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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 20-F
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
Commission File No. 0-11456
 
 ELRON ELECTRONIC INDUSTRIES LTD.
  
 ISRAEL
 3 Azrieli Center, 42nd Floor, Tel-Aviv, Israel 67023
 
 Rinat Remler, Telephone: (972) 3-607-5555, Facsimile: (972) 3-607-5556
3 Azrieli Center, 42nd Floor, Tel-Aviv, Israel 67023
   Ordinary shares, nominal value 0.003 New Israeli Shekels per share
 Name of each exchange on which registered
 None
 None
 
   o þ
  o þ
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  US GAAP þ
    
    International Financial Reporting Standards as issued by the International Accounting
Standards Board o
    
    Other o
  o o
  o þ




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TABLE OF CONTENTS
 Page No.PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    26Item 4A. Unresolved Staff Comments
    
    
    53Item 5. Operating and Financial Review and Prospects
    
    
    53Item 6. Directors, Senior Management and Employees
    
    
    85Item 7. Major Shareholders and Related Party Transactions
    
    
    96Item 8. Financial Information
    
    
    100Item 9. The Offer and Listing
    
    
    102Item 10. Additional Information
    
    
    103Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    122Item 12. Description of Securities Other than Equity Securities
    
    
    122PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    122Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
    
    
    122Item 15. Controls and Procedures
    
    
    123Item 16. [Reserved]
    
    
    123Item 16A. Audit Committee Financial Expert
    
    
    123Item 16B. Code of Ethics
    
    
    124Item 16C. Principal Accountant Fees and Services
    
    
    124Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    124Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    124Item 16F
Change in Registrants Certifying Accountant
    
    
    125Item 16G
Corporate Governance
    
    
    125PART IIIItem 17. Financial Statements
    
    
    126Item 18. Financial Statements
    
    
    126Item 19. Exhibits
    
    
    126Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 12.3Exhibit 13.1Exhibit 13.2Exhibit 13.3Exhibit 15.1Exhibit 15.2Exhibit 15.3
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Introduction
   Forward-Looking Statements
   
 PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
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Selected Financial Data
  Consolidated statements of operations
  Years ended December 312004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Income:Net revenues
    
    $
    11,265
    
    
    $
    12,646
    
    
    $
    12,863
    
    
    $
    4,371
    
    
    $
    6,237Equity in losses of affiliated companies
    
    
    (10,492
    )
    
    
    (17,522
    )
    
    
    (17,740
    )
    
    
    (20,416
    )
    
    
    (15,984
    )Gain (loss) from disposal of businesses and
affiliated
companies and changes in holdings in
affiliated companies, net
    
    
    132,396
    
    
    
    23,328
    
    
    
    2,547
    
    
    
    14,854
    
    
    
    (44
    )Other income (expenses), net
    
    
    4,749
    
    
    
    58,648
    
    
    
    29,310
    
    
    
    (3,214
    )
    
    
    (25,429
    )Financial income, net
    
    
    1,433
    
    
    
    5,483
    
    
    
    4,051
    
    
    
    3,945
    
    
    
    1,678139,351
    
    
    
    82,583
    
    
    
    31,031
    
    
    
    (460
    )
    
    
    (33,542
    )Costs and expenses:Cost of revenues
    
    
    6,791
    
    
    
    7,907
    
    
    
    6,625
    
    
    
    2,233
    
    
    
    3,646Research and development costs, net
    
    
    2,889
    
    
    
    6,163
    
    
    
    11,758
    
    
    
    13,284
    
    
    
    29,194Marketing and selling expenses, net
    
    
    1,311
    
    
    
    2,386
    
    
    
    4,717
    
    
    
    2,802
    
    
    
    7,525General and administrative expenses
    
    
    12,292
    
    
    
    9,249
    
    
    
    12,995
    
    
    
    13,716
    
    
    
    18,832Amortization of intangible assets and
acquired in- process- research and
development write-off
    
    
    142
    
    
    
    392
    
    
    
    18
    
    
    
    2,306
    
    
    
    4,801Impairment of goodwill
    
    
    4,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,51227,617
    
    
    
    26,097
    
    
    
    36,113
    
    
    
    34,341
    
    
    
    66,510
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Years ended December 312004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Income (loss) before taxes on income
    
    
    111,734
    
    
    
    56,486
    
    
    
    (5,082
    )
    
    
    (34,801
    )
    
    
    (100,052
    )Taxes on income
    
    
    (15,101
    )
    
    
    (10,461
    )
    
    
    (1,110
    )
    
    
    (7,544
    )
    
    
    (1,269
    )Income (loss) after taxes on income
    
    
    96,633
    
    
    
    46,025
    
    
    
    (6,192
    )
    
    
    (42,345
    )
    
    
    (101,321
    )Minority interest in losses (income) of
subsidiaries
    
    
    (4,135
    )
    
    
    5,160
    
    
    
    9,224
    
    
    
    5,250
    
    
    
    15,167Net income (loss) from continuing operations
    
    
    92,498
    
    
    
    51,185
    
    
    
    3,032
    
    
    
    (37,095
    )
    
    
    (86,154
    )Net loss from discontinued operations, net of tax
    
    
    (8,365
    )
    
    
    (3,850
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    84,133
    
    
    $
    47,335
    
    
    $
    3,032
    
    
    $
    (37,095
    )
    
    $
    (86,154
    )Net income (loss) per share:Basic -Income (loss) from continuing operations
    
    $
    3.26
    
    
    $
    1.74
    
    
    $
    0.10
    
    
    $
    (1.25
    )
    
    $
    (2.91
    )Loss from discontinued operations
    
    
    (0.39
    )
    
    
    (0.13
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2.86
    
    
    $
    1.61
    
    
    $
    0.10
    
    
    $
    (1.25
    )
    
    $
    (2.91
    )Weighted average number of ordinary
shares used in computing basic net
income (loss) per share (in thousands)
    
    
    29,266
    
    
    
    29,437
    
    
    
    29,532
    
    
    
    29,619
    
    
    
    29,619Diluted -Income (loss) from continuing operations
    
    $
    3.25
    
    
    $
    1.73
    
    
    $
    0.07
    
    
    $
    (1.27
    )
    
    $
    (2.94
    )Loss from discontinued operations
    
    
    (0.39
    )
    
    
    (0.13
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    2.86
    
    
    $
    1.60
    
    
    $
    0.07
    
    
    $
    (1.27
    )
    
    $
    (2.94
    )Weighted average number of ordinary
shares used in computing diluted net
income (loss) per share in thousands)
    
    
    29,385
    
    
    
    29,550
    
    
    
    29,624
    
    
    
    29,619
    
    
    
    29,619Dividend paid per share
    
    $
    
    
    
    $
    3.00
    
    
    $
    
    
    
    $
    
    
    
    $
    
 As of December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008( in thousands of $)Balance Sheet DataCash, cash equivalents and short-term and long
term investments
    
    $
    188,106
    
    
    $
    143,798
    
    
    $
    128,733
    
    
    $
    74,362
    
    
    $
    17,507Investments in affiliated companies and in
other companies and long term receivables
    
    
    273,053
    
    
    
    176,711
    
    
    
    168,607
    
    
    
    205,069
    
    
    
    219,240Total assets
    
    
    501,156
    
    
    
    353,773
    
    
    
    326,249
    
    
    
    298,947
    
    
    
    260,649Total current liabilities
    
    
    40,670
    
    
    
    19,044
    
    
    
    20,535
    
    
    
    21,448
    
    
    
    19,166Long term loans from banks and others
    
    
    4,072
    
    
    
    1,477
    
    
    
    2,113
    
    
    
    2,244
    
    
    
    35,062Long term loans from shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,176Accrued severance pay and retirement obligations
    
    
    3,006
    
    
    
    2,635
    
    
    
    2,089
    
    
    
    2,451
    
    
    
    4,137Shareholders equity
    
    
    389,080
    
    
    
    302,116
    
    
    
    297,504
    
    
    
    265,817
    
    
    
    177,417Capital stock
    
    
    337,294
    
    
    
    291,445
    
    
    
    283,801
    
    
    
    289,209
    
    
    
    286,963
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B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Specific Risks Affecting Elron
 We are currently dependent on shareholder loans from our principal shareholder, DIC, as well
as bank finance to fund our and our group companies operations
  Our principal shareholder, DIC has the ability to significantly influence our business and
affairs
 We may be deemed to be an investment company under the Investment Company Act of 1940.
  6




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If we are characterized as a passive foreign investment company for U.S. federal income tax
purposes, our U.S. shareholders may suffer adverse tax consequences.
     It may be difficult to serve process or to enforce a U.S. judgment against us, our directors
and our officers.
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Risks Affecting Us and the Companies in Our Group
 The current economic and financial crisis has adversely affected and may continue to adversely
affect our and our group companies results and financial condition and could lead to further
impairment charges.
 Our financial results and financial condition are principally impacted by the results of
operations, and the value of our holdings in, our group companies, which is primarily concentrated
in two principal holdings.
  8




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Our financial results significantly depend on the results of operations of our group
companies, which have generated losses and continue to invest heavily in their development.
 Our financial results and our cash reserves are directly impacted by our ability to conclude
exit transactions, which has been made more difficult by the global recession
 We may face difficulties in our ability to dispose of our shares in publicly traded companies
in our group.
 Our market value significantly depends on the market values of publicly traded companies in
our group.
 The market price of our ordinary shares is subject to fluctuations.
 
    
    the continued current global economic and financial crisis;
    
    the market price of our group companies that are publicly traded, in particular, Given
Imaging and NetVision;
    
    low trading volume of our ordinary shares;
    
    our group companies, their competitors or other third parties announcing technological
innovations, new products, regulatory developments, new clinical data regarding current
or future products or earnings or losses;
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
    
    delays or failures in the development of products of our group companies;
    
    periodic variations in results of operations of our group companies;
    
    factors that generally affect the market for stocks of medical device,
telecommunications, semiconductor and clean technology companies;
    
    political, economic or other developments affecting Israel;
    
    global economic and other external factors; and
    
    quarter-to-quarter fluctuations in our financial results.
 Many of our group companies may face difficulties in obtaining future financing on favorable
terms or at all especially in light of the continued current global economic and financial crisis.
 Bank of Israel regulations limit our and our group companies ability to borrow from Israeli
banks.
 Our results, and the value of our investments, are affected by volatility in the securities
markets.
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There is no assurance that our subsidiary, RDC, will be able to continue to develop
technologies and/or new companies.
 
    
    Rafael does not cooperate with RDC in the realization of RDCs rights under the
agreement;
 
    
    Rafael or RDC does not identify existing technology, or Rafael does not develop new
technology, that can be commercially exploited in non-military markets;
 
    
    Rafael does not transfer human or other resources necessary for the development and
commercial exploitation of this technology in non-military markets;
 
    
    RDC does not reach agreement with Rafael on the terms of any commercial exploitation;
or
 
    
    RDC is unable to rely on continued financing by its shareholders, if and when
required; or RDC may face difficulties in securing financial resources to support new and
existing innovations.
 Most of our group companies are dependent upon proprietary technology, which may be infringed,
or may infringe, upon the proprietary technology of others
  
    
    Some foreign countries may not protect their proprietary rights as fully as do the
laws of the United States;
 
    
    The process of issuing a patent may sometimes be lengthy and may not always result in
patents issued in a form that will be advantageous to our group companies, or at all, and
patents and applications for patents may be challenged, invalidated or circumvented by
third parties;
 
    
    Competitors of our group companies may be issued patents that will prevent our group
companies from using technologies, designs or methods that our group companies would like
to integrate into their products;
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
    
    Enforcing their rights may be time consuming and costly, thereby diverting
managements attention and company resources;
 
    
    Measures such as entering into non-disclosure agreements afford us only limited
protection;
 
    
    Unauthorized parties may attempt to copy aspects of their products and develop similar
products or to obtain and use information that they regard as proprietary; and
 
    
    Competitors may independently develop products that are substantially equivalent or
superior to their products or that circumvent intellectual property rights.
   Many of our group companies experience intense competition
 Our group companies may experience delays or failures in product development.
 Israeli government programs in which certain of our group companies participate may be
terminated or reduced in the future and may be restrictive in their terms.
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
    
    Our group companies could be required to pay the OCS a portion, to be
determined by the OCS under applicable law, of the consideration received upon
any sale of such technology or group company to an entity that is not Israeli.
The scope of the support received, the royalties that were paid, the amount of
time that elapsed between the date on which the technology was transferred and
the date on which the grants were received, as well as the sale price, will be
taken into account in order to calculate the amount of the payment; and
 
    
    The transfer of manufacturing rights could be conditioned upon an increase
in the royalty rate and payment of increased aggregate royalties (up to 300% of
the amount of the grant plus interest, depending on the percentage of the
manufacturing transferred outside of Israel).
   We and our group companies may have difficulty retaining key employees
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Many of our group companies depend on international operations.
 
    
    unexpected changes in regulatory requirements;
 
    
    fluctuation of the New Israeli Shekel / U.S. Dollar representative rate of exchange;
 
    
    inability of our group companies, their subsidiaries and subcontractors to obtain
export licenses;
 
    
    imposition of tariffs and other barriers and restrictions;
 
    
    burdens of complying with a variety of foreign laws;
 
    
    political and economic instability;
 
    
    changes in diplomatic and trade relationships; and
 
    
    acts of terror.
  Conditions in Israel may affect our operations and the operations of our group companies.
 
    
    any major hostilities involving Israel;
 
    
    a full or partial mobilization of the reserve forces of the Israeli army;
 
    
    the interruption or curtailment of trade between Israel and its present trading
partners;
 
    
    a significant downturn in the economic or financial condition of Israel;
 
    
    a significant downgrading of Israels international credit rating;
 
    
    labor disputes and strike actions; and
 
    
    political instability.
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Our and our group companies operations could be disrupted as a result of the obligation of
personnel in Israel to perform military service.
 The results of operations of our group companies may be harmed by foreign currency exchange
rate fluctuations.
 Product liability claims could adversely affect the business results of our group companies,
especially those operating in the medical device industry.
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Product regulation may adversely affect the ability of our medical device group companies to
bring new products to market or to continue to supply existing products to the market.
 Because the medical device industry is litigious, our medical device group companies are
susceptible to intellectual property suits that could cause our medical device group companies to
incur substantial costs or pay substantial damages or prohibit them from selling their products .
 If our medical device group companies are unable to obtain reimbursement coverage from
third-party healthcare payors for procedures using their products, or if reimbursement is
insufficient to cover the costs of purchasing their products, demand for their products may be
adversely affected
 Our telecommunications group companies operate in a highly regulated telecommunications
market, which limits their flexibility to manage their businesses.
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The semiconductor industry in which certain of our group companies operate is cyclical in
nature and is characterized by ongoing changes.
  Risks Affecting Our Holdings in Given Imaging
  The price of Given Imagings shares could fluctuate significantly as a result of a number of
factors, including varying quarterly financial performance or Given Imagings failure to meet its
guidance or the expectations of analysts or investors, which may lead to additional volatility in
its share price
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If Given Imaging is unable to manufacture, market or sell the PillCam capsules, its revenues
may decline significantly or it may not be able to maintain its expected annual growth rate
 If Given Imaging fails to increase utilization of its workstations and recurring orders of its
PillCam SB capsule, it may not be able to achieve the growth rate it expects
  18




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Given Imagings future growth depends in part on its ability to market the PillCam SB capsule
for additional indications other than obscure gastrointestinal bleeding
 If Given Imaging is unable to expand the market for the PillCam ESO capsule and obtain
adequate third-party reimbursement for the esophageal capsule endoscopy procedure, sales of the
PillCam ESO capsule may not grow as it expects or at all.
 If Given Imagings estimates regarding the Bravo pH monitoring business are materially
incorrect, Given Imaging may not be able to grow its revenues and profitability as its expects.
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If Given Imaging is unable to transition and integrate the Bravo pH monitoring business
successfully, its revenues may not grow as it expects, its gross margins may suffer and Given
Imaging may lose market share to its competitors in the pH monitoring market.
 If Given Imaging is unable to market and sell its PillCam COLON capsule, it may miss a
significant market opportunity and may not grow as it expects.
 
    
    Given Imagings ability to develop and introduce new technologies that will improve
the clinical effectiveness of the PillCam COLON capsule.
 
    
    Receipt of FDA marketing clearance in the United States. Given Imaging cannot be
sure that FDA clearance or other regulatory approvals will be granted. In order to
obtain FDA clearance and other regulatory approvals, Given Imaging will be required to
demonstrate that the PillCam COLON is safe and effective for its intended purpose;
 
    
    The existence of clinical data sufficient to support the use of the PillCam COLON
for visualization of the colon as compared to other colon visualization methods: If
clinical trials indicate that PillCam COLON is not as clinically-effective as other
current methods, or if the PillCam COLON procedure causes unexpected complications or
other unforeseen negative effects, Given Imaging may not obtain regulatory clearance to
market and sell this capsule or physicians may be reluctant to use it;
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
    
    The availability of sufficient clinical and cost-effectiveness data for the American
Medical Association, or AMA, to provide a favorable permanent current procedural
terminology, or CPT, code and for private third-party payors to make an
adequatereimbursement decision to provide coverage for the PillCam COLON procedure;
 
    
    The availability of a reliable colon cleansing and preparation procedure for the
PillCam COLON capsule, which is accepted by physicians and patients; and/or
 
    
    The absence of other safe and effective colon cancer screening products, which, if
brought to market by third parties, may make the PillCam COLON capsule obsolete.
  Given Imaging may lose market share and its revenues and gross margins may be negatively
affected due to increasing competitive pressure from other capsule endoscopy manufacturers.
 Given Imaging faces competition from large, well-established manufacturers of traditional
technologies for detecting gastrointestinal disorders, as well as from gastrointestinal products in
general that compete for the limited capital expenditure budgets of customers.
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If Given Imaging is unable to introduce new capsules and products for use in the
gastrointestinal tract, its growth may be negatively affected .
 Any disruption in the United States, the primary market for Given Imagings products, may
result in a material reduction in Given Imagings revenues and negatively affect its results of
operations.
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If Given Imaging is unable to successfully market and sell its products in Japan, one of Given
Imagings significant potential growth opportunities may be
materially and adversely affected.
 Given Imagings reliance on single source suppliers could harm its ability to meet demand for
the Given System in a timely manner or within budget.
  23




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Risks Affecting Our Holdings in NetVision
  The market for the supply of Internet access services and value added services in Israel is
very competitive
 The market for the supply of international telephone services in Israel is very competitive.
 NetVision invests in infrastructure and technology which could require significant capital
resources
  24




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NetVision relies on certain third-parties infrastructures.
  Israeli Telecommunications companies are exposed to consumer class action lawsuits
 Damage to one or more of NetVisions principal facilities may significantly impact the
companys ability to provide services.
  25




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Conflicts of interest may arise between NetVision and other IDB group companies.
 
 Item 4. Information on the Company
 A. History and Development of the Company
      26




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
    
    Agreement with Rafael and settlement of claim by Rafael against Elrons subsidiaries,
DEP and RDC.On December 30, 2007, Elron, DEP, RDC and Rafael signed an agreement (the
Addendum) effective as of January 1, 2008, which was subsequently approved by the
court. The Addendum amended the existing agreement between the parties pertaining to the
rights granted to RDC to commercialize certain technologies of Rafael, and settled a
claim filed by Rafael in September 2006 against DEP and RDC. Pursuant to the Addendum,
RDCs rights to commercialize certain technologies of Rafael will continue without time
restrictions. In January 2008 we made a one-time investment in RDC of $4 million and are
committed to make further investments of $0.75 million in RDC for each company
established by RDC based on Rafaels technologies. The Addendum settles all claims
between Rafael and RDC and DEP as well as resolves other issues which will facilitate
cooperation between the parties. In 2008, RDC established two new companies, each of
which is based on Rafaels technologies following which and in accordance with the terms
of the Addendum, in the fourth quarter of 2008, Elron invested an additional $1.5 million
in RDC.
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
    
    Investment in Medingo. In February 2008, Medingo received the second installment in
the amount of $12.5 million out of the total amount of approximately $29.0 million raised
in November 2007. Medingo is developing a miniature insulin pump for diabetic patients.
As part of the financing round RDC, our 50.1% held subsidiary, invested $18 million, we
invested $6.1 million (including $4.2 million resulting from the conversion of
convertible loans previously granted to Medingo) and a U.S. venture capital fund together
with other investors invested $5.1 million. As a result of the above transaction, we and
RDC hold 7% and 70%, respectively, of Medingos shares on a fully diluted and on an as
converted basis (or 42%, representing Elrons direct and indirect fully diluted share
(through RDC). In February 2009, the shareholders of Medingo signed a convertible loan
agreement in the aggregate amount of $5.5 million, to be advanced in two installments.
The first installment in the amount of $1.2 million, of which Elrons share was
approximately $0.1 million and RDCs share was approximately $1.0 million, was advanced
immediately and the second installment in the amount of $4.3 million, of which Elrons
share was approximately $0.4 million and RDCs share was approximately $3.6 million, was
advanced during April 2009.
 
    
    Investment in Wavion. In March and June 2008, Elron together with another shareholder
of Wavion, in accordance with an agreement signed in August 2007, invested the second and
third installments of a previous financing round. Each installment was in the amount of
$3.2 million of which Elron invested in each approximately $2.0 million as a result of
which we commenced consolidating Wavion as of March 31, 2008. In addition, simultaneously
with the second installment, Elron together with such other shareholder purchased all the
 shares then held by a former shareholder in Wavion, of which Elron purchased 75% of such
purchased shares. Following the above transactions, we held approximately 57% of Wavions
share capital on a fully diluted and on an as converted basis.
  
    
    Impliant Inc.In March 2008, we and other existing shareholders of Impliant granted a
convertible loan in the amount $10 million to Impliant in two installments of which we
granted $6 million and as a result of which we commenced consolidating Impliant as of
March 31, 2008. The first installment in the amount of $5 million was invested
immediately (of which we granted $3 million) and the second installment was invested in
June 2008 following completion of a certain milestone event by Impliant.
  28




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
    
    Investment in Pocared. In March 2008, we granted Pocared a convertible loan in the
amount of $5.0 million out of an aggregate amount of $14.0 million. The balance of the
loan was granted by other existing shareholders of Pocared and a new investor. The loan
was advanced in two equal installments, the first installment was paid immediately and
the second installment was advanced during June 2008.
  
    
    Tender Offer to Purchase Given Imaging Shares. On June 20, 2008 we completed a tender
offer to purchase 1,462,640 ordinary shares of Given Imaging, representing 5% of Given
Imagings issued outstanding shares, for $16.54 per share in the aggregate amount of
$24.5 million (including approximately $0.3 million related costs). After the
transaction, Elrons direct and indirect share (through RDC) in Given Imaging increased
to approximately 27.8% of Given Imagings issued and outstanding shares (or a 32.4%
beneficial ownership). DIC holds 16.1% of Given Imaging. Therefore, we together with DIC
and RDC hold approximately 48.5% of the issued and outstanding shares of Given Imaging.
 
    
    Investment in BrainsGate. In August 2008, BrainsGate completed a financing round of
$27.5 million. The round was initially an internal financing round (which was signed in
January 2008) of $12.5 million of which we invested approximately $5.5 million. The
financing round was extended in August 2008 by an additional $15.0 million of which $12.5
million was invested by Johnson & Johnson Development Corporation joined by VC-Fund Agate
Medical Investments LP and the balance by existing shareholders, of which we invested an
additional $1 million. Following payment of all aggregate investments, we hold
approximately 21% of BrainsGate on a fully diluted and on an as converted basis.
  29




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
    
    Tender Offer to Purchase Starling Convertible Debentures.
   
    
    Merger of Galil Medical. On November 10, 2008, Galil Medical Ltd., held 29% by us and
RDC (or 21% by Elron directly and indirectly), announced that it signed a definitive
merger agreement with Endocare, Inc. (Nasdaq:ENDO). Galil and Endocare announced that the
terms of the definitive merger agreement called for a stock-for-stock merger transaction.
In a June 5, 2009 letter to Galil, Endocare purported to terminate the merger agreement
by asserting that conditions to closing the merger had become incapable of fulfillment
because the U.S. Federal Trade Commission (FTC) had refused to close its ongoing
examination of the merger. Galil has rejected that assertion, noting that discussions
with the FTC Commissioners and Staff were continuing. On June 8, 2009, Endocare announced
that it had terminated the merger agreement and announced further that HealthTronics,
Inc. had agreed to acquire Endocare. Galil Medical has filed separate law suits in the
Delaware courts against each of Endocare and HealthTronics, Inc. in connection with
Endocares purported termination of the merger agreement between Galil and Endocare and
HealthTronics, Inc.s proposed acquisition of Endocare. There is no assurance as to the
outcome of these suits.
 
    
    Dividend Distribution by Given Imaging.On February 10, 2009, Given Imaging declared a
special cash dividend of approximately $0.54 per share, or $16.0 million in the
aggregate, of which our and RDCs share was approximately $3.7 million and $1.4 million,
respectively. Payment of this dividend was distributed on March 10, 2009.
 
    
    NetVision Dividend Distribution. On March 10, 2009, NetVision declared a special cash
dividend of approximately NIS 3.08 per share (approximately $0.74), or NIS 90 million
(approximately $21.5 million), in the aggregate, of which Elrons share was approximately
NIS 14.2 million (approximately $3.4 million). Payment of this dividend was distributed
on April 7, 2009.
 
    
    Sale of Interest in 3DV.On June 2, 2009 we announced that 3DV completed the sale of
substantially all of its assets to a third party. Pursuant to the terms of the definitive
agreement, following the payment of certain expenses, proceeds to be distributed to Elron
and RDC are expected to be up to approximately $3 million and $4 million,
respectively and we expect to record a gain of between approximately $4 million and $5
million in the second quarter of 2009.
  30




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
    
    $14 Million Investment in Ellara. On June 8, 2006, Ellara Ltd. (formerly known as
A.M.T. Advanced Metal Technologies), or Ellara, completed a $14 million financing led by
Shamrock Israel Growth Fund, an Israeli private equity fund, pursuant to which we
invested an aggregate of $5 million in the financing round in which other existing
shareholders also participated. Following the transaction, we held approximately 34% of
Ellara on an as-converted basis.
  
    
    Purchase of Shares of Given Imaging. In August 2006, we purchased, in a series of open
market transactions, approximately 540,000 ordinary shares of Given Imaging for an
aggregate purchase consideration of approximately $10 million. As a result of the
transactions, our beneficial ownership of Given Imaging increased to approximately 26.0%
and our direct and indirect ownership interest in Given Imaging increased from
approximately 19% to approximately 20%. In parallel transactions, DIC purchased the same
number of shares of Given Imaging for the same aggregate consideration, increasing its
holding in Given Imaging from approximately 12% to approximately 14.3% of Given Imaging.
 
