
|                                     |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |   |   |   |
| Other investments:                       |   |     |         |   |     |   |   |        |   |   |            |     |   |   |    |   |   |   |   |   |
| GigOptix Inc.                            |   |     | 8.71         |   |     |   | N/A    |        |   |   | 1,618           |     |   |   | 1,618   |   |   |   | 3,082 |   |
| BPT Ltd.                                 |   |     | 17.45        |   |     |   | 15.88  |        |   |   | 2,942           |     |   |   |    |   |   |   |   |   |
| Jordan Valley Ltd.                       |   |     | 19.58        |   |     |   | 18.16  |        |   |   | 8,071           |     |   |   |    |   |   |   |   |   |
| EVS (Nasdaq: EVSNF.OB)                   |   |     | 9.68         |   |     |   | N/A    |        |   |   | 395             |     |   |   | 395     |   |   |   | 345 |   |
| InnoMed Ventures L.P.                    |   |     | 13.92        |   |     |   | N/A    |        |   |   | 1,434           |     |   |   |    |   |   |   |   |   |

----

----

| B. | Subsidiaries consolidated by the Company |
|----|------------------------------------------|

|                                                                    |   | Rate of holdings in      |      |
|-------------------------------------------------------------------------|--------|--------------------------|-----------|
|                                                                    |   | shares and voting rights |      |
|                                                                    |   | December 31              |      |
|                                                                    |   | 2009                     |      |   | 2008 |   |
|                                                                    |   | %                        |      |
|                                                                    |   |                     |      |   |   |   |
|     Companies consolidated by the Company           |   |                     |      |   |   |   |
|     Starling Advanced Communications Ltd.(*)        |   |                     | 68.1(49.9 | ) |   |   | 68.1(49.9 | ) |
|     Medingo Ltd. (*)                                |   |                     | 92.0(50.3 | ) |   |   | 92.0(50.4 | ) |
|     Wavion Ltd.                                     |   |                     | 65.7      |   |   |   | 65.7 |   |
|     RDC – Rafael Development Corporation Ltd. |   |                     | 50.1      |   |   |   | 50.1 |   |
|     Xsights Ltd. (*)                                |   |                     | 100(50.1  | ) |   |   | 100(50.1 | ) |
|     Sync-Rx Ltd. (*)                                |   |                     | 84.0(42.0 | ) |   |   | 77.9(39.0 | ) |
|     ActySafe Ltd. (*)                               |   |                     | 100(50.1  | ) |   |   | 100(50.1 | ) |
|     Sela Ltd. (*),(**)                              |   |                     | -         |   |   |   | 71.9(45.6 | ) |
|     Impliant Inc. (*); (***)                        |   |                     | -         |   |   |   | 46.4 |   |

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| C. | Subsidiaries consolidated by Company subsidiaries |
|----|---------------------------------------------------|

|                                         |   | Rate of holdings in      |   |
|----------------------------------------------|--------|--------------------------|--------|
|                                         |   | shares and voting rights |   |
|                                         |   | December 31              |   |
|                                         |   | 2009                     |   |   | 2008 |   |
|                                         |   | %                        |   |
|                                         |   |                     |   |   |   |   |
|     By RDC Ltd.          |   |                     |   |   |   |   |
|     ActySafe Ltd.        |   |                     | 100    |   |   |   | 100 |   |
|     Sync-Rx Ltd.         |   |                     | 84     |   |   |   | 78 |   |
|     Xsights Ltd.         |   |                     | 100    |   |   |   | 100 |   |
|                     |   |                     |   |   |   |   |   |   |
|     By Medingo Ltd.      |   |                     |   |   |   |   |   |   |
|     Medingo Inc.         |   |                     | 100    |   |   |   | 100 |   |
|                     |   |                     |   |   |   |   |   |   |
|     By Wavion Inc.       |   |                     |   |   |   |   |   |   |
|     Wavion Ltd.          |   |                     | 100    |   |   |   | 100 |   |
|                     |   |                     |   |   |   |   |   |   |
|     By Impliant Inc. (*) |   |                     |   |   |   |   |   |   |
|     Impliant Ltd.        |   |                     | -      |   |   |   | 100 |   |
|                                         |   |                     |   |   |   |   |   |   |

| (*) | Impliant was de-consolidated on September 30, 2009. |
|-----|-----------------------------------------------------|

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