    
    Investment in Atlantium. In October 2006, we completed a new investment of $10 million
in Atlantium Technologies Inc., or Atlantium. Following the transaction, we held
approximately 31% of Atlantium. In June 2008, we invested an additional $3.6
million in Atlantium following which we held approximately 33% of Atlantium.
 
    
    DIC Tender Offer. In November 2006, DIC purchased 352,183 of our ordinary shares for
$12 per share, net to the seller in cash, less any required withholding taxes and without
interest pursuant to a tender offer for our ordinary shares. As a result, DIC increased
its holding in Elron from approximately 48% to approximately 49%.
 
    
    $52 Million Investment in Galil Medical. In December 2006, Galil Medical completed a
$52 million financing by new investors Thomas, McNerney & Partners and The Vertical
Group, joined by Investor Growth Capital, all leading U.S. venture capital funds. As part
of the financing round, the new investors purchased shares from certain existing
shareholders of Galil Medical, including RDC, for approximately $8 million, and $4
million of existing shareholders loans were converted into shares of Galil Medical.
Following the transaction, we beneficially owned approximately 29% of Galil Medical
representing all shares owned by us and RDC, or approximately 20% representing our direct
holding and our share in the holding of RDC.
 
    
    Sale of Interest in Oncura and Acquisition of Urology-Related Cryotherapy Business. In
December 2006, Galil Medical completed the sale of its 25% interest in Oncura, Inc., or
Oncura, to Oncuras 75% shareholder and acquired Oncuras urology-
related cryotherapy business from Oncura for a net amount paid by Galil Medical of $20
million.
  31




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
    
    $15 Million Investment in 3DV. In December 2006, 3DV Systems, or 3DV, completed the
first of two tranches of a $15 million investment round, led by new investors, Kleiner
Perkins Caufield & Byers, a leading U.S. venture capital fund, and Pitango Venture
Capital. We and RDC also participated in the investment round as well as converted
approximately $5.1 million of shareholder loans into shares of 3DV. The second tranche
was completed in April 2008. Following the completion of the investment, we beneficially
owned approximately 51% of 3DV representing all shares owned by us and RDC, or
approximately 36% representing our direct holding and our share in the holding of RDC.
 
    
    Sale of Remaining Partner Shares.In December 2006, we completed the sale of all our
remaining shares of Partner, constituting approximately 2.5% of Partner Communications
Ltd.s outstanding share capital, to several Israeli institutional investors for
approximately $40 million. This followed the purchase of additional Partner shares in
April 2006 then constituting 0.6% of Partners then outstanding shares from Polar
Communications Ltd., one of the other founding shareholders of Partner, for approximately
$5.3 million.
  
    
    Merger of NetVision, Barak and GlobCall. In January 2007, NetVision completed its
merger with Barak, then a subsidiary of Clal Industries & Investments Ltd. or, CII, and
the merger with GlobCall Communications Ltd., then a subsidiary of DIC, or GlobCall.
Following the merger, our holding in NetVision reduced to approximately 18% from
approximately 36%, resulting in a gain for Elron of approximately $9.1 million (net of
tax) recorded in the first quarter of 2007. As part of the merger, we entered into a
shareholders agreement with DIC and CII and into a separate agreement with DIC
concerning, among other things, the appointment of directors. During 2007, NetVision
raised in two private placements an aggregate amount of approximately NIS 112.2 million
(then approximately $28.0 million). As a result, our holding in NetVision decreased to
approximately 16%.
 
    
    Purchase of 2.5% of Ordinary Shares of Given Imaging. In May, 2007, we completed the
purchase of 2.5% of the ordinary shares of Given Imaging in a series of open market
transactions for an aggregate purchase consideration of approximately $18.7 million. As a
result of the transactions, we beneficially owned approximately 27% of the outstanding
 shares representing all shares owned by us and RDC; and our direct and indirect ownership
interest in Given Imaging, increased to approximately 23%. In parallel transactions, DIC
also purchased 2.5% of the ordinary shares of Given Imaging for the same aggregate
consideration, increasing its holding in Given Imaging to approximately 16%. Following
these transactions, we, DIC and RDC together held approximately 43.5% of the ordinary
 shares of Given Imaging.
  32




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
    
    Sale of Carmiel Real Estate. On June 17, 2007, our wholly owned subsidiary, Elbit,
completed the sale of its real estate in Carmiel, Israel for approximately $11.6 million.
As a result of the sale, we recorded a gain net of tax of $4.1 million in the second
quarter of 2007.
 
    
    Investment in Pocared.In June 2007, we completed a new investment of approximately
$5.35 million, in two tranches, in Pocared Diagnostics Ltd., or Pocared. The aggregate
financing round of $10.7 million was led by us and Vitalife. As a result of our aggregate
investment, we held approximately 23% of Pocareds outstanding shares.
 
    
    Initial Public Offering of Starling on the TASE. On June 13, 2007, Starling completed
its initial public offering on the TASE for the sale of shares and convertible securities
in consideration for aggregate net proceeds of approximately NIS 57 million
(approximately $14 million), approximately half of which consisted of convertible
interest-bearing debentures, the proceeds of which will be used by the company upon
achieving certain milestones. We invested approximately $4 million as part of the
offering. In addition, immediately prior to the offering, existing shareholders of
Starling, including us and RDC, converted shareholder loans in the amount of
approximately $6.5 million. Following the offering, as of June 13, 2007, we beneficially
owned approximately 68% of the outstanding shares representing all outstanding shares of
Starling owned by us and RDC, or approximately 50% representing our direct holding and
our share in the holding of RDC.
 B. Business Overview
   Information andCommunicationMedical Devices
    
    Technology
    
    Semiconductors
    
    Clean TechnologyGiven Imaging
    
    NetVision
    
    ChipX
    
    AtlantiumMedingo
    
    Teledata
    
    Jordan Valley
    
    AqWiseGalil Medical
    
    Wavion
    
    SELA
    
    BPTNuLens
    
    StarlingBrainsgate
    
    SafendPocared
    
    RADLIVEImpliant
    
    PlyMediaNotal
    
    ActysafeSyncRx
    
    XsightsKyma
  33




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1. Medical Devices
  
    
    Given Imaging, in which we beneficially own approximately 48.5% of the outstanding
 shares, representing all shares owned by us, RDC and DIC (which we may be deemed to
beneficially own as a result of the voting agreement between DIC and us), or
approximately 32.4%, representing our direct holding together with RDCs holding or 27.8%
representing our direct holding and our share in the holding of RDC;
 
    
    Medingo, in which we beneficially own approximately 92% of the outstanding shares
representing all shares owned by us and RDC, or 51% representing our direct holding and
our share in the holding of RDC;
 
    
    Galil Medical, in which we beneficially own approximately 29% of the outstanding
 shares, representing all shares owned by us and RDC, or approximately 21%, representing
our direct holding and our share in the holding of RDC;
 
    
    NuLens, in which we hold approximately 34% of the outstanding shares;
 
    
    BrainsGate, in which we hold approximately 23% of the outstanding shares;
 
    
    Pocared, in which we hold approximately 31% of the outstanding shares;
 
    
    Impliant, in which we hold approximately 22% of the outstanding shares (46% assuming
completion of the recapitalization and loan conversion by the end of the second quarter
of 2009);
 
    
    Notal, in which we hold approximately 22% of the outstanding shares;
 
    
    Sync-Rx, in which we beneficially own approximately 84% of the outstanding shares
representing all shares owned by RDC, or 42% representing our share in the holding of
RDC; and
 
    
    Kyma Medical Technologies Ltd., or Kyma, in which we hold approximately 41% of the
outstanding shares.
  34




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Given Imaging
         35




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36




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,
     37




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##### Table of Contents



38




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.
 Medingo
      Galil Medical
    39




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##### Table of Contents



NuLens
     BrainsGate
   40




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##### Table of Contents



Pocared
      41




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##### Table of Contents



Impliant
   TM
        42




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2. Information, Communications & Technology, or ICT
  
    
    NetVision, in which we hold approximately 16% of the outstanding shares;
 
    
    Teledata, in which we hold approximately 21% of the outstanding shares, and in which,
Infinity, a related venture capital fund, holds approximately 4% of the outstanding
 shares;
 
    
    Wavion, Inc., or Wavion, in which we hold approximately 66% of the outstanding shares;
 
    
    Starling, in which we beneficially own approximately 68% of the outstanding shares,
representing all shares owned by us and RDC, or approximately 50%, representing our
direct holding and our share in the holding of RDC;
 
    
    Safend, in which we hold approximately 27% of the outstanding shares;
 
    
    RADLIVE,in which we hold approximately 29% of the outstanding shares;
 
    
    PLYmedia, in which we hold approximately 28% of the outstanding shares;
 
    
    XSights in which we beneficially own approximately 100% of the outstanding shares
representing all shares owned by RDC, or approximately 50%, representing our share in the
holding of RDC; and
 
    
    Actysafe, in which we beneficially own approximately 100% of the outstanding shares
representing all shares owned by RDC, or approximately 50%, representing our share in the
holding of RDC.
  NetVision
     43




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44




---



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Teledata
      Wavion
   45




---



##### Table of Contents



Starling
      46




---



##### Table of Contents



47




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##### Table of Contents



Safend
      RADLIVE
    48




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3. Semiconductors
  
    
    ChipX, in which we hold approximately 28% of the outstanding shares;
 
    
    Jordan Valley, in which we hold approximately 20% of the outstanding shares; and
 
    
    Sela  Semiconductor Engineering Laboratories Ltd., or SELA, in which we beneficially
own approximately 75% of the outstanding shares representing all the shares owned by us
and RDC, or approximately 50%, representing our direct holding and our share in the
holding of RDC.
 ChipX
       49




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Jordan Valley
 ®
      50




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SELA
     4. Clean Technology
  
    
    Atlantium, in which we hold approximately 33% of the outstanding shares;
 
    
    AqWise, in which we hold approximately 34% of the outstanding shares; and
 
    
    BPT -Biopure Technologies Ltd, or BPT, in which we hold approximately 30% of the
outstanding shares.
 Atlantium
     51




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AqWise  Wise Water Technologies Ltd.
 ®
  ® ®
    BPT
    52




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##### Table of Contents



C. Organizational Structure
  D. Property, Plants and Equipment
   
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
 Overview
   53




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54




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Global Financial Crisis and Economic Downturn
    55




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Critical Accounting Policies
  
    
    Principles of accounting for holdings in group companies
 
    
    Business combinations and purchase price allocation
 
    
    Other-than-temporary decline in value of investments in group companies and valuation of
financial assets
 
    
    Impairment of goodwill and other intangible assets
 
    
    Accounting for income taxes
 Principles of Accounting for Holdings in Group Companies
   56




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Consolidation
    57




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58




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##### Table of Contents



Equity Method .
    Other Methods .
   59




---



##### Table of Contents



Business Combinations and Purchase Price Allocation
     60




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##### Table of Contents



Other-Than-Temporary Decline in Value of Investments in Group Companies and Valuation of Financial
Assets
    61




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
    
    Discounted Future Earnings Method- The discounted future earnings method can use cash
flow or earnings as a basis to forecast the income which the investee will generate.
Thereafter, an aggregate present value is calculated for the future cash flows using a
required rate of return. This methodology was used in determining a fair value as of the
balance sheet date because the investees were able to provide projections for their future
cash flows.
 
    
    Company Security Transaction Method (CSTM)  According to the CSTM method the value
of the company was estimated based upon recent transactions in the companys securities.
For these transactions to be relied upon to develop an estimate of fair value, they must be
arms length transactions.
 
    
    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 to
allocate value among multiple classes of equity with varying characteristics is an option
pricing model based on the Black Scholes formula or on the Binomial (lattice) model.
    62




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Impairment of Goodwill and Other Intangible Assets
   Accounting for Income Taxes
   63




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64




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A. Operating Results
 Basis of Presentation
 Consolidation.
 Year ended December 31,2008
    
    2007
    
    2006RDC
    
    RDC
    
    RDCSELA
    
    SELA
    
    Galil Medical3Medingo
    
    Medingo
    
    SelaStarling
    
    Starling
    
    MedingoSync-Rx Ltd.1
    
    
    
    3DV4XSIGHTS Ltd.1
    
    
    
    StarlingWavion2
    
    
    
    Enure5Impliant2
 1
    
    Sync-Rx Ltd and Xsights Ltd. were both established by RDC during 2008.2
    
    Consolidated under FIN46(R) from March 31, 20083
    
    Galil Medical has been consolidated through December 2006.4
    
    3DV had been consolidated from the first quarter of 2004 through December 2006.5
    
    Ceased to be consolidated from August 2006. Equity Method .
 Year ended December 31,2008
    
    2007
    
    2006Given Imaging
    
    Given Imaging
    
    Given ImagingNetVision
    
    NetVision
    
    Oncura6ChipX
    
    ChipX
    
    Galil Medical7Wavion1
    
    Wavion
    
    NetVisionAqwise
    
    Ellara
    
    3DV8Kyma4
    
    Aqwise
    
    ChipXEllara3
    
    Notal Vision
    
    WavionNotal Vision
    
    Galil Medical
    
    EllaraGalil Medical
    
    3DV
    
    Notal3DV
    
    RADLIVE2
    
    CellActRADLIVE
    
    CellAct5
 1
    
    Through March 31, 20082
    
    Since May 20073
    
    Through September 11, 2008 on which date it was sold.4
    
    Since February 20085
    
    Sold in February 20076
    
    Through December 2006(7,8)
    
    Commencing in December 2006  65




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Other investments.
 Cost:
 Year ended December 31,2008
    
    2007
    
    2006Jordan Valley
    
    Jordan Valley
    
    Jordan ValleyImpliant4
    
    Impliant
    
    ImpliantTeledata
    
    Teledata
    
    TeledataBrainsGate
    
    BrainsGate
    
    BrainsGateNuLens
    
    NuLens
    
    NuLensSafend
    
    Safend
    
    SafendNeurosonix
    
    Neurosonix
    
    NeuroSonixAtlantium
    
    Atlantium
    
    AtlantiumEnure
    
    Enure
    
    Enure5Pocared
    
    Pocared1BPT
    
    BPT2MuseStorm
    
    MuseStormPLYmedia3
 1
    
    Purchased in June 20072
    
    Purchased in April 20073
    
    Purchased in February 20084
    
    Through March 31, 20085
    
    From August 2006 when it ceased to be consolidated Available-for-sale Securities-
  Results of Operations
  Year ended December 31,2008
    
    
    2007
    
    
    2006(millions of $, except per share data)Net income (loss) from
continuing operations
    
    
    (86.2
    )
    
    
    (37.1
    )
    
    
    3.03Basic net income
(loss) from continuing
operations per share
    
    
    (2.91
    )
    
    
    (1.25
    )
    
    
    0.10Diluted net income
(loss) from continuing
operations per share
    
    
    (2.91
    )
    
    
    (1.27
    )
    
    
    0.07
  66




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(i)
    
    losses in the amount of $29.6 million, resulting from consolidated companies, mainly
Medingo, Starling, Wavion and Impliant, in which we recorded 100% of their respective
losses;
 (ii)
    
    write offs of certain of our investments in the amount of $28.6 million, as a result of
an other-than-temporary decline in value, including mainly $6.9 million in Atlantium as a
result of slower than expected market penetration and the need for additional financing, $5
million and $3.5 million in Enure and Neurosonix, respectively, in which we decided to
cease our investment, and $2.5 million of goodwill impairment;
 (iii)
    
    a $4.5 million write-off of IPR&D with respect to the initial consolidation of
Impliant based on a fair value assessment in the first quarter of 2008; and
 (iv)
    
    intangible asset amortization related to Elrons investment in Given Imaging in the
amount of $6.2 million (of which $0.8 million was a write-off of IPR&D related to the
acquisition of additional shares of Given Imaging in June 2008).
   (i)
    
    a $5.9 million amortization of intangible assets related to the purchase of Given Imaging
shares which included a $1.4 million write-off of IPR&D; and(ii)
    
    an $8.3 million impairment charge
in Impliant Inc. as a result of material adverse events in connection with Impliants main product
during clinical trials, which occurred during the second half of 2007.
   (i)
    
    a gain, net of tax, of approximately $9.1 million from the merger between NetVision, Barak
and GlobCall, which was completed during the first quarter of 2007; and
 (ii)
    
    a gain, net of tax, of approximately $4.1 million resulting from the sale of Elbits real
estate in Carmiel, Israel.
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(i)
    
    a gain of approximately $21.2 million, net of tax, resulting from the sale of Partners
 shares in consideration of $39.9 million. The tax expense relating to the aforementioned gain
was decreased by approximately $3.7 million, resulting from a decrease in our valuation
allowance in respect of losses incurred in prior periods, following Elbits receipt of a final
tax assessment; and
 (ii)
    
    a tax benefit of approximately $3 million resulting from the decrease in our valuation
allowance in respect of losses incurred in prior periods as a result of a continued increase
in the market price of certain of our marketable securities.
   Year ended December 31,2008
    
    
    2007
    
    
    2006(millions of $)Net revenues
    
    
    6.2
    
    
    
    4.4
    
    
    
    12.9Net loss (gain) from equity investments
    
    
    16.0
    
    
    
    (20.4
    )
    
    
    (17.7
    )Gains from disposal of business and
affiliated companies and changes in
holdings in affiliated companies
    
    
    
    
    
    
    14.9
    
    
    
    2.5Other income (expenses), net
    
    
    (25.5
    )
    
    
    (3.2
    )
    
    
    29.3Finance income, net
    
    
    1.7
    
    
    
    3.9
    
    
    
    4.1Total income
    
    
    (33.5
    )
    
    
    0.5
    
    
    
    31.0Cost of revenues
    
    
    3.6
    
    
    
    2.2
    
    
    
    6.6Operating expenses1
    
    
    55.5
    
    
    
    29.8
    
    
    
    29.5Amortization of intangible assets and
acquired in-process-research and
development write-off
    
    
    4.8
    
    
    
    2.3
    
    
    
    Impairment of goodwill
    
    
    2.5
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    66.5
    
    
    
    34.3
    
    
    
    36.1Gain (loss) from continuing operations
before income taxes
    
    
    (100.0
    )
    
    
    (34.8
    )
    
    
    (5.1
    )Taxes on income (tax benefit)
    
    
    (1.3
    )
    
    
    7.5
    
    
    
    (1.1
    )Minority interest
    
    
    15.2
    
    
    
    5.3
    
    
    
    9.2Net income (loss)
    
    
    (86.2
    )
    
    
    (37.1
    )
    
    
    3.0
 1
    
    Excludes amortization of other assets and impairment of intangible assets which are
presented separately.  68




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Year Ended December 31, 2008 compared to Year Ended December 31, 2007.
  Year ended December 31,2008
    
    
    2007(millions of $, except per share data)Net loss
    
    
    (86.2
    )
    
    
    (37.1
    )Net loss per share
    
    
    (2.91
    )
    
    
    (1.25
    )
 Income
 Net revenues.
 Year ended December 31,2008
    
    
    2007(millions of $)SELA
    
    
    3.8
    
    
    
    4.4Wavion1
    
    
    2.4
    
    
    
    6.2
    
    
    
    4.4
 1
    
    Wavion was consolidated from March 31, 2008. Equity in net losses of affiliated companies.
  Highlights of the Results of Operations of Our Major Group Companies :
 Given Imaging (Nasdaq and TASE: GIVN) (a 28% holding directly and indirectly through RDC).
  69




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##### Table of Contents



NetVision (a 16% holding ) (TASE: NTSN).
   Impliant Inc (a 46%
  70




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##### Table of Contents



Wavion Inc. (a 66% holding).
 Teledata (a 21% holding).
  Gains from Disposal of Businesses and Affiliated Companies and Changes in Holdings in Affiliated
Companies.
 Other Income (expenses), net.
 Finance income, net
  71




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##### Table of Contents



Expenses
 Cost of revenues.
 Operating expenses.
 Year ended December 31,2008
    
    
    2007(millions of $)Corporate
    
    
    9.4
    
    
    
    8.3SELA
    
    
    3.5
    
    
    
    3.2Starling
    
    
    8.4
    
    
    
    7.0Wavion
    
    
    5.6
    
    
    
    Medingo
    
    
    17.1
    
    
    
    8.6Impliant
    
    
    4.7
    
    
    
    RDC
    
    
    2.0
    
    
    
    2.1Other 1
    
    
    4.8
    
    
    
    0.555.5
    
    
    
    29.8
 1
    
    Includes mainly Sync-Rx and XSIGHTS.    72




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##### Table of Contents



Amortization of intangible assets and acquired in-process- research and development write-off
 Taxes on Income.
  73




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##### Table of Contents



Year Ended December 31, 2007 compared to Year Ended December 31, 2006.
 Income
 Net revenues
 Year ended December 31,2007
    
    
    2006(millions of $)Galil Medical1
    
    
    
    
    
    
    8.5SELA
    
    
    4.4
    
    
    
    4.2Other
    
    
    
    
    
    
    0.24.4
    
    
    
    12.9
 1
    
    Galil Medical had been consolidated through December 2006. Through December 2006 Galil
Medicals revenues derived mainly from the supply of cryo products and R&D services to Oncura,
which it sold in December 2006. At the same time Galil purchased from Oncura the urology related
cryotherapy business. Equity in net losses of affiliated companies.
 Highlights of the Results of Operations of Our Major group companies (which are not consolidated):
 Given Imaging (Nasdaq: GIVN) (a 23% holding directly and indirectly through RDC as of December 31,
2007).
 Galil Medical Ltd. (a 20% holding directly and indirectly through RDC as of December 31, 2007)
  74




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##### Table of Contents



NetVision (TASE: NTSN) (a 16% holding as of December 31, 2007).
 Teledata (a 21% holding).
 Impliant Inc. (a 22% holding).
  Gains from Disposal of Business and Affiliated Companies and Changes in Holdings in Affiliated
Companies
  75




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##### Table of Contents



Other Income (expenses), net.
 Finance income, net.
 Expenses
 Cost of revenues.
 Operating expenses.
 Year ended December 31,2007
    
    
    2006(millions of $)Corporate
    
    
    8.3
    
    
    
    6.5Galil Medical1
    
    
    
    
    
    
    4.4SELA
    
    
    3.2
    
    
    
    3.5Starling
    
    
    7.0
    
    
    
    5.83DV1
    
    
    
    
    
    
    2.6Medingo
    
    
    8.6
    
    
    
    3.0Enure2
    
    
    
    
    
    
    1.9RDC
    
    
    2.1
    
    
    
    1.8Other
    
    
    0.5
    
    
    
    29.8
    
    
    
    29.5
 1
    
    Galil Medical and 3DV had been consolidated through December 2006.2
    
    Enure had been consolidated through August 2006.  76




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##### Table of Contents



Taxes on Income.
  B. Liquidity and Capital Resources
   77




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##### Table of Contents



Consolidated companies (**)($ in milllons)RDC
    
    
    5.5Medingo
    
    
    1.0Impliant(*)
    
    
    6.0Wavion(*)
    
    
    4.9SELA
    
    
    0.8Starling (***)
    
    
    4.422.6Affiliated companies and other investmentsGiven Imaging
    
    
    24.5Pocared
    
    
    6.9Brainsgate
    
    
    6.0Safend
    
    
    2.7BPT
    
    
    2.1Enure
    
    
    1.9Atlantium
    
    
    2.6Kyma
    
    
    1.0Ellara
    
    
    1.6PlyMedia
    
    
    2.5Aqwise
    
    
    1.1Other
    
    
    4.157.0Total corporate investments
    
    
    79.6
 (*)
    
    Consolidated from March 31, 2008(**)
    
    These investments do not affect the cash included in the consolidated financial statements,
exept for the investment in Starlings debentures.(***)
    
    Purchase of Starling Convertible Debentures.  78




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##### Table of Contents



(i)
    
    maintaining a ratio equal to the sum of (1) cash and cash
equivalents, (2) the market value of holdings in public companies and (3) short
term investments, to the finance debt, as defined in the Agreement, which shall be
not less than three;
 (ii)
    
    obligating to provide the Bank with any covenant, undertaking and/or
lien of any kind, that may be provided to any other financial institution, all in
equal parts, pari passu with such financial institution so that the Banks rights
will not harmed;
 (iii)
    
    obligating not to make, or agree to make, loans available to the
Companys shareholders and not to repay future loans to shareholders without the
prior consent of the Bank, and moreover, any funds or loans granted or which may
be granted to our shareholders shall be subordinated to any debt to or credit from
the Bank; and
 (iv)
    
    obligating not to issue dividends to the Companys shareholders
without the prior written consent of the Bank.
   79




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##### Table of Contents



80




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##### Table of Contents



Consolidated companies
    
    (millions of $)Medingo
    
    
    0.5Wavion
    
    
    1.1Starling
    
    
    0.72.3Affiliated companies and other investmentsBrainsGate
    
    
    0.5Pocared
    
    
    2.4BPT
    
    
    0.5Kyma
    
    
    0.5Teledata
    
    
    0.6Other
    
    
    0.34.8Total corporate investments
    
    
    7.1
    81




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##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risks
 Exchange Rate Risk.
  Equity Price Risk
  82




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##### Table of Contents



C. Research and Development
       83




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##### Table of Contents



D.
    
    Trend Information
  E. Off- Balance Sheet Arrangements
  F. Tabular Disclosure of Contractual Obligations
  Type of Obligation
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    TotalLoans from banks
    
    
    3.3
    
    
    
    2.7
    
    
    
    30.0
    
    
    
    
    
    
    
    
    
    
    
    36.0Loans from others
    
    
    0.2
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    2.6Loan from
Shareholders
    
    
    
    
    
    
    
    
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    6.2Starlings
Convertible
Debentures
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    1.6Leases
    
    
    1.6
    
    
    
    1.2
    
    
    
    0.6
    
    
    
    0.1
    
    
    
    
    
    
    
    3.5
 *
    
    Does not include accrued severance pay and retirement obligation of $4.1 million at December 31,
2008.**
    
    See Note 14 (I) to our consolidated financial statements with respect to FIN 48.   84




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##### Table of Contents



Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Directors
 Name
    
    Age
    
    PositionArie Mientkavich(5)
    
    
    66
    
    
    Chairman of the Board of DirectorsAvraham Asheri(1)(4)
    
    
    71
    
    
    DirectorGad Arbel(1)(2)(4)
    
    
    60
    
    
    External DirectorProf. Gabi Barbash
    
    
    59
    
    
    DirectorRona Dankner(5)(6)
    
    
    26
    
    
    DirectorAmi Erel(5)
    
    
    62
    
    
    DirectorAvraham Fischer(5)
    
    
    52
    
    
    DirectorYaacov Goldman (1)(2)(3) (4)
    
    
    53
    
    
    External DirectorShay Livnat(5) (6)
    
    
    50
    
    
    DirectorDori Manor(5) (6)
    
    
    42
    
    
    DirectorArie Ovadia
    
    
    60
    
    
    Director
 Executive Officers
 Name
    
    Age
    
    PositionAri Bronshtein
    
    
    39
    
    
    Co- Chief Executive OfficerZvika Slovin
    
    
    43
    
    
    Co- Chief Executive OfficerRinat Remler
    
    
    37
    
    
    Vice President, Chief Financial Officer
 (1)
    
    Member of our Audit Committee.(2)
    
    External director under the Israeli Companies Law.(3)
    
    Designated financial expert under the Sarbanes-Oxley Act of 2002.(4)
    
    Designated financial expert under the Israeli Companies Law.(5)
    
    Director or officer of IDBH, IDBD and/or DIC.(6)
    
    Rona Dankner is the daughter of Nochi Dankner, Shay Livnat is the son of Avraham Livnat and
Dori Manor is the son of Isaac and Ruth Manor. See Item 7Major Shareholders and Related
Party TransactionsMajor Shareholders.  85




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##### Table of Contents



Arie Mientkavich
 Gad Arbel
 Avraham Asheri
  86




---



##### Table of Contents



Prof. Gabi Barbash
 Rona
Dankner
 Ami Erel
 Avraham Fischer
  87




---



##### Table of Contents



Yaacov Goldman
 Shay Livnat
 Dori Manor
 Dr. Arie Ovadia
 Ari Bronshtein
  88




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##### Table of Contents



Dr. Zvika Slovin
 Rinat Remler
 B. Compensation
   Cash and Cash-EquivalentForms of Compensation(in thousands of U.S. $)Salaries, Fees, DirectorsFees, Commissions andBonuses2008(1)All Directors as a group,
consisting of 11 persons
    
    
    2,603All Officers as a group,
consisting of 6 persons
    
    
    1,325
 (1)
    
    Does not include an increase in provision for vacation in the amount of approximately
$207.  89




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##### Table of Contents



C. Board Practices
  Board of Directors
  Substitute Directors
    90




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##### Table of Contents



External Directors
   
    
    an employment relationship;
 
    
    a business or professional relationship maintained on a regular basis;
 
    
    control; and
 
    
    service as an office holder, as defined below in Item 10  Additional Information 
Memorandum and Articles of Association, excluding service as a director who was appointed
to serve as an external director in a company which is going to initially offer its shares
to the public.
 
    
    No person may serve as an external director if the persons position or other business
activities create, or may create, a conflict of interest with the persons responsibilities
as an external director or may otherwise interfere with the persons ability to serve as an
external director. If, at the time an external director is to be appointed, all current
members of the Board of Directors are of the same gender, then the appointed external
director must be of the other gender.
   91




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##### Table of Contents




    
    The majority of shares voted at the meeting, including at least one-third of the
 shares held by non-controlling shareholders, or their representatives, which voted at
the meeting, vote in favor of election of the director, without taking abstentions
into account. According to the Israeli Companies Law, a controlling shareholder is
a person who has the ability to direct the activities of a company, other than if
this power derives solely from his/her position on the board of directors or any
other position with the company. A person is presumed to be a controlling shareholder
if he or she holds half or more of the following: (i) voting rights in the general
meeting, or (ii) rights to appoint directors or the chief executive officer; or
 
    
    The total number of shares held by non-controlling shareholders, which voted
against the election of the director, does not exceed one percent of the aggregate
voting rights in the company.
   Audit Committee
   92




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##### Table of Contents



Internal Auditor
  D. Employees
  Period ended December 31,
    
    2008
    
    
    2007
    
    
    2006Management and Administration
    
    
    *27
    
    
    
    25
    
    
    
    22
 *
    
    As of June 24, 2009, 13 are employed of which 12 are employed by DIC and provide services to
us through the Services Agreement entered into with DIC.  93




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##### Table of Contents



Israeli Employment Law and Practices
      94




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##### Table of Contents



E. Share Ownership
  Director
    
    Ordinary SharesArie Mientkavich, Chairman(1)
    
    
    0Ami Erel(1)
    
    
    0Gad Arbel
    
    
    0Avraham Asheri
    
    
    0Prof. Gabi Barbash
    
    
    0Rona Dankner(1)
    
    
    0Avraham Fischer(1)
    
    
    0Yaacov Goldman
    
    
    0Shay Livnat(1)
    
    
    0Dori Manor(1)
    
    
    0Arie Ovadia
    
    
    0All officers and directors as a group (consisting of
14 persons)
    
    
    92,500
    (2)
 (1)
    
    Director or officer of DIC, IDBD or IDBH. Ownership excludes shares beneficially owned by
these companies.(2)
    
    Options to purchase 92,500 of our ordinary shares currently exercisable or exercisable within
60 days of May 31, 2009.   2003 Option Plan
   95




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##### Table of Contents



Aggregate No. ofOptions GrantedAggregate No. of
    
    
    to Officers (orDate of Grant
    
    Options
    
    
    former Officers)
    
    
    Exercise Price
    
    
    Expiry DateDecember 2004
    
    
    20,000
    
    
    
    20,000
    
    
    $
    9.41
    (1)
    
    December 2012July 2005
    
    
    30,000
    
    
    
    30,000
    
    
    $
    7.84
    (1)
    
    August 2009November 2005
    
    
    18,750
    
    
    
    18,750
    
    
    $
    9.12
    
    
    November 2010March 2006
    
    
    5,000
    
    
    
    
    
    
    $
    9.05
    
    
    March 2011March 2007
    
    
    120,000
    
    
    
    120,000
    
    
    $
    15.53
    
    
    May  2012January 2008
    
    
    10,000
    
    
    
    10,000
    
    
    $
    10.57
    
    
    May 2013May 2008
    
    
    3,750
    
    
    
    
    
    
    $
    9.59
    
    
    August 2009
 (1)
    
    Exercise price reduced as a result of a $3.00 dividend per share distributed in September
2005. 
 Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
  Number of
    
    
    Percent ofName and Address
    
    Ordinary Shares
    
    
    Ordinary SharesDiscount Investment Corporation Ltd. (1)
Tel Aviv, Israel
    
    
    14,442,111
    
    
    
    48.71
    %Clal Insurance Enterprises Holdings Ltd. (2)
Tel Aviv, Israel
    
    
    11,079
    
    
    
    0.04
    %All Officers and Directors as a group (3)
    
    
    92,500
    
    
    
    0.3
    %
 *
    
    The above table does not include 135,300 shares held for members of the public through,
among others, provident funds, mutual funds, pension funds, exchange traded funds and
insurance policies, which are managed by subsidiaries of Clal Insurance Enterprises Holdings
Ltd., an entity controlled by IDBD.  96




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##### Table of Contents



(1)
    
    IDBH is the parent of IDBD, which, in turn, is the parent of DIC and Clal Insurance
Enterprises Holdings Ltd. (Clal Insurance). IDBH, DIC and Clal Insurance are public companies
whose ordinary shares are traded on the TASE.As of May 31, 2009, IDBH was controlled as follows: (i) Ganden Holdings Ltd. (Ganden), a
private Israeli company controlled by Nochi Dankner and his sister Shelly Bergman, held, directly
and through a wholly-owned subsidiary, approximately 55.26% of the outstanding shares of IDBH; (ii)
Shelly Bergman, through a wholly-owned company, held approximately 4.23% of the outstanding shares
of IDBH; (iii) Avraham Livnat Ltd. (Livnat), a private Israeli company controlled by Avraham
Livnat held, directly and through a wholly-owned subsidiary, approximately 13.43% of the
outstanding shares of IDBH; and (iv) Manor Holdings BA Ltd. (Manor), a private company controlled
by Ruth Manor held, directly and through a majority-owned subsidiary, approximately 13.42% of the
outstanding shares of IDBH.Subsidiaries of Ganden, Livnat and Manor have entered into a shareholders agreement with
respect to shares of IDBH constituting 31.02%, 10.34% and 10.34%, respectively, of the outstanding
shares of IDBH for the purpose of maintaining and exercising control of IDBH as a group. Their
additional holdings in IDBH are not subject to the shareholders agreement. The term of the
shareholders agreement expires in May 2023.Based on the foregoing, IDBH (by reason of its control of IDBD, and by reason of IDBDs
control of DIC), Ganden, Manor and Livnat (by reason of their control of IDBH) and Nochi Dankner,
Shelly Bergman, Ruth Manor and Avraham Livnat (by reason of their control of Ganden, Manor and
Livnat, respectively) may be deemed to share with DIC the power to vote and dispose of Elrons
Ordinary Shares held by DIC.Most of the foregoing holdings in IDBH have been pledged in favor of certain financial
institutions as collateral for loans taken to finance the purchase of shares of IDBH. Upon certain
events of default, these financial institutions may foreclose on the loans and assume ownership of
or sell such holdings.Nochi Dankner is the Chairman of IDBH, IDBD and DIC and a director of Clal Insurance. Zehava
Dankner (the mother of Nochi Dankner) is a director of IDBH, IDBD and DIC. Rona Dankner (the
daughter of Nochi Dankner) is a director of Elron. Zvi Livnat (a son of Avraham Livnat) is a
director of IDBH, IDBD and DIC. Shay Livnat (a son of Avraham Livnat)
is a director of IDBD, Clal Insurance and Elron. Isaac Manor (the husband of Ruth Manor) is a
director of IDBH, IDBD, DIC and Clal Insurance and Dori Manor (the son of Isaac and Ruth Manor) is
a director of IDBH, IDBD, DIC and Elron.DICs address is 3 Azrieli Center, 44th floor, Tel Aviv 67023, Israel.(2)
    
    Clal Insurance is majority owned by IDBD, the parent company of DIC, which in turn is our
significant shareholder. As of May 31, 2009, the other major shareholder of Clal Insurance was
Bank Hapoalim B.M., which held approximately 9.95% of Clal Insurances shares. None of the
remaining shareholders of Clal Insurance held more than 5% of its shares.Clal Insurances address is 48 Menachem Begin Rd., Tel Aviv, Israel.(3)
    
    This amount includes 92,500 shares underlying options that are currently exercisable or
that will become exercisable within 60 days of May 31, 2009.This amount does not include any shares
that may be deemed to be beneficially owned by directors by virtue of their affiliation with DIC.  97




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##### Table of Contents



B. Related Party Transactions
 Bonus granted to the Chairman of the Board of Directors
  Engagement of Clal Finance Batucha Investment Management Ltd. in Connection with the Partial Tender
Offer to Purchase shares of Given Imaging and the Partial Tender Offer to Purchase Convertible
Debentures of Starling
   Loan Agreements with DIC
     98




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Services Agreement with DIC
     C. Interests of Experts and Counsel
   99




---



##### Table of Contents



Item 8. Financial Information
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
 Gesser Claim:
  Investors Claim
   100




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##### Table of Contents



Dividend Policy
  B. Significant Changes
   101




---



##### Table of Contents



Item 9. The Offer and Listing
 A. Offer and Listing Details
 Markets and Share Price History
  NASDAQ
    
    
    NASDAQ
    
    
    TASE
    
    
    TASEHigh
    
    
    Low
    
    
    High
    
    
    LowPeriod
    
    (U.S. $)
    
    
    (U.S. $)
    
    
    (NIS)
    
    
    (NIS)Annually2004
    
    
    12.09
    
    
    
    9.2
    
    
    
    56.82
    
    
    
    43.552005
    
    
    13.09
    
    
    
    9.61
    
    
    
    60.05
    
    
    
    46.412006
    
    
    12.80
    
    
    
    8.75
    
    
    
    55.79
    
    
    
    40.812007
    
    
    17.41
    
    
    
    10.27
    
    
    
    68.66
    
    
    
    39.502008
    
    
    12.37
    
    
    
    1.07
    
    
    
    45.50
    
    
    
    4.45QuarterlyFirst Quarter 2007
    
    
    13.43
    
    
    
    12.02
    
    
    
    55.72
    
    
    
    50.55Second Quarter 2007
    
    
    17.41
    
    
    
    13.08
    
    
    
    68.66
    
    
    
    55.12Third Quarter 2007
    
    
    15.48
    
    
    
    11.77
    
    
    
    64.12
    
    
    
    49.10Fourth Quarter 2007
    
    
    14.43
    
    
    
    10.27
    
    
    
    57.07
    
    
    
    39.50First Quarter 2008
    
    
    12.37
    
    
    
    8.21
    
    
    
    45.50
    
    
    
    27.41Second Quarter 2008
    
    
    9.87
    
    
    
    8.08
    
    
    
    34.00
    
    
    
    26.95Third Quarter 2008
    
    
    8.28
    
    
    
    4.30
    
    
    
    27.56
    
    
    
    17.3Fourth Quarter 2008
    
    
    4.59
    
    
    
    1.07
    
    
    
    15.17
    
    
    
    4.45First Quarter 2009
    
    
    2.43
    
    
    
    1.48
    
    
    
    10.36
    
    
    
    5.46Second Quarter 2009 (through
June 24, 2009)
    
    
    3.57
    
    
    
    2.07
    
    
    
    13.28
    
    
    
    8.63Most recent six monthsJanuary 2009
    
    
    1.67
    
    
    
    1.48
    
    
    
    6.53
    
    
    
    5.46February 2009
    
    
    2.09
    
    
    
    1.50
    
    
    
    8.50
    
    
    
    6.00March 2009
    
    
    2.43
    
    
    
    1.77
    
    
    
    10.36
    
    
    
    7.80April 2009
    
    
    2.52
    
    
    
    2.07
    
    
    
    10.15
    
    
    
    8.63May 2009
    
    
    2.84
    
    
    
    2.15
    
    
    
    12.40
    
    
    
    9.09June 2009 (through June 24, 2009)
    
    
    3.57
    
    
    
    2.87
    
    
    
    13.28
    
    
    
    11.12
 B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
   102




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Item 10. Additional Information
 A. Share Capital
  B. Memorandum and Articles of Association
 Articles of Association; Israeli Companies Law
       
    
    amendments to our Articles of Association and our Memorandum of Association;
 
    
    appointment or termination of our auditors;
  103




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
    
    appointment and dismissal of directors;
 
    
    approval of interested party actions and transactions requiring general meeting
approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law;
 
    
    increase or reduction of our authorized share capital and alterations of our share
capital;
 
    
    a merger as provided in section 320 of the Israeli Companies Law;
 
    
    the exercise of the Board of Directors powers by a general meeting, if the Board
of Directors is unable to exercise its powers and the exercise of any of its powers
is vital for our proper management, as provided in section 52(a) of the Israeli
Companies Law; and
 
    
    any matter that is required to be adopted by resolution of a general meeting
pursuant to the Israeli Companies Law or in accordance with our Articles of
Association.
    104




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##### Table of Contents



(a)
    
    all of the directors are permitted to vote on the matter and attend the meeting in
which the matter is considered; and
 (b)
    
    approval of the shareholders at a general meeting is required if the majority of
the Board of Directors have a personal interest in the matter.
    105




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##### Table of Contents




    
    any amendment to the Articles of Association;
 
    
    an increase of the companys authorized share capital;
 
    
    a merger; or
 
    
    approval of interested party acts and transactions that require general meeting
approval as provided in sections 255 and 268 to 275 of the Israeli Companies Law.
  C. Material Contracts
 Services Agreement with DIC
   106




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Agreement with Rafael
  D. Exchange Controls
  E. Taxation
 General
    107




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Israeli Tax Reform
   General Corporate Tax Structure
  Law for the Encouragement of Capital Investments, 1959
     108




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% of Foreign
    
    TaxOwnership
    
    RateOver 25% but less than 49%
    
    
    25
    %49% or more but less than 74%
    
    
    20
    %74% or more but less than 90%
    
    
    15
    %90% or more
    
    
    10
    %
    109




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Reform (Amendment) of the Encouragement of Capital Investment Law
    
    
    Tax holiday package for a Privileged Enterprise: a tax exemption applies to
undistributed profits for two to fifteen years depending on geographical location of the
Privileged Enterprise and the level of foreign ownership. Company tax rates of between
10% and 25% apply to distributed exempt profits or profits derived subsequent to the
exempt period. The total period of tax benefits is seven to fifteen years; or
 
    
    Grant / Reduced tax package for an Approved Enterprise: Fixed asset grants up to 24%
for enterprises in a development area and reduced company tax rates between 0% and 25%
for seven to 15 years.
  110




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Taxation under Inflationary Conditions
        111




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Law for the Encouragement of Industry (Taxes), 1969
    Capital Gains Tax
   112




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Employee Stock Options
     113




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U.S.-Israel Tax Treaty
   114




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Taxation of Non-Residents
  U.S. Federal Income Tax Considerations
  
    
    an individual citizen or resident of the United States for U.S. federal income
tax purposes;
 
    
    a corporation (or another entity taxable as a corporation for U.S. federal
income tax purposes) created or organized under the laws of the United States or
any political subdivision thereof;
 
    
    an estate, the income of which may be included in gross income for U.S. federal
income tax purposes regardless of its source; or
 
    
    a trust (i) if, in general, a U.S. court is able to exercise primary supervision
over its administration and one or more U.S. persons have the authority to control
all of its substantial decisions or (ii) that has in effect a valid election under
applicable U.S. Treasury Regulations to be treated as a U.S. person.
   115




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You are advised to consult your tax advisor with respect to the specific U.S. federal, state,
local and foreign tax consequences to you of purchasing, holding or disposing of our ordinary
shares.
 Taxation of Distributions on Ordinary Shares
   116




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117




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Taxation of the Disposition of Ordinary Shares
   Tax Consequences If We Are a Passive Foreign Investment Company (PFIC)
   118




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119




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120




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U.S.
holders are urged to consult their tax advisors regarding the
application of the PFIC
rules, including eligibility for and the manner and advisability of making the QEF election or the
mark-to-market election.
 Non-U.S. Holders of Ordinary Shares
  Information Reporting and Backup Withholding
   F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
   121




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I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 12. Descriptions of Securities Other Than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
   122




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Item 15. Controls and Procedures
 a. Disclosure Controls and Procedures
  b. Managements Annual Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
  c. Attestation Report of the Registered Public Accounting Firm
  d. Changes in Internal Control Over Financial Reporting
  
 Item 16. [Reserved]
 
 Item 16A Audit Committee Financial Expert
   123




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Item 16B. Code of Ethics
 www.elron.com
 
 Item 16C. Principal Accountant Fees and Services
  2007
    
    
    2008(in thousands of U.S. $)Audit Fees (1)
    
    
    319
    
    
    
    410Tax Fees (2)
    
    
    55
    
    
    
    37Audit-Related Fees(3)
    
    
    240
    
    
    
    96All Other Fees (4)
    
    
    20
    
    
    
    46Total
    
    
    634
    
    
    
    589
 (1)
    
    Audit Fees consist of fees billed for the annual audit services
engagement and other audit services, which are those services that only the
external auditor can reasonably provide, and include statutory audits;
consents; and assistance with and review of documents filed with the SEC.(2)
    
    Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for tax refund;
tax consultations, such as assistance and representation in connection with
tax audits and appeals requests for rulings or technical advice from taxing
authority; and tax planning services.(3)
    
    Audit-Related Fees include fees billed for accounting consultations
related to accounting, financial reporting or disclosure matters not
classified as Audit services; audit of prospectuses prepaid by
subsidiaries assistance with understanding and implementing new accounting
and financial reporting guidance from rulemaking authorities; and assistance
with internal control reporting requirements.(4)
    
    All Other Fees consists of services relating to Elrons subsidiaries
status as approved enterprise/beneficiary enterprise.  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   124




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Item 16F. Change in Registrants Certifying Accountant.
  
 Item 16G. Corporate Governance
   
    
    independence of the board of directors (Israeli law only requires that at least two
independent External Directors (a defined in the Companies Law) serve on the board of
directors of a publicly traded company);
 
    
    executive sessions of independent directors (under Israeli law, there is no requirement
of separate sessions of independent directors);
 
    
    the requirement that compensation of executive officers is to be determined by an
independent committee of the board or by the independent members of the board of directors
(under Israeli law, the compensation of such officers may be determined by the board of
directors or a committee thereof and there is no requirement for a recommendation or
determination by independent directors or a compensation committee);
 
    
    the requirement that director nominees must be selected by an independent committee of
the board or by the independent members of the board of directors (under Israeli law, the
nominations process is conducted by the full board of directors and there is no requirement
to adopt a formal charter or board resolution addressing a companys nomination process);
and
 
    
    the requirement that any material amendment to the Companys option plan must be
approved by the shareholders of the Company (under Israeli law and practice, generally, the
approval of a companys board of directors, not its shareholders, is required to establish
or amend equity based compensation plans).
 The above requirements of Rule 5600 are not required under the Israeli Companies Law.
  125




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PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 Exhibit No.
    
    Exhibit1.1
    
    
    Articles of Association (English translation), consolidated version
including amendments approved by the Companys shareholders on
December 28, 2006, incorporated by reference to Exhibit 1.1 to the
Companys Annual Report on Form 20-F for the year ended December 31,
2006, filed with SEC on June 27, 2007.1.2
    
    
    Memorandum of Association of Elron Electronic Industries Ltd.,
incorporated by reference to Exhibit 1.2 to the Companys Annual
Report on Form 20-F for the year ended December 31, 2000, filed with
the SEC on June 8, 2001.4.1
    
    
    Services Agreement dated as of March 19, 2009 by and between the
registrant and Discount Investment Corporation Ltd., incorporated by
reference to Exhibit 99.2 to Form 6-K, filed with the SEC on March
24, 2009.4.2
    
    
    Joint Venture Agreement, dated as of April 1993, among Discount
Investment Corporation Ltd., PEC Israel Economic Corporation, Rafael
Armament Development Authority Ltd. and Galram Technology Industries
Limited (Joint Venture Agreement), incorporated by reference to
Exhibit 10.4 to Amendment No. 5 to the Companys Registration
Statement on Form F-4, filed with the SEC on March 14, 2002.4.3
    
    

Amendment
to Joint Venture Agreement, dated December 30, 2007,
incorporated by reference to Exhibit 4.2 to the Companys Annual
Report on Form 20-F for the year ended December 31, 2007 filed with
the SEC on June 30, 2008.8.1
    
    
    List of subsidiaries.11.1
    
    
    Code of Ethics, incorporated by reference to Exhibit 11.1 to the
Companys Annual Report on Form 20-F, filed with the SEC on June 29,
2004.12.1
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.12.2
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.12.3
    
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.13.1
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*13.2
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*13.3
    
    
    Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*15.1
    
    
    Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, for Elron Electronic Industries Ltd., dated June 25, 2009.15.2
    
    
    Consent of Somekh Chaikin, a member firm of KPMG International, for
Given Imaging Ltd., dated June 25, 2009.15.3
    
    
    Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, for NetVision Ltd., dated June 24, 2009.
 *
    
    This document is being furnished in accordance with SEC Release No. 33-8212 and 34-47551.  126




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SIGNATURES
  Dated: June 25, 2009
    ELRON ELECTRONIC INDUSTRIES LTD.By:
    /s/ Ari BronshteinName:
    Ari BronshteinTitle:
    Co-Chief Executive OfficerBy:
    /s/ Zvi SlovinName:
    Zvi SlovinTitle:
    Co-Chief Executive OfficerBy:
    /s/ Rinat RemlerName:
    Rinat RemlerTitle:
    Vice President & Chief Financial Officer  127




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ELRON ELECTRONIC INDUSTRIES LTD.  AND ITS SUBSIDIARIES
 CONSOLIDATED
 FINANCIAL STATEMENTS
 As of December 31, 2008




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2008
 INDEX
 PageAuditors Report
    
    
    2-3Consolidated Balance Sheets
    
    
    4-5Consolidated Statements of Operations
    
    
    6Statements of Shareholders Equity
    
    
    7Consolidated Statements of Cash Flows
    
    
    8-9Notes to the Consolidated Financial Statements
    
    
    10-61Annex to the Consolidated Financial Statements
    
    
    62




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of
 ELRON ELECTRONIC INDUSTRIES LTD.
       /s/ KOST FORER GABBAY & KASIERERTel-Aviv, Israel
    
    KOST FORER GABBAY & KASIERERJune 25, 2009
    
    A Member of Ernst & Young Global
  2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of
 ELRON ELECTRONIC INDUSTRIES LTD.
     /s/ KOST FORER GABBAY & KASIERERTel-Aviv, Israel
    
    KOST FORER GABBAY & KASIERERJune 25, 2009
    
    A Member of Ernst & Young Global
  3




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS  U.S. dollars in thousands, except share and per share data
 December 31,Note
    
    2008
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    4
    
    $
    17,364
    
    
    $
    20,090Short-term investments
    
    5
    
    
    
    
    
    
    16,900Restricted cash
    
    3.a.
    
    
    143
    
    
    
    7,642Available for sale marketable securities
    
    6
    
    
    
    
    
    
    29,730Trade receivables
    
    
    
    
    1,150
    
    
    
    1,043Other receivables and prepaid expenses *
    
    
    
    
    5,772
    
    
    
    5,269Inventories
    
    
    
    
    1,999
    
    
    
    1,732Total current assets
    
    
    
    
    26,428
    
    
    
    82,406INVESTMENTS AND LONG-TERM RECEIVABLESInvestments in affiliated companies
    
    7
    
    
    148,407
    
    
    
    131,351Investments in other companies and long-term receivables
    
    8
    
    
    70,833
    
    
    
    73,718Deferred taxes
    
    14
    
    
    
    
    
    
    2,204Severance pay deposits
    
    
    
    
    2,942
    
    
    
    1,808Total investments and long-term receivables
    
    
    
    
    222,182
    
    
    
    209,081PROPERTY AND EQUIPMENT, NET
    
    9
    
    
    4,582
    
    
    
    1,936INTANGIBLE ASSETS
    
    10Goodwill
    
    
    
    
    
    
    
    
    2,512Other intangible assets
    
    
    
    
    7,457
    
    
    
    3,012Total intangible assets
    
    
    
    
    7,457
    
    
    
    5,524Total assets
    
    
    
    $
    260,649
    
    
    $
    298,947
 *
    
    Includes short-term receivables from related parties in the aggregate amount of $69 and $169
as of December 31, 2008 and 2007, respectively.   4




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  U.S. dollars in thousands, except share and per share data
 December 31,Note
    
    2008
    
    
    2007LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESShort-term loans from banks and others
    
    11
    
    $
    1,142
    
    
    $
    850Current maturities of long-term loans from banks and others
    
    13
    
    
    2,349
    
    
    
    2,475Trade payables
    
    
    
    
    3,829
    
    
    
    3,236Convertible Debentures
    
    3.a.
    
    
    
    
    
    
    5,549Option to Convertible Debentures
    
    3.a.
    
    
    
    
    
    
    830Other payables and accrued expenses
    
    12
    
    
    11,846
    
    
    
    8,508Total current liabilities
    
    
    
    
    19,166
    
    
    
    21,448LONG-TERM LIABILITIESLong-term loans from banks and others
    
    13
    
    
    35,062
    
    
    
    2,244Long-term loans from shareholders
    
    13
    
    
    6,176
    
    
    
    Accrued severance pay and retirement obligations
    
    
    
    
    4,137
    
    
    
    2,451Convertible Debentures
    
    3.a
    
    
    2,161
    
    
    
    Deferred taxes
    
    14
    
    
    
    
    
    
    373Total long-term liabilities
    
    
    
    
    47,536
    
    
    
    5,068CONTINGENT LIABILITIES, PLEDGES AND COMMITMENTS
    
    15MINORITY INTERESTS
    
    
    
    
    16,530
    
    
    
    6,614SHAREHOLDERS EQUITY:
    
    16Ordinary shares of NIS 0.003 par value; Authorized: 35,000,000 shares as of December 31, 2008 and 2007; Issued
and outstanding: 29,650,017 shares as of December 31, 2008
and 2007, respectively;
    
    
    
    
    9,573
    
    
    
    9,573Additional paid-in capital
    
    
    
    
    276,286
    
    
    
    275,947Accumulated other comprehensive income
    
    23
    
    
    1,104
    
    
    
    3,689Retained earnings (accumulative deficit)
    
    
    
    
    (109,546
    )
    
    
    (23,392
    )Total shareholders equity
    
    
    
    
    177,417
    
    
    
    265,817Total liabilities and shareholders equity
    
    
    
    $
    260,649
    
    
    $
    298,947
  June 25, 2009
    

/s/
Arie Mientkavich
    

/s/
Avraham Asheri
    

/s/
Ari Bronshtein
    

/s/
Zvi SlovinDate of approval of the 
financial statements
    
    Arie Mientkavich
Chairman of the
Board of Directors
    
    Avraham Asheri
Director
    
    Ari Bronshtein,
Co-Chief Executive
Officer
    
    Zvi Slovin
Co-Chief Executive
Officer
  5




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  U.S. dollars in thousands, except share and per share data
 Years ended December 31Note
    
    2008
    
    
    2007
    
    
    2006INCOMENet revenues*
    
    
    
    $
    6,237
    
    
    $
    4,371
    
    
    $
    12,863Equity in losses of affiliated companies, net
    
    18
    
    
    (15,984
    )
    
    
    (20,416
    )
    
    
    (17,740
    )Gain (loss) from disposal of businesses and
affiliated companies and changes in holdings in
affiliated companies, net
    
    19
    
    
    (44
    )
    
    
    14,854
    
    
    
    2,547Other income (expenses), net
    
    20
    
    
    (25,429
    )
    
    
    (3,214
    )
    
    
    29,310Financial income (expenses), net
    
    21
    
    
    1,678
    
    
    
    3,945
    
    
    
    4,051(33,542
    )
    
    
    (460
    )
    
    
    31,031COSTS AND EXPENSESCost of revenues
    
    
    
    
    3,646
    
    
    
    2,233
    
    
    
    6,625Research and development costs, net
    
    
    
    
    29,194
    
    
    
    13,284
    
    
    
    11,758Marketing and selling expenses
    
    
    
    
    7,525
    
    
    
    2,802
    
    
    
    4,717General and administrative expenses
    
    
    
    
    18,832
    
    
    
    13,716
    
    
    
    12,995Amortization of intangible assets and acquired
in- process- research and development write-off
    
    
    
    
    4,801
    
    
    
    2,306
    
    
    
    18Impairment of goodwill
    
    
    
    
    2,512
    
    
    
    
    
    
    
    66,510
    
    
    
    34,341
    
    
    
    36,113Income (loss) before taxes on income
    
    
    
    
    (100,052
    )
    
    
    (34,801
    )
    
    
    (5,082
    )Taxes on income
    
    14
    
    
    (1,269
    )
    
    
    (7,544
    )
    
    
    (1,110
    )Income (loss) after taxes on income
    
    
    
    
    (101,321
    )
    
    
    (42,345
    )
    
    
    (6,192
    )Minority interest in losses (income) of subsidiaries
    
    
    
    
    15,167
    
    
    
    5,250
    
    
    
    9,224Net income (loss)
    
    
    
    $
    (86,154
    )
    
    $
    (37,095
    )
    
    $
    3,032Net income (loss) per share
    
    17Basic:Net income (loss)
    
    
    
    $
    (2.91
    )
    
    $
    (1.25
    )
    
    $
    0.10Diluted :Net income
    
    
    
    $
    (2.94
    )
    
    $
    (1.27
    )
    
    $
    0.07Weighted average number of Ordinary shares used in
computing basic net income (loss) per share
(thousands)
    
    
    
    
    29,619
    
    
    
    29,619
    
    
    
    29,532Weighted average number of Ordinary shares used in
computing diluted net income (loss) per share
(thousands)
    
    
    
    
    29,619
    
    
    
    29,619
    
    
    
    29,624
 *
    
    Includes revenues from related parties in the amount of $6,699, for the year ended December
31, 2006. (See Note 7.d.2 regarding the sale of Oncura by Galil)   6




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 STATEMENT OF SHAREHOLDERS EQUITY  U.S. dollars in thousands, except share and per share data
 Accumulated
    
    
    Retainedother
    
    
    earnings
    
    
    Total
    
    
    TotalNumber of
    
    
    
    
    
    
    Additional
    
    
    comprehensive
    
    
    (accumulated
    
    
    shareholders
    
    
    comprehensiveshares
    
    
    Share capital
    
    
    paid-in capital
    
    
    income (loss)
    
    
    deficit)
    
    
    equity
    
    
    income (loss)Balance as of January 1, 2006
    
    
    29,483,455
    
    
    $
    9,572
    
    
    $
    271,132
    
    
    $
    10,741
    
    
    $
    10,671
    
    
    $
    302,116Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    359Exercise of options
    
    
    109,293
    
    
    
    1
    
    
    
    527
    
    
    
    
    
    
    
    
    
    
    
    528Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    
    
    
    
    
    
    
    
    344Capital transaction in affiliated company (gain on purchase by
affiliate of its subsidiarys preferred stock)
    
    
    
    
    
    
    
    
    
    
    927
    
    
    
    
    
    
    
    
    
    
    
    927Other comprehensive income (loss), net of tax (see note 23):Unrealized gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,493
    
    
    
    
    
    
    
    6,493Reclassification adjustment for gain realized and other than
temporary impairment included in income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,645
    )
    
    
    
    
    
    
    (16,645
    )
    
    $
    (16,653
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    709
    
    
    
    709Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,032
    
    
    
    3,032
    
    
    
    3,032Balance as of December 31, 2006
    
    
    29,592,748
    
    
    $
    9,573
    
    
    $
    272,930
    
    
    $
    1,298
    
    
    $
    13,703
    
    
    $
    297,504Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (12,912
    )Exercise of options
    
    
    57,269
    
    
    
    
    
    
    
    230
    
    
    
    
    
    
    
    
    
    
    
    230Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    304Increase in investment due to issuance of shares by a development
stage subsidiary company (see Note 3.a.)
    
    
    
    
    
    
    
    
    
    
    2,483
    
    
    
    
    
    
    
    
    
    
    
    2,483Other comprehensive income (loss), net of tax (see note 23):Unrealized gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,658
    
    
    
    
    
    
    
    1,658
    
    
    $
    1,658Reclassification adjustment for loss realized included in income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,255
    )
    
    
    
    
    
    
    (1,255
    )
    
    
    (1,255
    )Foreign currency translation adjustments included in net income
due to decrease in holdings in affiliated companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (407
    )
    
    
    
    
    
    
    (407
    )
    
    
    (407
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,395
    
    
    
    
    
    
    
    2,395
    
    
    
    2,395Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,095
    )
    
    
    (37,095
    )
    
    
    (37,095
    )Balance as of December 31, 2007
    
    
    29,650,017
    
    
    $
    9,573
    
    
    $
    275,947
    
    
    $
    3,689
    
    
    $
    (23,392
    )
    
    $
    265,817Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (34,704
    )Stock  based compensation
    
    
    
    
    
    
    
    
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    339Other comprehensive income (loss), net of tax (see note 23):Decrease in unrealized gain on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,861
    )
    
    
    
    
    
    
    (1,861
    )
    
    $
    (1,861
    )Reclassification adjustment for loss realized and other
than temporary impairment included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    52Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (776
    )
    
    
    
    
    
    
    (776
    )
    
    
    (776
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86,154
    )
    
    
    (86,154
    )
    
    
    (86,154
    )Balance as of December 31, 2008
    
    
    29,650,017
    
    
    $
    9,573
    
    
    $
    276,286
    
    
    $
    1,104
    
    
    $
    (109,546
    )
    
    $
    177,417Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (88,739
    )
   7




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  U.S. dollars in thousands, except share and per share data
 Year ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (86,154
    )
    
    $
    (37,095
    )
    
    $
    3,032Adjustments to reconcile net income (loss) to net cash used in operating activities:Equity in losses of affiliated companies, net
    
    
    15,984
    
    
    
    20,416
    
    
    
    17,740Minority interest in losses of subsidiaries
    
    
    (15,167
    )
    
    
    (5,250
    )
    
    
    (9,224
    )Loss (gain) from disposal of businesses and affiliated companies and changes in
holdings in affiliated companies, net
    
    
    44
    
    
    
    (14,854
    )
    
    
    (2,547
    )Interest on loans from minority shareholders of subsidiary
    
    
    283
    
    
    
    
    
    
    
    Gain from sale of investments in available for sale securities
    
    
    (239
    )
    
    
    (1,592
    )
    
    
    (24,899
    )Gain from settlement of a subsidiarys loan
    
    
    
    
    
    
    
    
    
    
    (2,708
    )Depreciation and amortization (including IPR&D)
    
    
    5,819
    
    
    
    751
    
    
    
    1,192Impairment of investments
    
    
    26,079
    
    
    
    9,205
    
    
    
    Impairment of goodwill
    
    
    2,512
    
    
    
    
    
    
    
    Accrued interest on loans from shareholders
    
    
    176
    
    
    
    
    
    
    
    Equity in losses of partnerships
    
    
    818
    
    
    
    826
    
    
    
    672Stock based compensation and changes in liability in respect of call options
    
    
    1,180
    
    
    
    1,740
    
    
    
    771Decrease in restricted cash
    
    
    389
    
    
    
    
    
    
    
    Deferred taxes, net
    
    
    1,180
    
    
    
    4,986
    
    
    
    (4,243
    )Decrease (increase) in fair value of Convertible Debentures
    
    
    (2,684
    )
    
    
    243
    
    
    
    Loss resulted from early redemption of Convertible Debentures
    
    
    359
    
    
    
    
    
    
    
    Convertible Debentures and Option to Convertible Debentures issuance costs
recognized, included in net income
    
    
    
    
    
    
    976
    
    
    
    Gain from sale of real estate
    
    
    
    
    
    
    (5,460
    )
    
    
    Non-recurring gain from loans extinguishment
    
    
    (127
    )
    
    
    
    
    
    
    loss from sale of property and equipment, net
    
    
    8
    
    
    
    
    
    
    
    Changes in operating assets and liabilitiesIncrease in trade receivables
    
    
    (99
    )
    
    
    (401
    )
    
    
    (457
    )Decrease (increase) in other receivables and prepaid expenses
    
    
    1,819
    
    
    
    4,477
    
    
    
    (738
    )Decrease (increase) in trading securities, net
    
    
    
    
    
    
    1
    
    
    
    (2
    )increase in inventories and contracts-in-progress
    
    
    (326
    )
    
    
    (117
    )
    
    
    (1,069
    )Increase in trade payables
    
    
    8
    
    
    
    133
    
    
    
    2,589Increase (decrease) in other payables and accrued expenses (mainly provision for
income taxes)
    
    
    1,800
    
    
    
    (5,764
    )
    
    
    7,195Other
    
    
    814
    
    
    
    (119
    )
    
    
    843Net cash used in operating activities
    
    
    (45,524
    )
    
    
    (26,898
    )
    
    
    (11,853
    )CASH FLOWS FROM INVESTING ACTIVITIESInvestment in affiliated companies
    
    
    (31,225
    )
    
    
    (34,422
    )
    
    
    (18,395
    )Proceeds from sale of affiliated companies shares
    
    
    
    
    
    
    621
    
    
    
    992Cash and cash equivalents paid for newly consolidated subsidiaries(Schedule A)
    
    
    (117
    )
    
    
    
    
    
    
    Change in cash and cash equivalents resulting from disposal of businesses and
decrease in holdings in formerly consolidated subsidiaries (Schedule B)
    
    
    
    
    
    
    
    
    
    
    (808
    )Investment in other companies
    
    
    (26,540
    )
    
    
    (14,793
    )
    
    
    (25,153
    )Proceeds from sale and maturity of available for sale securities
    
    
    29,452
    
    
    
    44,518
    
    
    
    82,332Investments in long term deposits
    
    
    (228
    )
    
    
    (31,203
    )
    
    
    (40,183
    )Investment in available for sale securities
    
    
    
    
    
    
    (17,171
    )
    
    
    (35,377
    )Proceeds from long term deposits
    
    
    17,040
    
    
    
    34,720
    
    
    
    72,878Investment in restricted cash
    
    
    (3,184
    )
    
    
    (7,642
    )
    
    
    Proceeds from restricted cash
    
    
    10,294
    
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (1,348
    )
    
    
    (1,189
    )
    
    
    (1,308
    )Proceeds from sale of real estate and property and equipment
    
    
    68
    
    
    
    7,656
    
    
    
    19Net cash provided by (used in) investing activities
    
    
    (5,788
    )
    
    
    (18,905
    )
    
    
    34,997CASH FLOWS FROM FINANCING ACTIVITIESProceeds from options exercised
    
    
    
    
    
    
    230
    
    
    
    527Receipt of long-terms loans from shareholders
    
    
    6,000
    
    
    
    
    
    
    
    Repayment of long-term loans
    
    
    
    
    
    
    (6
    )
    
    
    (105
    )Receipt of long-term loans from banks
    
    
    31,000
    
    
    
    
    
    
    
    Increase (decrease) in short-term bank loan, net
    
    
    135
    
    
    
    (417
    )
    
    
    208Proceeds from issuance of shares to minority of subsidiary, net
    
    
    10,668
    
    
    
    7,619
    
    
    
    Proceeds from issuance of Convertible Debentures and Option to Convertible
Debentures
    
    
    3,184
    
    
    
    5,188
    
    
    
    Early redemption of Convertible Debentures
    
    
    (4,401
    )
    
    
    
    
    
    
    Receipt of short-term loans, convertible loans and long-term loans from minority
shareholders of a subsidiary
    
    
    2,000
    
    
    
    325
    
    
    
    2,660Net cash providing by financing activities
    
    
    48,586
    
    
    
    12,939
    
    
    
    3,290INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (2,726
    )
    
    
    (32,864
    )
    
    
    26,434CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
    
    
    20,090
    
    
    
    52,954
    
    
    
    26,520CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
    
    $
    17,364
    
    
    $
    20,090
    
    
    $
    52,954
   8




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)  U.S. dollars in thousands, except share and per share data
 Year ended December 31,2008
    
    
    2007
    
    
    2006Supplemental cash flow information:Cash paid during the year for:Income taxes
    
    $
    59
    
    
    $
    10,472
    
    
    $
    794Interest
    
    $
    1,741
    
    
    $
    119
    
    
    $
    69Non cash transactions:Issuance of warrants in connection with loan refinancing
    
    $
    177
    
    
    $
    
    
    
    $
    Proceeds from sale of shares of an affiliate not yet received
    
    $
    
    
    
    $
    228
    
    
    $
    Receivables in respect of issuance of shares by a subsidiary to the minority
    
    $
    
    
    
    $
    2,550
    
    
    $
    
 Year ended December 31,SCHEDULE A:
    
    2008
    
    
    2007
    
    
    2006Change in cash and cash equivalents paid for newly consolidated
subsidiariesAssets and liabilities at date of sale:Working capital, net (except cash and cash equivalents)
    
    $
    4,381
    
    
    $
    
    
    
    $
    Property and equipment
    
    
    (2,182
    )
    
    
    
    
    
    
    Intangible assets
    
    
    (2,049
    )
    
    
    
    
    
    
    Accrued severance pay, net
    
    
    231
    
    
    
    
    
    
    
    Investment in affiliated companies
    
    
    (762
    )
    
    
    
    
    
    
    Minority interests
    
    
    4,740
    
    
    
    
    
    
    
    Purchase Price allocated to IPR&D
    
    
    (4,476
    )
    
    
    
    
    
    
    Cash and cash equivalents paid for newly consolidated subsidiaries
    
    $
    (117
    )
    
    $
    
    
    
    $
    
 Year ended December 31,SCHEDULE B:
    
    2008
    
    
    2007
    
    
    2006Change in cash and cash equivalents resulting
from disposal of businesses and decrease in
holdings in formerly consolidated subsidiariesAssets and liabilities at date of sale:Working capital (working capital
deficiency), net (except cash and cash
equivalents)
    
    $
    
    
    
    $
    
    
    
    $
    2,826Investment in affiliated Company
    
    
    
    
    
    
    
    
    
    
    13,207Property and equipment
    
    
    
    
    
    
    
    
    
    
    709Minority interest
    
    
    
    
    
    
    
    
    
    
    (7,403
    )Accrued severance pay, net
    
    
    
    
    
    
    
    
    
    
    (215
    )Long term loans
    
    
    
    
    
    
    
    
    
    
    (1,401
    )Securities received:Other investments
    
    
    
    
    
    
    
    
    
    
    (1,713
    )Investment in affiliated Companies
    
    
    
    
    
    
    
    
    
    
    (6,818
    )Net decrease in cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    (808
    )
   9




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 1:- GENERAL
 a.
    
    Elron Electronic Industries Ltd. (Elron or the Company), an Israeli
corporation, is a high technology operational holding company. Elrons business is
conducted through subsidiaries and affiliates and other companies, referred as
group companies, in which Elron invested, primarily in the fields of medical
devices, information communications, technology, semiconductors and clean
technology.On November 30, 2006, as part of a tender offer to purchase up to 4,440,000 ordinary
 shares of Elron for $12 per share, Discount Investment Corporation Ltd. (DIC)
purchased an additional 1.2% of the Companys outstanding shares. Following the above
additional purchases of the Companys shares in 2006, DICs interest in the Company
increased from approximately 48% to approximately 49% of the Companys outstanding
 shares.b.
    
    The global markets are currently experiencing a financial crisis and
economic downturn which are adversely affecting the Company and its group
companies business. Events pertaining to the financial crisis affect the securities
markets which are facing increased volatility, including in securities of companies
in the high-technology field. As a result, high-technology companies, such as Elron
group companies may experience difficulties in raising additional financing
required to effectively operate and expand their businesses. It also affects the
Companys ability to raise additional capital, meet banks covanents, secure
additional bank facilities and sell holdings of Elron group companies. As a result,
the Company had to record impairment charges since the fair value of certain
investments decrease below their carrying amount in an other than temporary manner.
For impairment charges recorded during 2008 see Note 25.c.
    
    Subsequent to the balance sheet date, on March 19, 2009, Elron entered
into a Services Agreement (the Services Agreement) with DIC, its principal
shareholder, the execution of which was approved by the Companys Audit Committee
and Board of Directors, and thereafter approved on April 22, 2009 at a special
general meeting of Elrons shareholders. Pursuant to the Services Agreement, which
became effective on May 1, 2009, Elron receives general managerial and
administrative services from DIC. Other than the CEO and CFO who are to be proposed
and appointed by Elron following approval by DIC and Elrons Board of Directors,
the services are performed by persons designated by DIC and approved by Elron, all
of whom are employed or otherwise engaged by DIC. For these services Elron is to
pay DIC an annual fee currently equal to approximately $1,100. The term of the
Services Agreement is three years, subject to either party having the right to
terminate it on at least 120 days prior notice if DIC is no longer the largest
shareholder of Elron. In connection with these changes, Elrons employees were
terminated many of whom have joined DIC immediately thereafter.
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
 The financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (US GAAP).The significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are:
 a.
    
    Use of estimatesThe preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of income and expenses during the reported period. Actual results could
differ from those estimates.
  10




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 b.
    
    Financial statements in U.S. dollarsThe financial statements have been prepared in U.S. dollars, since the currency of
the primary economic environment in which the operations of the Company, its
principal subsidiaries and affiliates are conducted is the U.S. dollar. Most of
the Companys assets and liabilities are in U.S. dollars, sales of its
subsidiaries, affiliates and other companies are mainly in U.S. dollars and its
investments are mainly done in U.S. dollars. Therefore, the functional and
reporting currency of the Company and its subsidiaries is the U.S. dollar.Transactions and balances in other currencies have been remeasured into U.S.
dollars in accordance with the principles set forth in Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation (SFAS 52).Accordingly, amounts in currencies other than U.S dollars have been translated as
follows:Monetary balances  at the exchange rate in effect on the balance sheet date.Revenues and costs  at the exchange rates in effect as of the date of recognition
of the transactions.All exchange gains and losses from the remeasurement mentioned above are reflected
in the statement of operations in financial income expenses, net.The financial statements of affiliates accounted for under the equity method,
whose functional currency is not the U.S. dollar, have been translated into
dollars in accordance with SFAS 52. All balance sheet accounts have been
translated using the exchange rate in effect at the balance sheet date. Statement
of income amounts have been translated using average exchange rates prevailing
during the year. The resulting translation adjustments are reported as a component
of accumulated other comprehensive income (loss) in shareholders equity.c.
    
    Principles of consolidationThe consolidated financial statements include the accounts of the Company and its
subsidiaries, in which the Company has a controlling voting interest or
subsidiaries consolidated under the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (FIN 46). Inter-company balances and
transactions have been eliminated upon consolidation. The minority interest amount
adjusts the consolidated net income (loss) to reflect only the Companys share in
the earnings or losses of any consolidated company. However, when the minority
investment is in the form of a preferred security or other senior security which
entitles the holders to a preference in liquidation and dividends, losses are not
allocated to such minority interest in order not to reduce the carrying amount of
the minority investment beyond the lower of the amount invested or liquidation
value. When the subsidiaries equity is negative, subsidiarys loss is not
allocated to such minority interest, unless the minority has a firm liability to
finance subsidiary loss.The Company applies the provisions of FIN 46 which provides a framework for
identifying variable interest entities (VIE) and determining when a company
should include the assets, liabilities, noncontrolling interests and results of
activities of a VIE in its consolidated financial statements. See also Note
2.y.ii.
  11




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 c.
    
    Principles of consolidation (Cont.)In general, a VIE is a corporation, partnership, limited-liability corporation,
trust, or any other legal structure used to conduct activities or hold assets that
either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that is unable to make significant decisions about its activities,
(3) has a group of equity owners that does not have the obligation to absorb
losses or the right to receive returns generated by its operations or (4) the
voting rights of some investors are not proportional to their obligations to
absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both and substantially all of the entitys
activities (for example, providing financing or buying assets) either involve or
are conducted on behalf of an investor that has disproportionately few voting
rights.FIN 46 requires a VIE to be consolidated by the party with an ownership,
contractual or other financial interest in the VIE (a variable interest holder)
that will absorb a majority of the risk of loss from the VIEs activities, is
entitled to receive a majority of the VIEs residual returns (if no other variable
interests absorb a majority of the VIEs losses), or both.A variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must initially
record all of the VIEs assets, liabilities and noncontrolling interests at fair
value and subsequently account for the VIE as if it were consolidated based on a
majority voting interest. FIN 46 also requires disclosures about VIEs in which the
variable interest holder is not required to consolidate but in which it has a
significant variable interest.As of the balance sheet dates the significant subsidiaries whose balances and
results are consolidated are:
 December 31,2008
    
    
    2007% ofoutstanding share capitalElbit Ltd. (Elbit)
    
    
    100
    
    
    
    100DEP Technology Holdings Ltd. (DEP)
    
    
    100
    
    
    
    100RDC Rafael Development Corporation Ltd.
(RDC)
    
    
    50.1
    
    
    
    50.1SELA Semiconductors Engineering
Laboratories Ltd. (SELA)
    
    
    71.9
    
    
    
    70.6Starling Advanced Communications Ltd.
(Starling)
    
    
    68.1
    
    
    
    68.1Medingo Ltd. (Medingo)
    
    
    92.0
    
    
    
    92.3Wavion*
    
    
    65.9
    
    
    
    Impliant*
    
    
    46.4
    
    
    
    SyncRX
    
    
    77.9
    
    
    
    Xsights
    
    
    100
    
    
    
    
 *
    
    Consolidated according to FIN46 requirements.  12




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 d.
    
    Business combinationsBusiness combinations have been accounted for using the purchase method of
accounting. Under the purchase method of accounting the results of operations of
the acquired business are included from the date of acquisition. The costs to
acquire companies, including transactions costs, have been allocated to the
underlying net assets of each acquired company in proportion to their respective
fair values. Any excess of the purchase price over estimated fair values of the
identifiable net assets acquired has been recorded as goodwill. See also Note
2.y.i.e.
    
    Cash and cash equivalentsCash equivalents are short-term highly liquid investments that are readily
convertible to cash and have original maturities of three months or less at the
date acquired.
Cash that is restricted as to withdrawal or usage is presented as a separate line
item in the balance sheet as restricted cash.f.
    
    Bank depositsBank deposits with original maturities of more than three months but less than one
year are presented as part of short-term investments. Deposits are presented at
their cost including accrued interest. Interest on deposits is recorded as
financial income.g.
    
    Marketable securitiesManagement determines the classification of marketable investments in debt
securities with fixed maturities and marketable equity securities at the time of
purchase and reevaluates such designations at each balance sheet date.Certain marketable securities accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, (SFAS 115) are classified as
available-for-sale. Accordingly, these securities are measured at fair value, with
unrealized gains and losses reported net-of-tax in accumulated other comprehensive
income (loss), a separate component of shareholders equity. Realized gains and
losses on sales of investments, and a decline in value which is considered as
other than temporary, are included in the consolidated statement of operations.
The Company considers a decline in value to be other than temporary with regard to
available-for-sale marketable debentures and other securities when the fair value
is lower than cost for a continuing period which exceeds six months, when no
indicators to the contrary exist and when the Company does not intend to hold the
debentures or other securities until maturity, or recovery of value as applicable.
The Company also evaluates the prospects of the investee in relation to the
severity and duration of the impairment. Based on that evaluation and the
Companys ability and intent to maintain the investment until an anticipated
recovery of fair value, the Company evaluates whether the investment is considered
to be other-than-temporarily impaired. When computing realized gain or loss, cost
is determined on an average basis.Management determines the appropriate classification of its investments in
marketable debt securities at the time of purchase and re-evaluates such
designations as of each balance sheet date. During 2008, 2007 and 2006, all
marketable securities covered by Statement of Financial Accounting Standard No. 115
Accounting for Certain Investments in Debt and Equity Securities were designated
as available-for-sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in accumulated other comprehensive loss, a
separate component of shareholders equity, net of taxes. Realized gains and losses
on sales of investments, and impairment of investments, as determined on a specific
identification basis, are included in the consolidated statement of operations.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 g.
    
    Marketable securities (Cont.)FASB Staff Position (FSP) No. 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investment (FSP 115-1) and SAB
Topic 5M Other Than Temporary Impairment Of Certain Investments In Debt And
Equity Securities provides guidance for determining when an investment is
considered impaired, whether impairment is other-than temporary, and measurement
of an impairment loss. An investment is considered impaired if the fair value of
the investment decreased below its cost in an other-than temporary manner. If,
after consideration of all available evidence to evaluate the realizable value of
its investment, impairment is determined to be other than  temporary, then an
impairment loss should be recognized equal to the difference between the
investments cost and its fair value. FSP 115-1 nullifies certain provisions of
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1) while retaining the disclosure requirements of EITF 03-1.h.
    
    Inventories and contracts in progressInventories are stated at the lower of cost or market value.Cost is determined as follows:

Raw materials  using the first in, first out method;

Products in process  represents the cost of production in progress;

Finished Products  on the basis of direct manufacturing costs with the addition
of allocable indirect manufacturing costs. Cost is measured on an average basis.i.
    
    Investments in companiesInvestments in common stock or in-substance-common stock of entities in which the
Company has significant influence but less than a controlling voting interest are
accounted for using the equity method (affiliated companies) (see below for
provisions of EITF 02-14). Significant influence is presumed to exist when the
Company holds between 20%-50% of the investees voting instruments. However,
whether or not the Company has significant influence depends on evaluation of
certain factors including among others, the Companys representation on the
investees board of directors, agreements with other shareholders, additional
voting rights, participation in policy making processes, existence of material
intercompany transactions, technological dependency and the extent of ownership by
the Company in relation to the concentration of other shareholders.The Company discontinues applying the equity method when its investment (including
advances and loans) is reduced to zero and it has not guaranteed obligations of
the affiliate or is not otherwise committed to provide further financial support
to the affiliate.The Company applies EITF 02-14, Whether an Investor Should Apply the Equity Method
of Accounting to Investments Other Than Common Stock (EITF 02-14). EITF 02-14
states that the Company must apply the equity method of accounting to investments
in common stock and in in-substance-common stock if it has the ability to exercise
significant influence over the operating and financial policies of the investee.
EITF 02-14 defines in-substance-common stock as an investment with similar risk and
reward characteristics to common stock.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 i.
    
    Investments in companies (Cont.)The Company applies EITF 02-18 Accounting for Subsequent Investments in an
Investee after suspension of Equity Method Loss Recognition (EITF 02-18) in
cases where the Company suspended equity method loss recognition in a certain
investee, and it subsequently invests in the aforementioned investee (not resulting
in the ownership interest increasing from one of significant influence to one of
control). If the additional investment, in whole or in part, represents, in
substance, the funding of prior losses, the Company recognizes previously suspended
losses up to the amount of the additional investment determined to represent the
funding of prior losses. Whether the investment represents the funding of prior
losses, however, depends on the facts and circumstances.According to EITF 99-10, Percentage Used to Determine the Amount of Equity Method
Losses, in circumstances where the Companys ownership in an affiliate is in the
form of a preferred security or other senior security, the Company recognizes
losses based on the ownership level of the particular affiliates security or loan
held by the Company to which the equity method is being applied.The excess of the investment over the proportional fair value of
net tangible assets of the investee is attributed to technology and other
identifiable intangible assets and the residual amount invested is allocated
to goodwill. Technology and other identifiable intangible assets are amortized
over a weighted averaged period of approximately 12 years, commencing from the
acquisition date. Goodwill embedded in an equity method investment is not
amortized. Instead it is subject to an other than temporary impairment
assessment together with the entire carrying value of the investment.Gains arising from issuance of common or in substance common shares by affiliated
companies to third parties are recorded as income in the consolidated statements
of operations, unless the issuing company is a development stage company for which
the gain (loss) from issuance is accounted for as an equity transaction pursuant
to Staff Accounting Bulletin (SAB) No. 51 Accounting for Sales of Stock by a
Subsidiary.When an investment in common stock or in-substance common stock, that was
previously accounted for on other than the equity method, becomes qualified for
use of the equity method by an increase in level of ownership, the equity method
of accounting is applied retrospectively and financial statements of prior periods
are adjusted accordingly.Investments in partnerships in which the Company has a greater than five percent
interest, are accounted for under the equity method.Investments in non-marketable securities of companies, in which the Company does
not have the ability to exercise significant influence over their operating and
financial policies, and investments in non-marketable companies that are not
common stock or in-substance-common stock, are presented at cost.
 
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 i.
    
    Investments in companies (Cont.)Management evaluates investments in affiliates and other companies for evidence of
other than temporary declines in value. When relevant factors indicate a
decline in value that is other than temporary, the Company records a provision
for the decline in value. A judgmental aspect of accounting for investments
involves determining whether an other-than-temporary decline in value of the
investment has been sustained. Such evaluation is dependent on the specific
facts and circumstances. Accordingly, management evaluates financial
information (e.g. budgets, budget versus actual results, business plans,
financial statements, projections
etc.) in determining whether an other-than-temporary decline in
value exists. Factors indicative of an other-than-temporary decline include
global market conditions, recurring operating losses, failure of research and
development efforts, extremely negative deviation from the business plan,
credit defaults, specific conditions affecting the investment such as in the
industry or in geographic area and subsequent rounds of financings at an
amount below the cost basis of the investment. With respect to investments
which its fair value has declined, the Company evaluates the prospects of the
investee in relation to the severity and duration of the impairment. Based on
that evaluation and the Companys ability and intent to maintain the investment until an anticipated recovery of fair value, the Company evaluates
whether the investment is considered to be other-than-temporarily impaired. This
list of factors is not all inclusive and management weighs all quantitative and
qualitative factors in determining if an other-than-temporary decline in value of
an investment has occurred. See also Note 25.j.
    
    Property and equipmentProperty and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets at the following annual rates:
 %Building (*)
    
    4Computers, Machinery and Furniture
    
    6  33 (mainly 33%)Motor vehicles
    
    15Leasehold improvements
    
    over the term of the lease
 (*)
    
    The building was sold during 2007, see also Note 9. k.
    
    Impairment and disposal of long-lived assetsThe Company and its subsidiaries long-lived assets (including identifiable
intangible assets subject to amortization) are reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the asset. If an asset is considered to be impaired, the impairment
is measured by the difference between the carrying amount of the asset and its
fair value. No long-lived assets impairment was identified in 2008, 2007 and 2006.l.
    
    Intangible assets and GoodwillIntangible assets include mainly technology, customer relationships, goodwill,
agreement with Rafael (see Note 3.d.) and other identifiable intangible assets
acquired in connection with a business combination. Technology and other
identifiable intangible definite lived assets are amortized over their estimated
useful lives.The Company evaluates the amortization periods of all identifiable intangible
assets to determine whether events or circumstances warrant revised estimates of
useful lives.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 l.
    
    Intangible assets and Goodwill (Cont.)Under SFAS No. 142 Goodwill and other Intangible Assets (SFAS 142) goodwill
and intangible assets with indefinite lives are tested for impairment at least
annually (or more frequently if impairment indicators arise).SFAS 142 prescribes a two phase process for impairment testing of
goodwill. The first phase screens for impairment; while the second phase (if
necessary) measures impairment. In the first phase of impairment testing,
goodwill attributable to each of the reporting units is tested for impairment
by comparing the fair value of each reporting unit with its carrying
value. If the carrying value of the reporting unit exceeds its fair value the second phase
is then performed. The second phase of the goodwill impairment test compares the
implied fair value of the reporting units goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of the goodwill, an impairment loss is recognized in an amount
equal to that excess. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in
a business combination. That is, the fair value of the reporting unit is allocated
to all of the assets and liabilities of the unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid
to acquire the reporting unit. The Company performs its annual impairment tests
during the fourth fiscal quarter of each year.Fair value of the Companys reporting unit is determined, inter alia, using market
related capitalization.In 2008 when performing the first phase of the goodwill impairment test, the fair
value of the Company measured based on market share price was found to be lower
than its carrying value of its equity. Therefore the second phase of the goodwill
impairment test was then performed and as a result the entire balance of the
goodwill in the amount of approximately $2,500 was written down (see Note 10).The impairment test for other intangible assets not subject to amortization
consists of a comparison of the estimated fair value of the intangible asset with
its carrying value. If the carrying value of the intangible asset exceeds its
estimated fair value, an impairment loss is recognized in an amount equal to that
excess. No Impairment has been identified for all periods presented.m.
    
    Convertible Debentures and Options to Purchase Convertible DebenturesThe Company has elected pursuant to FAS 155, to present the Convertible Debentures
and the Options to Purchase Convertible Debentures issued by Starling, a
subsidiary of the Company, at their fair value, in the balance sheet and the
changes in their fair value is charged to the statement of operations as finance
income or expenses, net. See also Note 3.a.n.
    
    Revenue recognitionThe Companys subsidiaries generate revenues mainly from product sales and
services.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 n.
    
    Revenue recognition (Cont.)Revenues from product sales are generally recognized in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB
104), when delivery has occurred, persuasive evidence of an agreement exists, the
vendors fee is fixed or
determinable, no further obligation exists and collectability is deemed probable
by management. When a sales arrangement includes customer acceptance provisions,
revenue is not recognized before the subsidiary has demonstrated that the criteria
specified in the acceptance provisions have been satisfied.Revenues from service contracts are recognized over the life of the service
contracts.o.
    
    Research and development costsResearch and development costs, net of grants received, are charged to the
statement of operations as incurred. SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the subsidiaries product
development process, technological feasibility is established upon completion of a
working model. Costs, incurred by the Companys subsidiaries between completion of
the working models and the point at which the products are ready for general
release, have been insignificant. Therefore, research and development costs are
charged to the statement of operations, as incurred.p.
    
    Advertising costsAdvertising costs are charged to the consolidated statement of operations as
incurred.q.
    
    Royalty-bearing grantsRoyalty-bearing grants from the Government of Israel and other governmental
institutions for funding approved research and development projects are recognized
at the time the subsidiary is entitled to such grants, on the basis of the costs
incurred. Such grants are included as a deduction of research and development
costs, since at the time received it is not probable that they will be repaid.Research and development grants received by certain of the Companys subsidiaries
in 2008 amounted to $2,445 (2007  $1,038, 2006  $1,982).r.
    
    Income taxes
 1.
    
    The Company and its subsidiaries account for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes (FAS 109). This
Statement prescribes the use of the liability method whereby deferred tax assets
and liability account balances are determined for loss carryforwards and other
temporary differences between financial reporting and tax bases of assets and
liabilities, using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The Company and its subsidiaries
provide a valuation
allowance, if necessary, to reduce deferred tax assets to the amount that is more
likely than not to be realized.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 r.
    
    Income taxes (Cont.)
 2.
    
    In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 utilizes a two-step
approach for evaluating tax positions. Recognition (step one) occurs when
an enterprise concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step two)
is only addressed if step one has been satisfied (i.e., the position is
more-likely-than-not to be sustained) otherwise a full liability in respect of a
tax position not meeting the more-than-likely-than-not criteria is recognized.
Under step two, the tax benefit is measured as the largest amount of benefit,
determined on a cumulative probability basis, that is more-likely-than-not to be
realized upon ultimate settlement.FIN 48 applies to all tax positions related to income taxes subject to FAS 109.
This includes tax positions considered to be routine as well as those with a
high degree of uncertainty.FIN 48 has expanded disclosure requirements, which include a tabular roll forward
of the beginning and ending aggregate unrecognized tax benefits as well as
specific detail related to tax uncertainties for which it is reasonably possible
the amount of unrecognized tax benefit will significantly increase or decrease
within twelve months. (See also Note 14).
 s.
    
    Income (loss) per shareBasic net income (loss) per share is computed based on the weighted average number
of ordinary shares outstanding during each year. Diluted net income (loss) per
share is computed based on the weighted average number of ordinary shares and
ordinary share equivalents outstanding during the year; ordinary share equivalents
are excluded from the computation if their effect is anti-dilutive.t.
    
    Stock based compensationThe Company applies SFAS No. 123(R), Share-Base Payment (SFAS 123(R), which
requires the measurement and recognition of compensation expenses based on
estimated fair value for all shared based payment awards made to employees and
directors.In December 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (SAB
110), which became effective on January 1, 2008. SAB 110 amends and replaces
Staff Accounting Bulletin No. 107 (SAB 107), Share-Based Payment. SAB 110
expresses the views of the SEC staff regarding the use of a simplified method in
developing an estimate of expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share-Based Payment. Under the
simplified method, the expected term is calculated as the midpoint between the
vesting date and the end of the contractual term of the option. The use of the
simplified method, which was first described in SAB 107, was scheduled to expire
on December 31, 2007. SAB 110 extends the use of the simplified method for
plain vanilla awards in certain situations. The SEC staff does not expect the
simplified method to be used when sufficient information regarding exercise
behavior, such as historical exercise data or exercise information from external
sources, becomes available.The adoption of SAB 110 did not have any effect on the Companys financial
statements.The Company recognizes compensation expenses for the value of its awards over the
requisite service period of each of the awards using the straight line method.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 t.
    
    Stock based compensation (Cont.)The fair value of stock 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, 2007 and 2006:
 2008
    
    
    2007
    
    
    2006Risk-free Interest Rate
    
    
    2.40
    %
    
    
    4.61
    %
    
    
    4.75
    %Expected Dividend Yield1
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected Volatility2
    
    
    31.1
    %
    
    
    33
    %
    
    
    38
    %Expected Lives3
    
    
    3.69
    
    
    
    4.25
    
    
    
    2.8
 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.3
    
    The Company determined the expected life of the options according to
vesting and exercise terms of the options based on the simplified method when
applicable. The Companys additional disclosures required by SFAS 123R are provided in Note
16.Call options granted to employees to purchase shares in subsidiaries, affiliates
and other companies are recorded at fair value at each reporting date using the
Black-Scholes option-pricing model. The fair value of the call option is recorded
as a liability and changes in the liability are recorded as compensation expenses
in the statement of operations.u.
    
    Comprehensive incomeComprehensive income (loss) consists of net income (loss) and other gains and
losses affecting shareholders equity that under generally accepted accounting
principles are excluded from the net income (loss). For the Company, such items
consist of unrealized gains and losses on available for sale securities and
foreign currency translation adjustments (See Note 23).v.
    
    Severance payThe Companys and some of its subsidiaries liability for severance pay, with
respect to their Israeli employees, is calculated pursuant to Israeli severance
pay law and employee agreements based on the most recent salary of the employees.
The Companys liability for all of its Israeli employees is provided for by
monthly deposits with insurance policies and by an accrual. The value of these
policies is recorded as an asset in the Companys balance sheet.Some subsidiaries agreements with employees, specifically state, in accordance
with section
14 of the Severance Pay Law -1963, that the Companys contributions for severance
pay shall be instead of severance compensation and that upon release of the policy
to the employee, no additional calculations shall be conducted between the parties
regarding the matter of severance pay and no additional payments shall be made by
the Company to the employee.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 v.
    
    Severance pay (Cont.)Further, for companies which have signed section 14, related obligation and
amounts deposits on behalf of such obligation, are not stated on the balance
sheet, as they are legally released from obligation to employees once the deposit
amounts have been paid.The deposited funds include profits or losses accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligations pursuant to Israeli severance pay law or labor agreements.Severance pay expenses for the years ended December 31, 2008, 2007 and 2006
amounted to $1,750, $920, and $833, respectively.w.
    
    Fair value of financial instrumentsSFAS No. 107, Disclosure about Fair Value of Financial Instruments, requires
disclosure of an estimate of the fair value of certain financial instruments. The
Companys financial instruments consist of cash and cash equivalents, marketable
securities, foreign currency hedging instruments, short-term deposits and
debentures, trade receivables, other receivables, trade payables, other payables,
short-term and long-term bank loans and long-term loans from shareholders. The
estimated fair value of these financial instruments approximates their carrying
value as of December 31, 2008 and 2007, unless otherwise stated. The estimated
fair values have been determined through information obtained from market sources
and management estimates.The carrying amounts of long term receivables and investments in non-public
companies which were presented as investment in other companies, were $70,844 and
$70,753 at December 31, 2008 and 2007, respectively, and they represent the
original cost, net of any impairment charges since the dates of acquisition.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
157 establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value, and requires additional disclosures about fair
value measurements. SFAS 157 applies only to fair value measurements that are
already required or permitted by other accounting standards. The adoption of SFAS
157 did not have material effect on the Companys financial statements (see Note
25).In February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in
financial statements at fair value on a recurring basis (that is, at least
annually).  For purposes of applying the FSP 157-2, nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or a financial liability in FASB
Statement
159.   FSP 157-2 defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years
for items within the scope of this FSP 157-2. The adoption of FSP 157-2 will be
prospective to new acquisitions and impairment test required on long lived assets.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 w.
    
    Fair value of financial instruments (Cont.)In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP 157-3).
FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair value
of a financial asset when the
market for that financial asset is not active. FSP 157-3 is effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in
accounting estimate following the guidance in FASB Statement No. 154, Accounting
Changes and Error Corrections (SFAS 154). However, the disclosure provisions in
SFAS 154 for a change in accounting estimate are not required for revisions
resulting from a change in valuation technique or its application. The adoption of
FSP 157-3 did not have a material impact on the Companys financial position or
results of operations.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159), which permits
companies to choose to measure certain financial instruments and other items at
fair value that are not currently required to be measured at fair value which will
be determined according to SFAS 157 mentioned above. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company did not use the fair
value option of SFAS 159 in its financial statements.x.
    
    Concentrations of credit riskFinancial instruments that potentially subject the Company and its subsidiaries to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term bank deposits, marketable debentures and trade receivables.Cash and cash equivalents and bank deposits are invested mainly in U.S. dollars
with major banks in the United States and Israel.Trade receivables are derived from sales to large organizations located mainly in
the United States, Asia Pacific, Israel and Europe. The Companys subsidiaries
perform ongoing credit evaluations of its customers and to date has not
experienced any material losses. In certain circumstances, the Companys
subsidiaries may require a letter of credit other collateral or additional
guarantees. An allowance for doubtful accounts is determined with respect to
specific receivables whose collection may be doubtful.As of the balance sheet date there is no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option contracts
or other foreign hedging arrangements.y.
    
    Recently issued accounting pronouncements
 i.
    
    In December 2007, the FASB issued SFAS 141(R), Business
Combinations (SFAS 141(R)). This Statement replaces SFAS 141, Business
Combinations, and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a
business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair values
(or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS
141(R)s requirement to measure the noncontrolling interest in the acquiree at
fair value will result in recognizing the goodwill attributable to the
noncontrolling interest in addition to that attributable to the acquirer.
 
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 y.
    
    Recently issued accounting pronouncements (Cont.)
 SFAS 141(R) also amends SFAS No. 109, Accounting for Income Taxes, to require
the acquirer to recognize changes in the amount of its deferred tax benefits
that are recognizable because of a business combination either in income from
continuing operations in the period of the combination or directly in contributed
capital, depending on the circumstances. It also amends SFAS 142, Goodwill and
Other Intangible Assets, to, among other things; provide guidance on the
impairment testing of acquired research and development intangible assets and
assets that the acquirer intends not to use.SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. As such, the adoption of SFAS 141R is not
expected to have any effect on accounting for current subsidiaries. However, SFAS
141(R) provisions will be applied on future business combinations and future
purchase of additional holdings in current subsidiaries.ii.
    
    In December 2007, the FASB issued SFAS 160, Noncontrolling Interests
in Consolidated Financial Statements (SFAS 160). SFAS 160 amends ARB 51,
Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest (previously minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS 160 requires
that a parent recognizes a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS
160 is effective for fiscal periods, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The adoption of FAS 160 will
affect certain aspects of our accounting for subsidiaries and non controlling
interest mainly in allocation of losses to non controlling shareholders,
accounting for consolidating and de consolidating subsidiaries, recognition of a
gain upon a change of ownership in development stage investees and classification
of non controlling interests as part of equity.iii.
    
    In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an amendment to FASB Statement No.
133. SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash flows.
Entities are required to provide enhanced disclosures about: (a) how and why an
entity uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entitys financial position, financial performance, and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008, with early adoption encouraged. The adoption of this statement
will not have a material effect on the Companys financial statements.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 y.
    
    Recently issued accounting pronouncements (Cont.)
 iv.
    
    In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity
with generally accepted accounting principles in the United States. It is
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of this statement will not have a material effect on the
Companys financial statements.v.
    
    In April 2008, the FASB issued FSP 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. The Company does not expect the adoption of FSP
142-3 will have a material impact on the Companys consolidated financial
position, results of operations and cash flows.vi.
    
    In June 2008, the FASB issued EITF No. 07-5 Determining whether an
Instrument (or Embedded Feature) is indexed to an Entitys Own Stock (EITF
07-5). EITF 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years.
Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Companys own stock and (b) classified in stockholders equity
in the statement of financial position would not be considered a derivative
financial instrument. EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to an
issuers own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception. The adoption of this statement is not expected to have a material
effect on the Companys consolidated financial position, results of operations and
cash flows.vii.
    
    In November 2008, the FASB issued EITF Issue No. 08-6, Equity-Method
Investment Accounting(EITF 08-6) which concludes that the cost basis of a new
equity-method investment would be determined using a cost-accumulation model,
which would continue the practice of including transaction costs in the cost of
investment and would exclude the value of contingent consideration. Equity-method
investment should be subject to other-than-temporary impairment analysis. It also
requires that a gain or loss to be recognized on the portion of the investors
ownership sold. EITF 08-6 will be effective for the reporting period beginning
after December 15, 2008. As such, the adoption of EITF 08-6 is not expected to
have any effect on accounting for current investments accounted under the equity
method. However, EITF 08-6 provisions will be applied on future purchase of new
investments or additional holdings in current investments accounted under the
equity method.viii.
    
    In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly, (the
FSP). The FSP provides additional authoritative guidance to assist both issuers
and users of financial statements in determining whether a market is active or
inactive, and whether a transaction is distressed. The FSP will be effective for
the quarter ending June 30, 2009. The adoption of the FSP will not have a material
effect on the Companys financial statements.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 ix.
    
    In June 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R) (SFAS No. 167). SFAS No. 167 seeks to improve financial
reporting by enterprises involved with variable interest entities. SFAS No. 167 is
applicable for annual periods after November 15, 2009 and interim periods therein
and thereafter. The Company has not determined the impact, if any SFAS No. 167
will have on the companys consolidated financial statements.
 NOTE 3:-
    
    BUSINESS COMBINATIONS, SALE OF BUSINESSES AND CHANGE IN HOLDINGS IN SUBSIDIARIES
 a.
    
    StarlingStarling 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.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 following determination by the Court.
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. 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.Starling is considered a development stage company. Accordingly, the changes
in Elrons proportional shares of Starlings equity described above, resulting from
the decrease in Elrons shares in Starling, have been accounted for as an equity
transaction in accordance with SAB 51 and as a result a capital reserve of
approximately $3,300 (approximately $2,480 net of minority interest) was recorded.In September 2008, Starling announced (based in part on a legal opinion received
from its outside legal counsel) that it reached the milestone under which it may
use the proceeds of the Convertible Debentures. There was a dispute between
Starling and some of the debenture holders relating to satisfaction of the
milestone and therefore Starlings entitlement to the proceeds from the Convertible
Debentures. In addition, these Convertible Debenture holders requested the
immediate repayment of the Convertible Debentures. This matter, among others, was
brought before the District Court in Tel Aviv, Israel (the Court) which
determined that there is no basis for immediate repayment of the Convertible
Debentures and ordered the trustee to transfer the Convertible Debentures Proceeds.
On December 4, 2008 the trustee released approximately NIS 40,000 (approximately $
10,500) representing the Convertible Debenture proceeds.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 3:-
    
    BUSINESS COMBINATIONS, SALE OF BUSINESSES AND CHANGE IN HOLDINGS IN SUBSIDIARIES (Cont.)
 a.
    
    Starling (Cont.)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 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. Regarding loss resulting from early
redemption, see note 21.According to SFAS No. 133 Accounting For Derivative instruments And Hedging
Activities (FAS 133) as amended by SFAS 155 Accounting For Certain Hybrid
Financial Instruments (FAS 155) and according to FASB staff position FAS 150-5
Issuers Accounting under FASB statement No. 150 for Freestanding Warrants and
Other Similar Instruments on Share that are Redeemable the Convertible Debentures
and the Convertible Debentures Options are to be presented, in each reporting
period, at their fair value in the balance sheet and the changes in fair value will
be charged to the statement of operations as finance income (loss) finance income
or expenses, net. As of December 31, 2008 the minority portion in the Convertible
Debentures amounted to $2,561.The minority portion of the outstanding Convertible Debentures was classified in
the consolidated balance sheet under long term liabilities and amounted to $2,561
as of December 31, 2008.During May 2009, subsequent to the balance sheet date, Elron and RDC signed a
convertible loan agreement in the aggregate amount of $2,600 which will be advanced
to Starling in 2 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) will be advanced during July, 2009.b.
    
    MedingoMedingo Ltd. (Medingo) is developing solutions specifically for the needs of
insulin-dependent diabetic patients. Medingos device is a miniature dispensing
patch, which is convenient, easy to use, discreet and more cost-effective than
standard insulin pumps.In November 2007 (the closing date), Medingo, then wholly owned by RDC,completed
a financing round of approximately $29,000 in consideration for 74,966 series A
preferred shares pursuant to which Elron undertook to invest $22,200 and was
granted an option to invest an additional $1,900 and a U.S. venture capital fund
(The U.S. VC) and others, undertook to invest $5,100. The investment was in two
installments the first, in the amount of $ 16,700 of which Elron invested $14,200
(including $4,200 conversion of convertible loans, previously granted to Medingo by
Elron and approximately $1,000 as a result of the exercise of the option granted to
Elron) and the U.S. VC invested $2,500.In addition RDC also converted previously granted loans of approximately $2,000
into ordinary shares of Medingo.The agreement provided that Elron was entitled to transfer all or a portion of its
unpaid shares in the amount of up to $9,000, and the rights related thereto to
Rafael Advanced Defense Systems Ltd. (Rafael), (the other shareholder of RDC)
and/or to RDC, in each event, at Rafaels discretion and instruction.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 3:-
    
    BUSINESS COMBINATIONS, SALE OF BUSINESSES AND CHANGE IN HOLDINGS IN SUBSIDIARIES (Cont.)
 b.
    
    Medingo (cont.)During February 2008, Elron, Rafael and RDC, executed an agreement according to
which Rafael agreed to transfer $9,000 to RDC for the purpose of investing in
Medingo, and Elron agreed to assign a portion of its investment in Medingo in the
amount of $9,000 which it already invested as part of the first installment, to RDC
such that $18,000 of the total investment in Medingo will be considered an
investment by RDC.During February 2008, RDC, Elron and the U.S. VC and others invested the second
installment in the amount of $9,000, $ 1,000 and $ 2,550, respectively.As a result of the above agreement Elrons and RDCs holdings in Medingo are 7% and
70%, respectively on a fully diluted basis and on an as converted basis and 9% and
84%, respectively on an outstanding basis and on an as converted basis.The excess of the purchase price over the share in the equity acquired by the
Company on a consolidated basis with RDC amounted to $ 2,300 and was allocated to
in process research and development activities (IPR&D).The write off of the IPR&D is included as part of amortization of intangible
assets and acquired in-process-research and development write-off in the 2007
statement of operations.During February 2009, subsequent to the balance sheet date, the shareholders of
Medingo, including Elron and RDC signed a convertible loan agreement in the
aggregate amount of $5,500 which was granted to Medingo in 2 installments. The
first installment in the amount of $1,200 (of which Elrons and RDCs share was
approximately $100 and $1,000, respectively) was granted immediately. 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.Since RDC controls Medingo, Elron continues to consolidate Medingos financial
statements in Elrons consolidated financial statements.The minority interest presented in the balance sheet includes an amount of $5,100
which was invested by the U.S. VC and others as above mentioned.c.
    
    WavionWavion Inc. (Wavion) is a developer of broadband wireless access systems for
Wi-Fi networks. In each of 2005 and 2006, Elron invested approximately $1,400 in
Wavion in consideration for 1,696,728 Series B preferred shares in each year, out
of an aggregate amount of $3,600 invested each year in Wavion by existing
shareholders. As a result, Elrons share in Wavion increased from 37.5% to 38% in
2006.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 3:-
    
    BUSINESS COMBINATIONS, SALE OF BUSINESSES AND CHANGE IN HOLDINGS IN SUBSIDIARIES (Cont.)
 c.
    
    Wavion (Cont.)During the third quarter of 2007, Elron together with certain other stockholders
(Participating Stockholders) signed a stock purchase agreement (the Series A
purchase agreement) with Wavion relating to an aggregate investment of up to
$10,000, in three separate installments, of which an aggregate of $3,600 was
invested immediately in consideration for Series A preferred shares, of which Elron
invested approximately $1,700. The remaining balance of the investment was to be
invested by the Participating Stockholders pro rata to their holdings in Wavion, in
two installments, during 2007 (subsequently delayed to the first quarter of 2008)
and 2008 respectively. As part of the financing, all previously existing series of
preferred shares were converted into ordinary shares. In addition, the
Participating Stockholders purchased the shares held by another shareholder in
Wavion on a pro-rata basis.During March and June 2008, Elron together with another shareholder of Wavion, in
accordance with the Series A Purchase Agreement , invested the second and third
installments, each in the amount of $3,200 of which Elron invested in each
installment approximately $2,000. In addition, concurrently with the second
installment, Elron together with such other shareholder purchased all the shares
then held by a former stockholder in Wavion (Purchased Shares), of which Elron
purchased 75% of such Purchased Shares.Following the above transactions, Elron held approximately 57% of the outstanding
and as converted share capital of Wavion.Wavion is considered to be a variable interest entity. The Company is the primary
beneficiary of Wavion and accordingly has consolidated Wavion at fair value as
required by FIN 46, commencing the end of the first quarter of 2008. According to
SFAS 142,Goodwill and Other Intangible Assets a purchase price allocation
analysis (PPA) was preformed. According to the PPA an amount of approximately
$2,000 was allocated mainly to intangible asset such as technology. The amount
allocated to the above technology is amortized on a straight-line basis over the
technology expected useful life of 5 years.In December 2008, Elron together with the other shareholder of Wavion, invested
additional $3,000 in consideration for 7,672,633 Preferred A shares. The Investment
was granted in four installments, of which the first installment was invested
immediately, the second, third and fourth installments were invested in February,
April and June 2009, respectively. Elrons share in the above-mentioned round
amounted to approximately $1,900 in consideration for 4,908,557 Preferred A shares.Following the above mentioned transactions, Elron holds approximately 64% of the
outstanding and as converted share capital of Wavion. Wavion continues to be
consolidated in Elrons financial statements.d.
    
    Rafael Development Corporation Ltd. (RDC)RDC establishes and develops industrial projects and companies based on Rafaels
technological capabilities.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 3:-
    
    BUSINESS COMBINATIONS, SALE OF BUSINESSES AND CHANGE IN HOLDINGS IN SUBSIDIARIES (Cont.)
 d.
    
    Rafael Development Corporation Ltd. (RDC) (Cont.)In December 2007, Elron, DEP, RDC and Rafael signed an agreement (the Addendum)
which came into effect on January 1, 2008, and subsequently approved by the court,
amending the existing agreement between the parties pertaining to the rights
granted to RDC to commercialize certain technologies of Rafael and settling the
above-mentioned claim filed by Rafael against RDC and DEP in September 2006.
Pursuant to the Addendum, RDCs rights to commercialize certain technologies of
Rafael will continue without time restrictions. Elron has made a one time
investment in RDC of $4,000 and has committed to make further investments of $750
in RDC for each company established by RDC based on Rafaels technologies. The
Addendum settles all claims between Rafael and RDC and DEP as well as resolves many
other issues which will facilitate cooperation between the parties.In 2008, RDC established two new companies, each of which is based on Rafaels
technologies. Pursuant to the terms of the Addendum, the Company invested $1,500 in
RDC.The excess of the $5,500 invested in RDC over the increase in Elrons portion of
RDCs equity, in the amount of $2,700 was allocated to the agreement with Rafael as
intangible asset with indefinite life which is not subject to amortization.Regarding loan granted to RDC see Note 13b.e.
    
    ImpliantImpliant 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 granted a convertible loan in the amount $6,000 to Impliant
as part of an aggregate convertible loan of $10,000 in two installments. The first
installment in the amount of $5,000 was granted immediately and the second was
granted in June 2008 following Impliants achievement of a certain milestone as
stipulated in the loan agreement.Impliant is considered to be a variable interest entity. The Company is the primary
beneficiary of Impliant and accordingly has consolidated Impliant at fair value as
required by FIN 46 commencing the end of the first quarter of 2008. According to
SFAS 142,Goodwill and Other Intangible Assets a purchase price allocation
analysis (PPA) was preformed. According to the PPA an amount of approximately
$4,500 was allocated to in process research and development (IPR&D). Impliants
products which did not receive marketing clearance by the relevant regulatory
authorities as of the acquisition date were considered to be incomplete and
accordingly the amount allocated to such products is considered to be IPR&D.The total amount allocated to IPR&D was charged immediately to the Companys
results of operations and was included as part of Amortization of intangible
assets and acquired in- process-research and development write-off in the
statement of operations.Upon conversion of part of the convertible loan, and in the event a
recapitalization should occur, the Company will hold approximately 46% of Impliant
on a fully diluted basis.As a result of material adverse events in connection with Impliants main product,
during clinical trials, which occurred during 2007, Impliant temporarily ceased FDA
clinical trials. After the reassessment, Impliant renewed its clinical trials in
2008. The event caused a delay in bringing its product to the market and required
additional financing. As a result, an impairment charge in the amount of $8,340 was
recorded in 2007.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 4:- CASH AND CASH EQUIVALENTS
 Includes bank deposits in U.S. dollars, bearing an annual weighted average interest rate
of 0% per annum (December 31, 2007  4.66%) and bank deposits denominated in NIS bearing
an annual weighted average interest rate of 0% per annum (December 31, 2007  3.67%).
 NOTE
5: - SHORT-TERM INVESTMENTS
 Annual WeightedAverageInterest rate as ofDecember 31, 2008
    
    
    December 31,%
    
    
    2008
    
    
    2007Bank deposits
    
    
    
    
    
    
    
    
    
    
    16,900
    
    
    $
    
    
    
    $
    16,900
 NOTE
6: - AVAILABLE FOR SALE MARKETABLE SECURITIES
 Annual WeightedAverageInterest rate as ofDecember 31, 2008
    
    
    December 31,%
    
    
    2008
    
    
    2007Available-for-sale securities: (1)(2)U.S. government agencies and corporate
debentures
    
    
    
    
    
    $
    
    
    
    $
    29,730(1) Includes unrealized gain
    
    
    
    
    
    $
    
    
    
    $
    437(2) Includes unrealized loss
    
    
    
    
    
    $
    
    
    
    $
    (186
    )
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES
 a.
    
    Affiliated companies are as follows (see also Annex to financial
statements):
 December 31,2008
    
    
    2007Consolidated % ofNote
    
    
    outstanding share capitalGiven Imaging
    
    
    7.d.1.
    
    
    
    32.4
    
    
    
    27.4ChipX
    
    
    
    
    
    
    28.1
    
    
    
    29.1Wavion
    
    
    3.c.
    
    
    
    
    
    
    
    49.5Galil
    
    
    7.d.2.
    
    
    
    29.0
    
    
    
    29.03DV
    
    
    7.d.3.
    
    
    
    50.6
    
    
    
    63.2NetVision
    
    
    7.d.4.
    
    
    
    15.8
    
    
    
    16.0Ellara
    
    
    
    
    
    
    
    
    
    
    36.6Oncura
    
    
    7.d.5.
    
    
    
    
    
    
    
    Notal Vision
    
    
    
    
    
    
    22.5
    
    
    
    23.3Kyma (through convertible loans)
    
    
    
    
    
    
    
    
    
    
    Aqwise
    
    
    
    
    
    
    34.0
    
    
    
    34.0Radlive
    
    
    
    
    
    
    29.1
    
    
    
    29.1
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 b.
    
    Composition of investments: (1)(2)
 December 312008
    
    
    2007Given Imaging
    
    
    109,218
    
    
    
    89,969Netvision
    
    
    33,234
    
    
    
    30,293Others
    
    
    5,955
    
    
    
    11,269$
    148,407
    
    
    $
    131,351(1) Includes loans and
convertible loans (bearing a weighted
average interest rate of 2.38% per
annum (December 31, 2007  6.58%))
    
    $
    2,492
    
    
    $
    1,486(2) Difference between the
carrying amounts ofinvestments and the Companys
share in the net equity of affiliates,
generally attributed to technology,
goodwill and other intangible assets
    
    $
    71,050
    
    
    $
    63,417
 c.
    
    Fair market value of publicly traded companies:
 December 31Stock Exchange
    
    2008
    
    
    2007U.S. dollars in millionsGiven Imaging
    
    Tel-Aviv and NASDAQ
    
    $
    78.4
    
    
    $
    186.1Netvision
    
    Tel-Aviv
    
    
    29.7
    
    
    
    53.0
 d.
    
    Additional information
 1.
    
    GivenGiven 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.During August 2006 and May 2007, Elron purchased, in a series of open market
transactions, 539,721 and 717,366, respectively, ordinary shares of Given,
for an aggregate purchase consideration of approximately $10,000 and $18,700
respectively. As a result of the transactions, Elrons direct and indirect
ownership interest in Given increased from approximately 19.3% to
approximately 21.2% and 23%, respectively, of Givens outstanding ordinary
 shares.In parallel transactions, DIC purchased the same number of shares of
Given for the same aggregate consideration in both transactions, increasing
its holdings from approximately 12.4% to approximately 14.3% and 16%,
respectively, of Givens outstanding ordinary shares.The excess of the purchase price over the Companys share in the equity
acquired amounted to approximately $8,100 and $16,100, respectively, and was
allocated as follows: approximately $6,300 and $8,300, respectively, to
intangible assets other than goodwill, such as customer relationships and
technology, approximately $1,000 and $1,400, respectively, to IPR&D and
approximately $800 and $6,400, respectively, to
goodwill. The amounts allocated to intangible assets other than goodwill are
amortized on a straight-line basis over their weighted average expected
useful life of 10.5 and 10 years, respectively.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 d.
    
    Additional information (Cont.)
 1.
    
    Given (Cont.)The amount allocated to IPR&D was charged immediately to the statements of
operations in accordance with FASB Interpretation No. 4, Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method (FIN 4). The amortization of the identifiable intangible assets as
well as the write-off of the IPR&D are included as part of the line item
Equity in losses of affiliated companies in the statements of operations of
2006 and 2007.On June 20, 2008 Elron completed its tender offer to purchase 1,462,640
ordinary shares of Given Imaging, representing 5% of the issued and
outstanding Given Imaging shares, for $16.54 per share, net to the seller in
cash in an amount totaling approximately $24,500 (including approximately
$300 tender offer costs). After the transaction and as of December 31, 2008,
the Companys direct and indirect share in Given Imaging increased to
approximately 27.8% of Given Imagings issued and outstanding shares (32.4%
in aggregate) and to approximately 26.9% on a fully diluted basis. DIC holds
16.1% of Given Imaging. Therefore the Company together with DIC
and RDC hold approximately 48.5% of the issued and outstanding shares of
Given Imaging as of December 31, 2008.The excess of the purchase price over the Companys share in the equity
acquired amounted to approximately $18,000, and was allocated as follows:
approximately $12,600, to intangible assets other than goodwill, such as
technology, approximately $800 to IPR&D which was charged immediately to the
statements of operations and
approximately $4,600, to goodwill. The amounts allocated to intangible
assets other than goodwill are amortized on a straight-line basis over their
weighted average expected useful life of 15 years.Subsequent to the balance sheet date, on February 10, 2009, Given declared a
special cash dividend of approximately $0.54 per share, or $16,000 in the
aggregate, of which the Companys and RDCs share is approximately $3,700 and
$1,400, respectively. Payment of this dividend was distributed on March 10,
2009.As of December 31, 2008, the carrying amount of the Companys
investment in Given exceeded its market value. However, the Company evaluated
the prospects of the investee in relation to the severity and duration of the
impairment. Based on that evaluation and the Companys current ability and
intent to maintain that investment until an anticipated recovery of fair
value, the Company does not consider that investment to be
other-than-temporarily impaired.2.
    
    GalilGalil Medical Ltd. (Galil) develops, manufactures and markets cryotherapy
platform incorporating powerful freezing technology and proprietary needle
design for minimally invasive treatments for various clinical applications.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 d.
    
    Additional information (Cont.)
 2.
    
    Galil (Cont.)On December 8, 2006 Galil has completed a $40,000 financing in consideration
for 74,962,166 preferred A1 shares, led by U.S. venture capital funds namely
(the new investors). As part of the financing round, the new investors
purchased shares from certain existing shareholders of Galil, for
approximately $8,000 of which approximately $2,650 were purchased from
Elrons subsidiary, RDC. In addition, loans in the amount of approximately
$3,600 previously granted to Galil by Elron, RDC and DIC, were converted into
6,746,596 preferred A2 shares of Galil of which Elrons share was
approximately $1,400 and RDCs share was approximately $800. The sale of the
 shares in RDC and the conversion of the loans granted by RDC and Elron were
done as part of the same transaction. Accordingly, only the cash received in
excess of the converted loans represents consideration for the sale of
Galils shares by RDC. As a result, a gain in the amount of approximately
$600 was recorded ($0 net of minority interest since the converted loans
exceeded the cash received on a consolidated basis).
Following the above transactions, Elron and RDC holds approximately 12% and
17%, respectively, of Galils outstanding shares. As a result of the decrease
in Elrons and RDCs interest in Galil, Elron ceased to consolidate Galils
financial statements.On December 8, 2006 Galil also completed the sale of its 25% interest in
Oncura Inc (Oncura) to Oncuras 75% shareholder, and purchased from Oncura
the urology related cryotherapy business for a net consideration of $20,000.
Following the transaction, the cryotherapy business is solely owned and
operated by Galil. Galil recorded the additional 75% of the cryotherapy
business purchased, based on its fair value. As a result of the sale of
Oncura and the purchase of the cryotherapy business, Galil recorded loss in
the amount of approximately $1,700 (not including transaction costs). Elrons
share in the above loss amounted to approximately $600, included as
part of the line item Equity in losses of affiliated companies in the
statements of operations.On November 10, 2008, Galil Medical Ltd announced that it signed a definitive
merger agreement with Endocare, Inc. (Nasdaq:ENDO). Galil and Endocare
announced that the terms of the definitive merger agreement called for a
stock-for-stock merger transaction. Subsequent to the balance sheet date, in
a June 5, 2009, letter to Galil, Endocare purported to terminate the merger
agreement by asserting that conditions to closing the merger had become
incapable of fulfillment because the U.S. Federal Trade Commission (FTC)
had refused to close its ongoing examination of the merger.  Galil has
rejected that assertion, noting that discussions with the FTC Commissioners
and Staff were continuing. On June 8, 2009, subsequent to the balance sheet
date, Endocare announced that it had terminated the merger agreement and
announced further that HealThtronics, Inc. had agreed to acquire Endocare.
Galil Medical has filed separate law suits in the Delaware courts against
each of Endocare and HealthTronics, Inc in connection with Endocares
purported termination of the merger agreement between Galil and Endocare and
HealthTronics, Incs proposed acquisition of Endocare. There is no assurance
as to the outcome of these suits.3.
    
    3DV3DV Systems Ltd. (3DV) develops a unique video camera technology
capable of capturing the depth dimension of objects in real time.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 d.
    
    Additional information (Cont.)
 3.
    
    3DV (Cont.)On December 12, 2006, 3DV completed a financing round of $20,100, led by new
investors, a leading U.S venture capital fund, and Pitango Venture Capital, a
leading Israeli venture capital fund, which was granted in two separate
installments. The first installment, in the amount of $14,100, was invested
immediately and the second installment, in the amount of $6,000 was invested
in April 2008. During the financing round, Elron and RDC invested $2,900 and
$3,900, respectively (including conversion of previously granted convertible
loans). Following the completion of the investment, Elrons and RDCs
holdings in 3DV, decreased from 29.9% and 44.8% to approximately 17.3% and
24.7%, respectively, of the shares of 3DV on a fully diluted and on an as
converted basis (from approximately 35.7% and 53.5% to approximately 20.8%
and 29.8%, respectively, on an outstanding basis and on an as converted
basis). Since following the above mentioned financing round, Elron lost
control over 3DV, Elron ceased to consolidate 3DVs financial statements and
the investment in 3DV was accounted for under the equity method. Since the
Companys and RDCs investment and conversion of loans was to preferred B
 shares and since the Companys and RDCs investment in the converted loans
was reduced to zero through the losses of 3DV, gain in the amount of $3,500
($2,500 net of minority interest) was recorded in 2006 in order to reflect
its share in the preferred B share capital.3DV is considered to be a variable interest entity, however, the Company is
not the primary beneficiary of 3DV, and accordingly has not consolidated 3DV.
As of December 31, 2008, the Company does not have any exposure to loss as a
result of its investment in 3DV since the carrying amount of its investment
in 3DV is negative.Subsequent to the balance sheet date, on June 2, 2009 Elron announced
that 3DV completed the sale of substantially all of its assets to a third
party. Pursuant to the terms of the definitive agreement, following the
payment of certain expenses, proceeds to be distributed to Elron and RDC are
expected to be up to approximately $3,000 and $4,000, respectively.4.
    
    NetVisionNetVision Ltd. (NetVision) provides Internet services and solutions in
Israel and international telephony services through Voice over IP technology.On January 25, 2007, NetVision, then held 36% by Elron and 36% by DIC,
completed the merger with Barak I.T.C (1998) International Telecommunications
Services Corp Ltd. (Barak) and the merger with GlobCall Communications Ltd.
(Globcall), following which NetVision purchased from Barak shareholders all
of Baraks issued share capital in exchange for approximately 46.5% of NetVisions share
capital immediately after the transaction (Barak Merger), and from DIC, all
of GlobCalls issued share capital in exchange for approximately 7% of
NetVisions share capital
immediately after the Barak Merger and the transaction (GlobCall Merger).
Barak was a subsidiary of Clal Industries and Investments Ltd. (Clal).
Elron, Clal and DIC, are part of the IDB group. Following the transactions,
Elrons, DICs and Clals holdings in NetVision were approximately 18%, 25%
and 29%, respectively. The merger was recorded in NetVisions financial
statements based on the fair market value of NetVision ordinary shares
issued, according to the purchase method of accounting (according to US
GAAP). As a result of the Barak merger and GlobCall merger, Elron recorded
gain of approximately $10,300 ($9,100 net of tax).
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 d.
    
    Additional information (Cont.)
 4.
    
    NetVision (Cont.)
       5.
    
    Oncura
   35




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 e.
    
    Summarized information
 Summarized combined financial information is as follows:
 Given
    
    
    NetVision
    
    
    OtherDecember 31, 2008:Balance sheet information:Current assets
    
    $
    111,821
    
    
    $
    146,714
    
    
    $
    46,690Non-current assets
    
    
    66,094
    
    
    
    214,046
    
    
    
    35,066Total assets
    
    
    177,915
    
    
    
    360,760
    
    
    
    81,756Current liabilities
    
    
    26,667
    
    
    
    110,955
    
    
    
    23,704Non-current liabilities
    
    
    5,084
    
    
    
    32,716
    
    
    
    13,090Minority interest
    
    
    1,993
    
    
    
    2,354
    
    
    
    Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    59,676Shareholders equity (deficiency)
    
    
    144,171
    
    
    
    214,735
    
    
    
    (14,713
    )Year Ended December 31, 2008:Statement of operations information:Revenues
    
    $
    125,108
    
    
    $
    321,118
    
    
    $
    40,242Gross profit
    
    
    92,107
    
    
    
    36,129
    
    
    
    13,628Net income
    
    
    4,006
    
    
    
    24,653
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (37,192
    )
 Given
    
    
    NetVision
    
    
    Galil
    
    
    Ellara
    
    
    OtherDecember 31, 2007:Balance sheet information:Current assets
    
    $
    112,783
    
    
    $
    115,295
    
    
    $
    22,962
    
    
    $
    4,040
    
    
    $
    34,290Non-current assets
    
    
    64,533
    
    
    
    207,269
    
    
    
    30,085
    
    
    
    3,463
    
    
    
    8,900Total assets
    
    
    177,316
    
    
    
    322,564
    
    
    
    53,047
    
    
    
    7,503
    
    
    
    43,190Current liabilities
    
    
    37,787
    
    
    
    95,664
    
    
    
    7,906
    
    
    
    3,021
    
    
    
    18,056Non-current liabilities
    
    
    3,938
    
    
    
    43,954
    
    
    
    1,403
    
    
    
    40,554
    
    
    
    12,335Minority interest
    
    
    1,996
    
    
    
    2,230
    
    
    
    
    
    
    
    232
    
    
    
    Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,071Shareholders equity (deficiency)
    
    
    133,595
    
    
    
    180,716
    
    
    
    43,738
    
    
    
    (36,304
    )
    
    
    (40,272
    )Year Ended December 31, 2007:Statement of operations information:Revenues
    
    $
    112,868
    
    
    $
    293,112
    
    
    $
    25,622
    
    
    $
    4,833
    
    
    $
    34,887Gross profit
    
    
    78,304
    
    
    
    32,801
    
    
    
    17,362
    
    
    
    3,844
    
    
    
    11,008Net income
    
    
    15,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    (2,953
    )
    
    
    (9,269
    )
    
    
    (6,864
    )
    
    
    (29,911
    )
 f.
    
    Goodwill and intangible assets embedded in investments
     36




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 7:- INVESTMENTS IN AFFILIATED COMPANIES (Cont.)
 g.
    
    Impairment
  NOTE 8:- INVESTMENTS IN OTHER COMPANIES AND LONG-TERM RECEIVABLES
 December 312008
    
    
    2007Marketable securities presented as available- for- sale securities: (1)
    
    
    808
    
    
    
    2,965Partnerships
    
    
    1,667
    
    
    
    2,503Other investments and long-term receivables (2)(3)
    
    
    68,358
    
    
    
    68,250$
    70,833
    
    
    $
    73,718(1) Includes unrealized gains
    
    $
    58
    
    
    $
    1,708
 (2)
    
    During 2008 and 2007, Elron recorded impairment losses of
approximately $25,600 and $9,200, respectively, in respect of certain
investments and long term receivables. (see also Note 25)(3)
    
    Other investments include mainly the following companies (see
also Annex to financial statements): December 31,Note
    
    
    2008
    
    
    2007% of outstanding share capitalon an as converted basisJordan Valley
    
    
    
    
    
    
    19.6
    
    
    
    19.6Impliant
    
    
    3.e.
    
    
    
    
    
    
    
    22.3Nulens
    
    
    
    
    
    
    33.7
    
    
    
    33.7Teledata
    
    
    
    
    
    
    21.1
    
    
    
    21.1Brainsgate
    
    
    8(3)(a)
    
    
    
    25.3
    
    
    
    22.3Safend
    
    
    
    
    
    
    27.1
    
    
    
    26.0Neurosonix
    
    
    
    
    
    
    16.5
    
    
    
    16.5Atlantium
    
    
    8(3)(b)
    
    
    
    33.0
    
    
    
    29.8BPT
    
    
    8(5)
    
    
    
    30.0
    
    
    
    18.8Pocared
    
    
    8(3)(c)
    
    
    
    22.5
    
    
    
    17.4Enure
    
    
    
    
    
    
    38.6
    
    
    
    40.1Plymedia
    
    
    
    
    
    
    28.4
    
    
    
    
 (a)
    
    BrainsGate
    37




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 8:- INVESTMENTS IN OTHER COMPANIES AND LONG-TERM RECEIVABLES (Cont.)
 (3)
    
    Other investments include mainly the following companies (see
also Annex to financial statements): (Cont.)
 (a)
    
    BrainsGate (Cont.)
   (b)
    
    Atlantium
   
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 8:- INVESTMENTS IN OTHER COMPANIES AND LONG-TERM RECEIVABLES (Cont.)
 (4)
    
    Other investments include mainly the following companies (see
also Annex to financial statements): (Cont.)
 (c)
    
    Pocared
        (5)
    
    Impairment  see Note 25.
 (6)
    
    BPT and Plymedia (The companies) are considered to be a
variable interest entities, however, the Company is not the primary
beneficiary of the companies, and accordingly has not consolidated the
companies. As of December 31, 2008, the Companys maximum exposure to loss as
a result of its investment in the companies does not exceed the carrying
value of its investment in the companies in the amount of approximately
$5,800.
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 8:- INVESTMENTS IN OTHER COMPANIES AND LONG-TERM RECEIVABLES (Cont.)
 (7)
    
    Since the investment in Preferred shares of Nulens,
Teledata, Safend, BPT, Enure and PlyMedia were not considered to be an
investment that is in-substance-common stock, the investments in the
above-mentioned companies are accounted for under the cost method.
 (8)
    
    Total funds invested in investees by the company accounted
under the cost method amounted to $26,540, $14,793 and $25,153 in 2008, 2007
and 2006, respectively.
 NOTE 9:- PROPERTY AND EQUIPMENT, NET
 December 312008
    
    
    2007Land and Building (1)
    
    $
    
    
    
    $
    Leasehold improvements
    
    
    1,202
    
    
    
    838Computers, furniture and machinery
    
    
    9,414
    
    
    
    3,187Motor vehicles
    
    
    484
    
    
    
    53911,100
    
    
    
    4,564Less  accumulated depreciation
    
    
    6,518
    
    
    
    2,628Property and equipment, net
    
    $
    4,582
    
    
    $
    1,936
 (1)
    
    During June, 2007, Elbit sold its real estate in Carmiel, Israel, for approximately
$11,600. As a result, Elron recorded in the second quarter of 2007 a gain in the amount
of $5,500 (approximately $4,100 net of tax). The gain recorded is included in the line
item other income in the statement of operations.  NOTE 10:- GOODWILL AND OTHER INTANGIBLE ASSETS
 Period of
    
    
    December 31amortization
    
    
    2008
    
    
    2007yearsCost:Technology and other intangible assets (1)
    
    
    14
    
    
    $
    2,704
    
    
    $
    655Accumulated amortization:Technology and other intangible assets (1) (3)
(6)
    
    
    
    
    
    
    (598
    )
    
    
    (272
    )2,106
    
    
    
    383Intangible assets with indefinite useful life (7)
    
    
    
    
    
    
    5,351
    
    
    
    2,629Total other intangible assets
    
    
    
    
    
    $
    7,457
    
    
    $
    3,012Goodwill (2)
    
    
    
    
    
    $
    
    
    
    $
    2,512
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 10:- GOODWILL AND OTHER INTANGIBLE ASSETS (Cont.)
 1.
    
    The annual estimated amortization expense relating to Elrons
amortizable intangible assets existing as of December 31, 2008, for each of the
five years in the period ending December 31, 2013 is approximately $366.
 2.
    
    As of December 31, 2006, 2007 and 2008, the balance represents goodwill
relating to other holdings and corporate operations. In 2008, when performing the
first phase of the goodwill impairment test, the fair value of the Company measured
based on market share price was found to be lower than the carrying value of its
equity. Therefore the second phase of the goodwill impairment test was performed
and as a result the entire balance of the goodwill in the amount of approximately
$2,500 was written off.
 3.
    
    Amortization expenses amounted to approximately $325, $18 and $18 for
the years ended December 31, 2008, 2007 and 2006, respectively.
 4.
    
    Following Elrons investment in Medingo (see Note 3.b.) an amount of
$2,288 was recorded in 2007 as IPR&D and as a result, recognized as an amortization
of intangible assets and acquired in- process- research and development write-off
expense in the statement of operations in 2007.
 5.
    
    Following Elrons additional investment in Wavion in 2008 (see
Note 3.c.) an amount $2,049 was recorded as intangible asset (technology) which is
amortized on a straight-line basis over the technology expected useful life of 5
years.
 6.
    
    Following Elrons additional investment in Impliant in 2008 (see Note
3.e.) an amount of approximately $4,500 was allocated to in process research and
development (IPR&D) and as a result was charged immediately to the Companys
results of operations and was included as part of Amortization of intangible
assets and acquired in- process-research and development write-off in the
statement of operations.
 7.
    
    Additional excess cost in the amount of approximately $2,700 was
attributed to the agreement with Rafael due to the settlement of the claim and
revised agreement (see Note 3.d.).
 NOTE 11:- SHORT-TERM LOANS FROM BANKS AND OTHERS
 WeightedAverageInterest rateDecember 31,2008
    
    
    December 31%
    
    
    2008
    
    
    2007Short-term loans denominated in
U.S. dollars
    
    
    9.63
    %
    
    
    828
    
    
    
    850Short-term loans from other
shareholders of a subsidiaries
    
    
    6.58
    %
    
    
    314
    
    
    
    $
    1,142
    
    
    $
    $850
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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 12:- OTHER PAYABLES AND ACCRUED EXPENSES
 December 312008
    
    
    2007Payroll and related expenses (1)
    
    $
    4,851
    
    
    $
    3,021Provision for income taxes
    
    
    2,710
    
    
    
    2,384Accrued expenses
    
    
    725
    
    
    
    326Employees call options (2)
    
    
    272
    
    
    
    1,098Provision for Professional expenses
    
    
    656
    
    
    
    493Chief Scientist
    
    
    66
    
    
    
    77Others
    
    
    2,566
    
    
    
    1,109$
    11,846
    
    
    $
    8,508(1) Includes provision for vacation pay
    
    $
    2,332
    
    
    $
    1,472
 (2)
    
    Employee call options a.
    
    The Companys former Chairman of the Board has options to acquire up to
1.5% of any shares or other securities acquired by the Company in Wavion and up to
0.75% of any shares or other securities acquired directly and indirectly by the
Company in Galil. These options shall be exercisable at the weighted average price
of investments made by the Company with respect to any of those two companies until
the date of exercise of the options. The options shall be exercisable for a period
of three years commencing on the later of January 1, 2000 or the date of the latest
investment by the Company in the relevant entity.
 b.
    
    RDC granted to its former senior employees and to the current CEO
call options to purchase up to 5% of certain investments held by RDC at grant date
as of the dates and at exercise prices determined in the call option agreements.
    42




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 13:- LONG-TERM LOANS FROM BANKS AND OTHERS
 a.
    
    Composition
 Interest rateAs ofDecember 31,2008
    
    
    December 31%
    
    
    2008
    
    
    2007Long-term loans from banks (b)
    
    
    2.8%  12
    %
    
    $
    35,054
    
    
    $
    12Long-term loans from shareholders (c)
    
    
    5.95
    %
    
    
    2,357
    
    
    
    Long-term loans from others (1)
    
    
    6.2
    %
    
    
    6,176
    
    
    
    4,70743,587
    
    
    
    4,719Less-current maturities (1)
    
    
    
    
    
    
    (2,349
    )
    
    
    (2,475
    )$
    41,238
    
    
    $
    2,244
 (1)
    
    As of December 31, 2007 an amount of $2,463 represents
loans from Rafael to RDC which are denominated in New Israeli Shekel (NIS)
and did not bear interest or linkage. During 2008, the above mentioned loan
was converted to equity. These amounts are included in current maturities of
long term loans. As of December 31, 2008 and 2007 the amounts also included
$2,357 and $2,244 loans from Rafael received during 2006, which bear interest
at a rate of Libor plus 1.8% to be repaid in April 2011. b.
    
    On May 15, 2008, the Company signed an agreement (the Agreement) with
Israel Discount Bank Ltd., to provide the Company with a $30,000 credit line.
During this period, the Company may draw down loans from the credit line for a
three-year period bearing interest at a rate of three months LIBOR +1.3%.  Loans
drawn down from the credit line may be repaid early without  penalty on any
interest payment date. As of December 31, 2008 the Company utilized all of the
$30,000 credit line.As part of the agreement the Company committed to certain covanents. As of
December 31, 2008 the Company was in compliance with all covanents.In 2008, RDC entered into a credit line agreement with a commercial bank in Israel
(the Bank) for the granting of loans by the Bank to RDC in the total amount of
up to $ 10,000 (the Credit Line Agreement), to be utilized no later than August
30, 2009. According to the Credit Line Agreement, the loans to be granted (the
RDC Loans) shall bear an interest of Libor plus 4% (paid quarterly) and shall be
repaid at the lapse of 24 months from the initial withdrawal from the Credit Line.
RDC agreed to pay the Bank during the term of the agreement a fee equal to 0.5%
per annum on all amounts not utilized under the credit line.The RDC Loans are secured by a first priority fixed charge on such amount of
 shares of Given Imaging held by RDC, such that the market value of such shares
represents at any given time 200% of the aggregate of all the outstanding loan
drawn down under the Credit Line Agreement , as shall be adjusted according to the
terms stipulated in the Credit Line Agreement. In addition, RDC placed a first
priority floating charge on all its assets in favor of
the Bank to secure the RDC Loans. The loans from Rafael mentioned above are
subordinated to the loans from the Bank.
  43




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 13:- LONG-TERM LOANS FROM BANKS AND OTHERS (Cont.)
 As of December 31, 2008, RDC drew down the amount of $ 1,000 from the Credit Line.
Subsequent to the balance sheet date, RDC drew down an additional amount of $
9,000 from its Credit Line, and placed a fixed charge on 2,461,334 Ordinary shares
of Given held by RDC, in favor of the Bank.c.
    
    On October 30, 2008 the Company entered into a loan agreement with DIC
(the  loan), pursuant to which, DIC will provide the Company with a loan in an
amount equivalent to $6,000 bearing interest at a rate of 5.95% per annum and linked
to the Israel consumer price index. As part of the agreement the Company agreed to
customary default provisions generally included in loan agreements. The loan is
subordinated to the existing loan from Israel Discount Bank Ltd and extended for the
same period through September 24, 2011. If the loan from the Bank is repaid earlier,
then the DIC Loan will be repaid at that time; if the repayment of the loan from the
Bank is extended, then the repayment of the DIC loan will be extended for the same
period. With the Banks prior written consent, Elron may prepay the DIC loan in
whole or in part.On January 15, 2009, subsequent to the balance sheet date, the Company entered
into an additional loan agreement with DIC, pursuant to which, DIC provided the
Company with a loan in an amount equivalent to $2,000 bearing 5.5% interest rate
per annum. The terms of the additional loan are substantially the same as the
terms of the initial Loan.On June 15, 2009, subsequent to the balance sheet date, the Company entered into
a third loan agreement with DIC, pursuant to which DIC will, subject to receipt of
all corporate approvals, provide the Company with a loan in an amount equivalent
to $7,000 bearing interest at a rate of 3.23% per annum. The terms of the third
Loan are substantially the same as the terms of the First Loan and additional
Loan.d.
    
    The maturities of long-term loans for years subsequent to the balance
sheet date are as follows:
 First year (current maturities)
    
    $
    3,491Second year
    
    
    2,705Third year
    
    
    38,533$
    44,729
 NOTE 14:- INCOME TAXES
 a.
    
    Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:In accordance with the above law, results for tax purposes are measured and
reflected in real terms in accordance with the change in the Israeli CPI. As
explained in Note 2.b., the consolidated financial statements are presented in
U.S. dollars. The differences between the change in the Israeli CPI and in the
NIS/U.S. dollar exchange rate causes a difference between taxable income or loss
and the income or loss before taxes reflected in the consolidated financial
statements. In accordance with paragraph 9(f) of SFAS 109, the Company has not
provided deferred income taxes on this difference between amounts in the reporting
currency and the tax bases of assets and liabilities.
  44




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 14:- INCOME TAXES (Cont.)
 a.
    
    Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985: (Cont.)On 2008 the Knesset passed a law that limits the inception of the Income Tax
(Inflationary Adjustments) law, 1985, from the fiscal year 2008 onwards. In
accordance with the new law, certain tax adjustments were made based on changes in
the Israeli CPI for the period ended December 31, 2007. Starting January 1, 2008
the financial results for tax purposes are measured in nominal amounts.b.
    
    Tax benefits under Israels Law for the Encouragement of Industry
(Taxation), 1969:Certain of the Companys subsidiaries and affiliates 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.c.
    
    Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (Law):Pursuant to the Law, certain of the Companys subsidiaries were awarded a
Beneficiary Enterprise status. The principal benefit by virtue of the Law, if
the subsidiary implements all the terms of the approved program, is a ten-year
exemption from tax on income deriving from the Beneficiary Enterprise.The benefit period begins in the year in which taxable income is first earned,
limited to 12 years from the year that the enterprise began operations, or 14
years from the year in which the approval was granted, whichever period ends
earlier.In the event of a dividend distribution (including withdrawals and charges that
are deemed to be dividends) out of the tax exempt income originating from the
approved enterprise, the dividend distributed will be subject to a corporate tax
at the rate of 25%.Should the subsidiary derive income from sources other than the approved
enterprise during the relevant period of benefits, such income will be taxable at
the regular rate.d.
    
    On July 25, 2005, the Israeli parliament approved the Law for the
Amendment of the Tax Ordinance (No. 147), 2005 which progressively reduces the
corporate tax rate in Israel from 35% to the following tax rates: in 2006  31%, in
2007  29%, in 2008  27%, in 2009  26% and in 2010 and thereafter  25% (the
Amendment).e.
    
    Taxes on income (tax benefit) are comprised as follows:
 Year ended December 31,2008
    
    
    2007
    
    
    2006Current taxes
    
    $
    78
    
    
    $
    2,551
    
    
    $
    6,056Adjustments of deferred tax assets
and liabilities for enacted changes
in tax rates
    
    
    
    
    
    
    
    
    
    
    27Deferred income taxes
    
    
    1,201
    
    
    
    4,993
    
    
    
    (4,270
    )Taxes in respect of prior years
    
    
    (10
    )
    
    
    
    
    
    
    (703
    )$
    1,269
    
    
    $
    7,544
    
    
    $
    1,110Domestic
    
    $
    1,269
    
    
    $
    7,544
    
    
    $
    1,110
  45




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 14:- INCOME TAXES (Cont.)
 (1)
    
    In November and December 2006 Elbit and Elron sold all
their shares of Partner (See Note 20(1)). As a result Elbit and Elron
recorded tax expense in the amount of approximately $7,500.(2)
    
    In February 2007 Elbit received final tax assessment for
the year 2005 according to which certain prior year losses are to be offset
from certain gains. Consequently, Elbit reversed a valuation allowance
previously recorded in respect of deferred tax assets relating to loss
carryforwards. This reversal resulted in a tax benefit of approximately
$4,500 (of which $3,700 were offset against the gain from sale of Partner)
recorded in December 2006.(3)
    
    In 2006 the Company decreased its previous valuation
allowance in respect of losses incurred in prior periods as a result of its
revised estimate of expected future taxable income due to a continued
increase in the market price of certain of its marketable securities. The
aforementioned decrease resulted in a tax benefit recorded of approximately
$3,000. In 2008 and 2007 market prices were declined. Therefore the company
increased its valuation allowance and recorded tax expenses of approximately
$800 and $4,000, respectively.
 f.
    
    Deferred income taxes:Deferred income taxes reflect the net tax effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Companys deferred tax liabilities and assets are as follows:
 Deferred Tax Asset
    
    
    Deferred Tax LiabilityNon current
    
    
    Current
    
    
    Current
    
    
    Non current
    
    
    TotalAs of December 31, 2008Deferred tax assets:Provision for doubtful accounts,
vacation and others
    
    $
    
    
    
    $
    614
    
    
    $
    
    
    
    $
    
    
    
    $
    614Accrued severance pay, net
    
    
    603
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    603Investments in subsidiaries, affiliates
and other companies, net
    
    
    25,289
    
    
    
    
    
    
    
    
    
    
    
    (2,137
    )
    
    
    23,152Tax loss carryforwards(*)
    
    
    57,617
    
    
    
    
    
    
    
    
    
    
    
    2,250
    
    
    
    59,867Available-for-sale marketable securities
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    283Other
    
    
    2,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,884Valuation allowance (1)
    
    
    (86,393
    )
    
    
    (897
    )
    
    
    
    
    
    
    (113
    )
    
    
    (87,403
    )$
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 (*)
    
    Tax loss carryforwards after deduction of unrecognized tax benefits
according to FIN 48.  46




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 14:- INCOME TAXES (Cont.)
 Deferred Tax Asset
    
    
    Deferred Tax LiabilityNon current
    
    
    Current
    
    
    Current
    
    
    Non current
    
    
    TotalAs of December 31, 2007Deferred tax assets:Provision for doubtful accounts,
vacation and others
    
    $
    
    
    
    $
    372
    
    
    $
    
    
    
    $
    
    
    
    $
    372Accrued severance pay, net
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173Investments in subsidiaries, affiliates
and other companies, net
    
    
    46,305
    
    
    
    
    
    
    
    
    
    
    
    (196
    )
    
    
    46,109Tax loss carryforwards(*)
    
    
    24,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,323Other
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    275$
    70,801
    
    
    $
    647
    
    
    $
    
    
    
    $
    (196
    )
    
    $
    71,252Deferred tax liabilities:Available-for-sale marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    (209
    )Valuation allowance
    
    
    (68,597
    )
    
    
    (647
    )
    
    
    
    
    
    
    32
    
    
    
    (69,212
    )$
    2,204
    
    
    $
    
    
    
    $
    
    
    
    $
    (373
    )
    
    $
    1,831
 (*)
    
    Tax loss carryforwards after deduction of unrecognized tax benefits
according to FIN 48. g.
    
    A reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory tax rate applicable to income of the Company and
the actual tax expense as reported in the statement of income, is as follows:
 Year ended December 31,2008
    
    
    2007
    
    
    2006Income (loss) before taxes as reported
in the consolidated statements of
operations
    
    $
    (100,052
    )
    
    $
    (34,801
    )
    
    $
    (5,082
    )Statutory tax rate
    
    
    27
    %
    
    
    29
    %
    
    
    31
    %Theoretical tax expense (income)
    
    $
    (27,014
    )
    
    $
    (10,092
    )
    
    $
    (1,575
    )Equity in losses of affiliated companies
    
    
    4,937
    
    
    
    6,410
    
    
    
    5,545Non-deductible expenses, tax exempt and
reduced tax rate
    
    
    187
    
    
    
    (159
    )
    
    
    (154
    )Differences arising from the basis of
measurement for tax purposes
    
    
    
    
    
    
    (6,103
    )
    
    
    (2,534
    )Deferred taxes on losses for which
valuation allowance was provided
    
    
    23,169
    
    
    
    19,980
    
    
    
    6,911Reversal of valuation allowance
    
    
    
    
    
    
    (2,492
    )
    
    
    (7,422
    )Difference relating to a change in the
rate recognized as income in previous
years*
    
    
    
    
    
    
    
    
    
    
    1,015Taxes in respect of previous years
    
    
    (10
    )
    
    
    
    
    
    
    (703
    )Effect of change in tax rate
    
    
    
    
    
    
    
    
    
    
    27Actual tax expenses
    
    $
    1,269
    
    
    $
    7,544
    
    
    $
    1,110Effective tax rate
    
    
    (1.3
    %)
    
    
    (21.7
    %)
    
    
    (21.7
    %)
 *
    
    With respect to the sale of available for sale securities.  47




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 14:- INCOME TAXES (Cont.)
 h.
    
    As of December 31, 2008 the Company had tax loss carryforwards of
approximately $133,000, and its Israeli subsidiaries had an aggregate tax loss
carryforwards of approximately $156,000. Carryforward tax losses in Israel may be
carryforward indefinitely and may be set against future taxable income.
 Few subsidiaries are assessed under the US tax law. Losses to be carried forward
to future years amount approximately $7,000 for federal tax purpose.
 i.
    
    In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FAS 109. This interpretation prescribes a minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition of tax
positions, classification on the balance sheet, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 requires significant judgment
in determining what constitutes an individual tax position as well as assessing the
outcome of each tax position. Changes in judgment as to recognition or measurement
of tax positions can materially affect the estimate of the effective tax rate and
consequently, affect the operating results of the Company.
 As of December 31, 2008, the Company had unrecognized tax benefits of
approximately $19,496, of which $5,321, if recognized, would result in a reduction
of the Companys effective tax rate.
 unrecognized taxbenefitsBalance at January 1, 2007
    
    $
    14,214Additions based on tax positions related to current year
    
    $
    1,996
    (*)Additions for tax positions of prior years
    
    
    Reductions for tax positions of prior years
    
    
    Settlements
    
    
    Balance at December 31, 2007
    
    $
    16,210Additions based on tax positions related to current year
    
    $
    2,999
    (*)Additions for tax positions of prior years
    
    
    287Reductions for tax positions of prior years
    
    
    Settlements
    
    
    Balance at December 31, 2008
    
    $
    19,496
 (*)
    
    Including additions generated from change in the US Dollars /
NIS exchange rate and from adjustment to the CPI.  48




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 14:- INCOME TAXES (Cont.)
   NOTE 15:- CONTINGENT LIABILITIES, PLEDGES AND COMMITMENTS
 a.
    
    (1) Office Lease
 The Company and its subsidiaries have operating lease agreements in respect of
their premises for periods ending through 2012. Rent expenses amounted to
approximately $1,257, $651 and $803 for the years ended December 31, 2008, 2007and
2006, respectively. The future minimum rental payments under these agreements in
the years following the balance sheet date are as follows:
 First year
    
    $
    1,633Second year
    
    
    1,160Third year
    
    
    642Fourth year
    
    
    70Fifth year
    
    
    $
    3,505
 (2)
    
    Car LeaseThe Company and its subsidiaries have an operating lease contract for the rental
of vehicles for a period of 36 months. The rental payments are linked to the
Consumer Price Index (CPI). The company and its subsidiaries have deposited $262
covering rental payment for the last three months in respect of these contracts.
The deposit is linked to the CPI and bears no interest.
 b.
    
    Certain of the Companys subsidiaries are required to pay royalties to
the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade and
other institutions at the rate of 3%-5% of revenues derived from research and
development projects in which the Government of Israel or the other institutions
participated in financing up to an amount equal to 100% of the amount received by
each company and in certain cases plus interest of Libor. As of December 31, 2008,
the aggregate contingent royalty obligation amounted to approximately $12,766.c.
    
    In April 2007 and June 2008, Teledata was granted shareholders
loans (and guarantees which are convertibles to shareholders loans) in the amount
of $4,000. Elron granted 50% out of the above-mentioned amount ($800 in
shareholders loans and $1,200 in guarantees).
 d.
    
    1. SELAs liabilities to banks are secured by way of a fixed
lien on its share capital, goodwill, intellectual property and export documents.
In addition, there is a floating lien on all of SELAs assets.
  49




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 15:- CONTINGENT LIABILITIES, PLEDGES AND COMMITMENTS (Cont.)
 2.
    
    In order to ensure full repayment of the funds secured by
the Convertible Debentures issued by Starling (see Note 3.a.), Starling
registered a first ranking, fixed and floating lien, unlimited in amount, on
the Trustees account and all monies deposited therein and any interest
derived therefrom.
 3.
    
    Regarding a first priority fixed charge on a portion of
Given Imaging shares held by RDC and a first priority floating charge on all
of RDCs assets  see Note 13.b.
 e.
    
    Legal proceedings:
 1.
    
    During September 1999, the Company received a copy of a claim and a
request to approve such claim as a class action on behalf of public shareholders
of Elscint Ltd. (formerly an affiliated company) against Elron and others. The
allegation raised by the plaintiff related to the decision regarding the sale of
Elscints substantial assets. The purported class action claim is for an amount of
approximately $158,000, or alternatively, $123,000. The claim alleges that the
defendants, by their decisions regarding the sale of Elscints assets, caused
damage to Elscint and its minority shareholders. The plaintiff seeks a court order
requiring Elscint, or the other defendants, to purchase from each of the members
of the alleged represented class all shares held by them at a price of $27.46 per
share. The claim has been stayed pursuant to an arrangement reached by the parties
pending the outcome of the appeal in the claim described below (under Investors
Claim). The arrangement provides that if the appeal is accepted, then the
proceedings to recognize the lawsuit as a class action will proceed. Otherwise,
the application to recognize the claim as a class action suit will be dismissed.
Following the decision on the said appeal by the Supreme Court as described in the
following paragraph (under Investors Claim), the plaintiff requested the Court
to resume the hearing of this lawsuit. On March 31, 2009 the Court approved the
defendants application to dismiss certain claims while others still remain. A
hearing has been set for October 2009.
 2.
    
    In November 1999, a claim against Elscint, Elbit Medical Imaging
Ltd. (EMI), the parent company of Elsicnt, and various other defendants,
including Elron and certain of Elrons former officers, was filed in the Haifa
District Court together with a request to approve certain causes of action set out
in the claim, as a class action on behalf of some institutional investors, others
and those who held shares in Elscint on September 6, 1999 and a request for
certain casues of action to be treated as a derivative action. The allegations
raised in the claim relate, among others, to the period prior to the sale of our
holdings in Elbit Imaging Ltd. (formerly known as Elbit Medical Imaging Ltd.), or
EI (the parent company of Elscint and formerly an affiliated company). The
plaintiffs sought a court order pursuant to which EI would be compelled to effect
a tender offer. In August 2000, the Haifa District Court decided to strike out the
application for approval of the claim as a class action. Subsequent to that
decision the plaintiffs submitted an amended statement of claim which is similar
to the initial claim but is designated as a personal claim and partly as a
derivative action rather than as a purported class action. In addition, some of
the plaintiffs appealed to the Supreme Court in Israel against the District
Courts decision. In December 2006, the Supreme Court reversed that decision and
returned the matter back to the Haifa District Court in order to decide whether
the claim should be recognized as a class action. In June 2007, in accordance
with the directions of the Haifa District Court the plaintiffs submitted an
updated statement of claim and request to approve the claim as a class action.
Pursuant to the updated claim, the plaintiffs are no longer seeking an order
compelling the tender offer but instead are claiming compensation for damages
sustained due to the alleged failure of EI to effect the tender offer, as well as
due to other allegations. The updated statement of claim does not specify the
monetary amount claimed, but does include various allegations relating to the
manner of determining the damages claimed,
  50




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 15:- CONTINGENT LIABILITIES, PLEDGES AND COMMITMENTS (Cont.)
 e.
    
    Legal proceedings: (Cont.)
 which depends, amongst other things,
upon verification of the specific circumstances with regard to each shareholder of Elscint separately and the substance of each damage claimed. In
January 2009, the Haifa District Court dismissed the plaintiffs request to approve
the claim as a class action. On March 26, 2009, the plaintiffs appealed the Haifa
Distric Courts decision. At this stage, the personal claims of the plaintiffs for
monetary damages and their request to treat certain of it as a derivative action
remain pending.
 3.
    
    During September 2006, two claims were filed by a certain individual
in the Haifa District Court against the same defendants (including Elron and
certain of our former officers ) of the action described above and based
substantially on the same facts of such action. The claims are for an undisclosed
amount and also include a request to recognize the claims as class actions. The
Court has determined that the defendants do not yet have to file statements of
defense.
  NOTE 16:- SHAREHOLDERS EQUITY
 a.
    
    Share capital
  b.
    
    Options to employees
 1.
    
    Options to Elrons Employees
     51




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 16:- SHAREHOLDERS EQUITY (Cont.)
 b.
    
    Options to employees (Cont.)
 1.
    
    Options to Elrons Employees (Cont.)
   Year ended December 31, 2008WeightedWeighted
    
    
    Averageaverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    Contractual
    
    
    Intrinsicoptions
    
    
    price
    
    
    Term
    
    
    ValueOutstanding
 beginning of the year
    
    
    352,750
    
    
    $
    10.74
    
    
    
    
    
    
    
    Granted
    
    
    55,000
    
    
    $
    10.30
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (49,000
    )
    
    $
    13.90
    
    
    
    
    
    
    
    Outstanding  end of the year
    
    
    358,750
    
    
    $
    10.22
    
    
    
    2.93
    
    
    
    Options exercisable at the end of the year
    
    
    195,000
    
    
    $
    7.96
    
    
    
    2.50
    
    
    
    
 Year ended December 31,2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    priceOutstanding
 beginning of the
year
    
    
    323,111
    
    
    $
    9.27
    
    
    
    540,435
    
    
    $
    9.53
    (*)Granted
    
    
    120,000
    
    
    
    15.53
    
    
    
    10,000
    
    
    
    9.05Exercised
    
    
    (65,361
    )
    
    
    5.13
    
    
    
    (124,607
    )
    
    
    5.78Forfeited
    
    
    (25,000
    )
    
    
    29.38
    
    
    
    (102,717
    )
    
    
    14.84Outstanding  end of the year
    
    
    352,750
    
    
    $
    10.74
    
    
    
    323,111
    
    
    $
    9.27Options exercisable at the
end of the year
    
    
    179,000
    
    
    $
    8.15
    
    
    
    187,611
    
    
    $
    10.73
 (*)
    
    After an adjustment as a result of the dividend distributed of $3 per share.  52




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 16:- SHAREHOLDERS EQUITY (Cont.)
 b.
    
    Options to employees (Cont.)
 The weighted average fair values and weighted average exercise prices of options granted
during the years ended December 31, 2008, 2007 and 2006 were as follows:
 For options with an exercise price on the grant date that:Exceeds market price
    
    
    Less than market priceYear ended December 31,
    
    
    Year ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Weighted average
exercise prices
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10.30
    
    
    $
    15.53
    
    
    $
    9.05Weighted average
fair values on
grant date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2.39
    
    
    $
    5.79
    
    
    $
    3.89
 2.
    
    The following table summarizes information regarding
outstanding and exercisable options as of December 31, 2008:
 Options outstanding
    
    
    Options exercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averageoutstanding at
    
    
    contractual
    
    
    exercise
    
    
    outstanding at
    
    
    exerciseExercise price
    
    
    December 31, 2008
    
    
    life (years)
    
    
    price
    
    
    December 31, 2008
    
    
    price$57.838
    
    
    
    133,750
    
    
    
    2.12
    
    
    $
    5.85
    
    
    
    123,750
    
    
    $
    5.69$9.0510.57
    
    
    
    105,000
    
    
    
    3.42
    
    
    $
    9.79
    
    
    
    41,250
    
    
    $
    9.2615.53
    
    
    
    120,000
    
    
    
    3.41
    
    
    $
    15.53
    
    
    
    30,000
    
    
    $
    15.53358,750
    
    
    
    
    
    
    
    
    
    
    
    195,000
 3.
    
    In December 1999, the Companys shareholders approved a
plan whereby the former Chairman of the Board and the then Chief Executive
Officer of the Company were granted options to purchase up to 58,154 ordinary
 shares of the Company (the 1999 grant). The options were granted ratably
over a period of 3 years commencing February 2000 and are exercisable for a
period of three years, commencing two years after the date of the grant. In
February 2005 and February 2006, the first and the second portion were
expired (no income resulting from the expiration was recorded). In December
2006, 19,385 options at an exercise price per share of $10.01 from the 1999
grant were exercised into 4,070 shares.
   53




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 16:- SHAREHOLDERS EQUITY (Cont.)
 b.
    
    Options to employees (Cont.)
  4.
    
    In April 2007, the companys shareholders approved a plan
whereby the current chairman of the board 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. See Note 2.t.
 5.
    
    Compensation expense recorded during 2008 amounted to
$339 (2007  $ 304, 2006  $344).
 6.
    
    The balance of unrecognized compensation as of December 31,
2008 amounted to $602, which will be recognized over the following 4 years.
 NOTE 17:- INCOME (LOSS) PER SHARE
 Year Ended December 312008
    
    
    2007
    
    
    2006Number
    
    
    Loss
    
    
    
    
    
    
    Number
    
    
    Loss
    
    
    
    
    
    
    Number
    
    
    Incomeof shares
    
    
    per
    
    
    
    
    
    
    of shares
    
    
    per
    
    
    
    
    
    
    of shares
    
    
    per(in
    
    
    share
    
    
    
    
    
    
    (in
    
    
    share
    
    
    
    
    
    
    (in
    
    
    shareloss
    
    
    thousands)
    
    
    amount
    
    
    loss
    
    
    thousands)
    
    
    amount
    
    
    Income
    
    
    thousands)
    
    
    amountBasic
    
    $
    (86,154
    )
    
    
    29,650
    
    
    $
    (2.91
    )
    
    $
    (37,095
    )
    
    
    29,619
    
    
    $
    (1.25
    )
    
    $
    3,032
    
    
    
    29,532
    
    
    $
    0.10Effect of options
of investees
    
    
    (987
    )
    
    
    
    
    
    
    (0.03
    )
    
    
    (385
    )
    
    
    
    
    
    
    
    
    
    
    (821
    )
    
    
    
    
    
    
    Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    Diluted
    
    
    (87,141
    )
    
    
    29,650
    
    
    $
    (2.94
    )
    
    
    (37,480
    )
    
    
    29,619
    
    
    $
    (1.27
    )
    
    $
    2,211
    
    
    
    29,624
    
    
    $
    0.07
  NOTE 18:- EQUITY IN LOSSES OF AFFILIATED COMPANIES
 Year ended December 31,2008
    
    
    2007
    
    
    2006Affiliated companies:Given
    
    
    (5,136
    )
    
    
    (1,792
    )
    
    
    (5,170
    )NetVision
    
    
    2,626
    
    
    
    886
    
    
    
    5,059Others(1)
    
    
    (13,474
    )
    
    
    (19,510
    )
    
    
    (17,629
    )$
    (15,984
    )
    
    $
    (20,416
    )
    
    $
    (17,740
    )
  (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.  54




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 19:-
    
    GAIN (LOSS) FROM DISPOSAL OF BUSINESSES AND AFFILIATED COMPANIES AND CHANGES IN HOLDINGS
IN AFFILIATED COMPANIES, NET
 Year ended December 31,2008
    
    
    2007
    
    
    2006Given (See Note 7.d.1.)
    
    $
    55
    
    
    $
    552
    
    
    $
    (975
    )NetVision (See Note 7.d.4.)
    
    
    135
    
    
    
    13,845
    
    
    
    1,802Ellara (formerly AMT)*
    
    
    (225
    )
    
    
    
    
    
    
    985Galil Medical (See Note 7.d.2.)
    
    
    
    
    
    
    
    
    
    
    742Others
    
    
    (9
    )
    
    
    457
    
    
    
    (7
    )$
    (44
    )
    
    $
    14,854
    
    
    $
    2,547
 *
    
    In September 2008 Ellara was acquired by Domoteck Ltd. (Domoteck), in consideration
for 33.33% of Domotecks shares. Domoteck is an Israeli company engaged in the manufacture
of climate control systems. Following the above transaction, Elrons share in the equity
of Domoteck, on a fully diluted and on an as converted basis is approximately 19%.
Following the transaction, the Company recorded a loss in the amount of $225. NOTE 20:- OTHER INCOME (EXPENSES), NET
 Year ended December 31,2008
    
    
    2007
    
    
    2006Gain (loss) from sale and increase (decrease) in
market value of:Partner shares (1)
    
    $
    
    
    
    $
    
    
    
    $
    24,977Other companies, net, Mwise
    
    
    87
    
    
    
    1,030
    
    
    
    13Other than temporary decline in value of
investments (see Note 25)
    
    
    (26,079
    )
    
    
    (9,205
    )
    
    
    Bank loan extinguishment (2)
    
    
    
    
    
    
    
    
    
    
    2,708Equity in
losses of partnerships  Innomed, Gemini
    
    
    (818
    )
    
    
    (826
    )
    
    
    (672
    )Dividend from Partner (1)
    
    
    
    
    
    
    
    
    
    
    1,781Gain from sale of Carmiel building (see Note 9)
    
    
    
    
    
    
    5,449
    
    
    
    Other
    
    
    1,381
    
    
    
    338
    
    
    
    503$
    (25,429
    )
    
    $
    (3,214
    )
    
    $
    29,310
 Realized gains from sale of available-for-sale securities amounted to approximately $87,
$1,030 and $25,000 in the years ended December 31, 2008, 2007 and 2006, respectively. The
proceeds from such sales amounted to approximately $89, $1,030 and $39,800 for the years
ended December 31, 2008, 2007 and 2006, respectively.
 (1)
    
    On December 31, 2006, Elron and Elbit together completed the sale
of 3,906,085 shares of Partner (823,354 by Elron which were purchased by it in
March 2006 in consideration for $5,300 and 3,082,731 by Elbit) comprising all of
Elrons and Elbits shares in Partner, to several Israeli institutional investors
for approximately $39,800.As a result of the above transactions, Elron recorded in 2006 in the statement of
operations, a realized gain of approximately $25,000 (approximately $21,200 net of
tax). The gain net of tax includes a reduction of approximately $3,700 in the tax
expense as a result of the reversal of a valuation allowance previously recorded
in respect of deferred tax assets relating to loss carryforwards. See Note 14e(3).During 2006 Elron and Elbit received dividend from Partner in the amount of
approximately $1,800.(2)
    
    In February 2006, Mediagates bank loan in the amount of
approximately $2,800 was settled in consideration for $100. As a result,
according to the provisions of FAS 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, Elron recorded in the
first quarter of 2006 a gain of approximately $2,700.
  55




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 21:- FINANCING INCOME, NET
 Year ended December 31,2008
    
    
    2007
    
    
    2006Income:Interest on cash equivalents, bank deposits, debentures
and loans
    
    $
    2,483
    
    
    $
    5,599
    
    
    $
    5,854Income resulting from the decrease of market value of
convertible debentures
    
    
    3,571
    
    
    
    
    
    
    
    Foreign currency gains
    
    
    405
    
    
    
    78
    
    
    
    4936,459
    
    
    
    5,677
    
    
    
    6,347Expenses:Expenses regarding convertible debentures
    
    
    999
    
    
    
    
    
    
    
    Interest on short-term credit, long-term loans and others
    
    
    2,540
    
    
    
    1,249
    
    
    
    780Foreign currency losses
    
    
    755
    
    
    
    660
    
    
    
    1,1124,294
    
    
    
    1,909
    
    
    
    1,892Gain from sale of debentures
    
    
    122
    
    
    
    177
    
    
    
    114Loss resulted from early redemption of convertible
debentures*
    
    
    (359
    )
    
    
    
    
    
    
    Other than temporary decline in value of Available for
sale Debentures
    
    
    (250
    )
    
    
    
    
    
    
    (518
    )$
    1,678
    
    
    $
    3,945
    
    
    $
    4,051
 *
    
    Loss resulted from the purchase of Starlings Series A Convertible Debentures by Elron NOTE 22:- RELATED PARTY TRANSACTIONS
 a.
    
    Balances with related parties:
 December 312008
    
    
    2007Other receivables:Affiliated companies
    
    $
    31
    
    
    $
    142Other companies
    
    
    29
    
    
    
    2760
    
    
    
    169Long-term loans:Long-term loans from shareholders
    
    
    (6,176
    )
    
    
    Other companies
    
    
    
    
    
    
    $
    (6,116
    )
    
    $
    169
  56




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 22:- RELATED PARTY TRANSACTIONS (Cont.)
 b.
    
    Income and expenses from affiliated and other companies:
 Year ended December 31,2008
    
    
    2007
    
    
    2006Income:Revenues
    
    $
    
    
    
    $
    
    
    
    $
    6,699Interest and commission for guarantees
    
    
    266
    
    
    
    177
    
    
    
    362Participation in Directors remuneration
    
    
    98
    
    
    
    85
    
    
    
    84Participation in expenses
    
    
    
    
    
    
    
    
    
    
    15Costs and Expenses:Participation in expenses
    
    
    28
    
    
    
    17
    
    
    
    17Directors remuneration
    
    
    46
    
    
    
    73
    
    
    
    71Interest expenses
    
    
    176
    
    
    
    
    
    
    
    
 c.
    
    Option to the former Chairman of the Board and Chief Executive Officer
  see Note 16.b.3.
 d.
    
    See Note 7.d.4 regarding the Barak Merger and GlobCall Merger with Netvision.
 e.
    
    See Note 7.d.1. regarding the investment in Given.
 f.
    
    The Company holds certain investments together with DIC and Clal
(Elron, Clal and DIC are part of the IDB group) as of December 31, 2008, the
significant of which are as follows:
 % holding byClal
    
    
    DIC
    
    
    Elron and RDCGiven
    
    
    
    
    
    
    16.1
    %
    
    
    32.35
    %NetVision (see also Note 7.d.4.)
    
    
    25.25
    %
    
    
    32.3
    %
    
    
    15.79
    %Galil
    
    
    
    
    
    
    12.8
    %
    
    
    29.0
    %
 g.
    
    See Note 16.b.4. regarding options granted to the Chairman of the Board.
 h.
    
    See Note 13 regarding Loan granted by DIC.
  57




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 23:- ACCUMULATED OTHER COMPREHENSIVE INCOME
 Unrealized
    
    
    Foreigngains and
    
    
    currencylosses on
    
    
    translationsecurities
    
    
    adjustments
    
    
    TotalBalance as of January 1, 2007 (net of
tax effect of $326)
    
    $
    1,276
    
    
    $
    22
    
    
    $
    1,298Unrealized gains on available for sale
securities (net of tax effect of $325)
    
    
    1,658
    
    
    
    
    
    
    
    1,658Reclassification adjustment for
realized gain and other than temporary
decline in value included in net income
(net of tax effect of $87)
    
    
    (1,255
    )
    
    
    
    
    
    
    (1,255
    )Foreign currency translation
adjustments included in net income due
to decrease in holdings in affiliated
companies
    
    
    
    
    
    
    (407
    )
    
    
    (407
    )Foreign currency translation adjustments
    
    
    
    
    
    
    2,395
    
    
    
    2,395Balance as of December 31, 2007 (net of
tax effect of $564)
    
    $
    1,679
    
    
    $
    2,010
    
    
    $
    3,689Unrealized gains on available for sale
securities (net of tax effect of $531)
    
    
    (1,861
    )
    
    
    
    
    
    
    (1,861
    )Reclassification adjustment for
realized gain and other than temporary
decline in value included in net income
(net of tax effect of $33)
    
    
    52
    
    
    
    
    
    
    
    52Foreign currency translation adjustments
    
    
    
    
    
    
    (776
    )
    
    
    (776
    )Balance as of December 31, 2008 (net of
tax effect of $0)
    
    $
    (130
    )
    
    $
    1,234
    
    
    $
    1,104
 NOTE 24:- BUSINESS SEGMENT
 a.
    
    The Company operates in one segment, namely the Other Holdings and
Corporate Operations. This segment includes corporate headquarters and reflects
the investments in companies that operate in the fields of medical devices,
communications, semiconductors, software products and clean technology.
 b.
    
    Revenues according to location of customers are as follows:
 2008
    
    
    2007
    
    
    2006Israel
    
    $
    333
    
    
    $
    346
    
    
    $
    337USA
    
    
    2,975
    
    
    
    1,768
    
    
    
    9,061Europe
    
    
    1,062
    
    
    
    185
    
    
    
    625Asia
    
    
    1,669
    
    
    
    2,072
    
    
    
    2,840Africa
    
    
    198
    
    
    
    
    
    
    
    $
    6,237
    
    
    $
    4,371
    
    
    $
    12,863
  58




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE 24:- BUSINESS SEGMENT (Cont.)
 c.
    
    Revenues from major customers were as follows:
 2008
    
    
    2007
    
    
    2006In the Other Holdings and Corporate Operations
segment:Oncura
    
    
    
    %
    
    
    
    %
    
    
    52
    %
 d.
    
    The majority of the long-lived assets are located in Israel.
 NOTE 25: - A FAIR VALUE MEASUREMENT AND IMPAIRMENT
       a.
    
    Assets and Liabilities measured at fair value on a recurring basis:
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalLong term investments
    
    $
    808
    
    
    
    
    
    
    
    
    
    
    $
    808Convertible Debentures
    
    $
    2,161
    
    
    
    
    
    
    
    
    
    
    $
    2,161
  59




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE
25: - A FAIR VALUE MEASUREMENT AND IMPAIRMENT (Cont.)
 b.
    
    Assets Measured at Fair Value on a Nonrecurring Basis
 
 Fair Value Measurements UsingYear ended
    
    
    Level
    
    
    Level
    
    
    Level
    
    
    Losses31.12.08
    
    
    1
    
    
    2
    
    
    3
    
    
    (see Note 20)Investments in
companies and long
term receivables
    
    $
    23,672
    
    
    
    
    
    
    
    
    
    
    $
    23,672
    
    
    $
    25,585
    a.
    
    Discounted Future Earnings Method- The discounted future
earnings method can use cash flow (DFE) or earnings as a basis to forecast
the income which the investee will generate. Thereafter, an aggregate present
value is calculated for the future cash flows using a required rate of return
(The discount rate). 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 secondary venture capital investors would use this
methodology to determine the value of the Shares.
 b.
    
    Company Security Transaction Method (CSTM)  according to
the CSTM method the value of the Company was estimated based upon recent
transactions in the Company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:
 1.
    
    The size, amount and type
of stock sold;
 2.
    
    The timing of the
transaction relative to the estimation date;
 3.
    
    Differences in the rights,
preferences, marketability, and control of the transaction
securities and the subject securities;
  60




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ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands, except share and per share data
 NOTE
25: - A FAIR VALUE MEASUREMENT AND IMPAIRMENT (Cont.)
 4.
    
    The financial condition and
capital structure of the evaluated investee;
 5.
    
    The 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) to allocate value
amongst multiple classes of equity with varying characteristics 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.
Using option analyses and the value of a given security purchased by a
sophisticated third-party investor or the value of the investee itself, sale,
or liquidation (several years in the future) is calculated for each type of
security. With these inputs, the model uses a Black-Scholes option model or a
Binomial (lattice) model to estimate the value of the investee between the
proceed ranges. The model considers many aspects of venture financing such as
the capital structure of the investee, seniority of securities, future
financing needs, the time to the liquidation event, and the investee specific
volatility. Given the investees capital structure, including securities with
different rights and attributes, the model was used to allocate the investee
value among its various securities.
  61




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##### Table of Contents



ELRON ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
 
 ANNEX TO THE CONSOLIDATED FINANCIAL STATEMENTS  U.S. dollars in thousands
 ANNEX TO THE FINANCIAL STATEMENTS
 Details relating to major investments as of December 31, 2008:
 Carryingvalue of the
    
    
    Market value of the publiclyinvestment
    
    
    traded% of
    
    
    as of
    
    
    investments as ofownership
    
    
    December 31,
    
    
    December 31,
    
    
    June 24,interest(1)
    
    
    2008(2)
    
    
    2008
    
    
    2009Consolidated Companies:Starling Advanced Communication Ltd. (TASE:STLG) (3) (4)
    
    
    50
    %
    
    
    (38
    )
    
    
    6,854
    
    
    
    6,180SELA Ltd. (3)
    
    
    46
    %
    
    
    891Medingo Ltd. (3)
    
    
    50
    %
    
    
    (2,052
    )Sync RX (3)
    
    
    39
    %
    
    
    306Xsights (formerly: Paper lynx)(3)
    
    
    50
    %
    
    
    (45
    )Wavion, Inc.
    
    
    66
    %
    
    
    (1,914
    )Impliant Inc.
    
    
    46
    %
    
    
    (2,349
    )Affiliated Companies (equity):Given Imaging Ltd. (Nasdaq: GIVN) (3)
    
    
    28
    %
    
    
    103,390
    
    
    
    67,730
    
    
    
    75,587NetVision Ltd. (TASE: NTSN)
    
    
    16
    %
    
    
    33,234
    
    
    
    29,657
    
    
    
    43,344ChipX, Inc.
    
    
    28
    %
    
    
    298Galil Medical Ltd. (3)
    
    
    21
    %
    
    
    (355
    )3DV Systems Ltd. (3)
    
    
    36
    %
    
    
    (78
    )Notal Vision, Inc.
    
    
    22
    %
    
    
    552Aqwise Ltd.
    
    
    34
    %
    
    
    3,774Radlive Ltd.
    
    
    29
    %
    
    
    1,565Kyma Ltd. (5)
    
    
    
    
    
    
    309Affiliated for sale:EVS (Nasdaq: EVSNF.OB)
    
    
    10
    %
    
    
    741
    
    
    
    741
    
    
    
    444MWise Inc.(Nasdaq: MWIS.OB)
    
    
    2
    %
    
    
    67
    
    
    
    67
    
    
    
    63Partnership:InnoMed Ventures L.P.
    
    
    14
    %
    
    
    1,667Cost:Jordan Valley Ltd.
    
    
    20
    %
    
    
    4,635Teledata Ltd.
    
    
    21
    %
    
    
    16,877NuLens Ltd.
    
    
    34
    %
    
    
    8,546BrainsGate Ltd.
    
    
    25
    %
    
    
    13,087Enure Networks Ltd.
    
    
    39
    %
    
    
    500Safend Ltd.
    
    
    27
    %
    
    
    5,010Neurosonix Ltd.
    
    
    16
    %
    
    
    Atlantium Inc.
    
    
    33
    %
    
    
    6,745BPT Ltd.
    
    
    30
    %
    
    
    3,209Pocared Ltd.
    
    
    23
    %
    
    
    6,882Plymedia Inc.
    
    
    28
    %
    
    
    2,559
 (1)
    
    On the basis of the outstanding share capital.(2)
    
    Includes loans and convertible notes.(3)
    
    Represents the carrying value and the ownership interest of the investment in
Elrons books and Elrons share in the carrying value and ownership interest of the investment
in RDCs books.(4)
    
    Includes Convertible Debentures.(5)
    
    Investment by convertible loans  62




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##### Table of Contents



Given Imaging Ltd.
and its Subsidiaries
 Consolidated
Financial Statements
 As of and for the
Year Ended December 31, 2008
and 2007




---



##### 



Given Imaging Ltd. and its subsidiaries
 Index to Consolidated Financial Statements
  
 PageReport of Independent Auditor
    
    
    2Consolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    5Consolidated Statements of Changes in Shareholders Equity
    
    
    6Consolidated Statements of Cash Flows
    
    
    7Notes to the Consolidated Financial Statements
    
    
    8




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders of
Given Imaging Ltd.:
      
 
  2




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##### Table of Contents



Given Imaging Ltd. and its subsidiaries
 
 Consolidated Balance Sheets
 (In thousands except per share data)
 December 31Note
    
    2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    1D; 2
    
    $
    31,697
    
    
    $
    37,103Short-term investments
    
    1H; 5
    
    
    28,509
    
    
    
    23,191Accounts receivable:Trade, net
    
    1E
    
    
    21,673
    
    
    
    23,315Other
    
    3
    
    
    4,662
    
    
    
    10,385Inventories
    
    1F; 4
    
    
    18,931
    
    
    
    15,960Advances to suppliers
    
    16
    
    
    3,540
    
    
    
    190Deferred tax assets
    
    1R; 14D
    
    
    1,178
    
    
    
    1,350Prepaid expenses
    
    
    
    
    1,631
    
    
    
    1,289Total current assets
    
    
    
    
    111,821
    
    
    
    112,783Deposits
    
    
    
    
    1,094
    
    
    
    892Assets held for employees severance payments
    
    1G; 10
    
    
    3,686
    
    
    
    3,007Marketable securities
    
    1H; 5
    
    
    30,063
    
    
    
    41,629Fixed assets, less accumulated depreciation
    
    1I; 6
    
    
    15,115
    
    
    
    15,422Intangible assets less accumulated amortization
    
    1J; 7; 16
    
    
    12,067
    
    
    
    3,583Goodwill
    
    1K; 16
    
    
    4,069
    
    
    
    Total Assets
    
    
    
    $
    177,915
    
    
    $
    177,316
 President and CEO
    
    CFO
    3




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##### Table of Contents



Given Imaging Ltd. and its subsidiaries
 Consolidated Balance Sheets
(In thousands except share data)
 December 31Note
    
    2008
    
    
    2007Liabilities and shareholders equityCurrent liabilitiesCurrent installments of obligation under capital lease
    
    8B
    
    $
    114
    
    
    $
    121Accounts payable:Trade
    
    
    
    
    7,418
    
    
    
    7,275Other
    
    9
    
    
    17,612
    
    
    
    21,012Deferred income
    
    1P
    
    
    1,523
    
    
    
    9,379Total current liabilities
    
    
    
    
    26,667
    
    
    
    37,787Long-term liabilitiesObligation under capital lease
    
    8B
    
    
    485
    
    
    
    448Liability in respect of employees severance payments
    
    10
    
    
    4,599
    
    
    
    3,490Total long-term liabilities
    
    
    
    
    5,084
    
    
    
    3,938Total liabilities
    
    
    
    
    31,751
    
    
    
    41,725Commitments and contingencies
    
    8Minority interest
    
    
    
    
    1,993
    
    
    
    1,996Shareholders equity
    
    11Share capital:
    
    11Ordinary Shares, NIS 0.05 par value each
(90,000,000 shares authorized as of December 31, 2007
and 2008,
29,241,785 and 29,257,785 shares issued and fully
paid as of December 31, 2007 and 2008, respectively)
    
    
    
    
    343
    
    
    
    343Additional paid-in capital
    
    
    
    
    173,983
    
    
    
    166,813Capital reserve
    
    
    
    
    2,166
    
    
    
    2,166Accumulated other comprehensive loss
    
    
    
    
    (600
    )
    
    
    Accumulated deficit
    
    
    
    
    (31,721
    )
    
    
    (35,727
    )Total shareholders equity
    
    
    
    
    144,171
    
    
    
    133,595Total liabilities and shareholders equity
    
    
    
    $
    177,915
    
    
    $
    177,316
   4




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##### Table of Contents



Given Imaging Ltd. and its subsidiaries
 
 Consolidated Statements of Operations
 (In thousands except share and per share data)
 Year ended December 31,Note
    
    2008
    
    
    2007
    
    
    2006Revenues
    
    1P; 12
    
    $
    125,108
    
    
    $
    112,868
    
    
    $
    95,029Cost of revenues
    
    
    
    
    (33,001
    )
    
    
    (29,721
    )
    
    
    (24,154
    )Early repayment of royalty bearing
government grants
    
    8A
    
    
    
    
    
    
    (4,843
    )
    
    
    Gross profit
    
    
    
    
    92,107
    
    
    
    78,304
    
    
    
    70,875Operating expensesResearch and development, gross
    
    1S
    
    
    (15,126
    )
    
    
    (12,847
    )
    
    
    (12,678
    )In-process research and development acquired
in a business combination
    
    16
    
    
    (4,700
    )
    
    
    
    
    
    
    (19,826
    )
    
    
    (12,847
    )
    
    
    (12,678
    )Government grants
    
    1Q; 8A
    
    
    1,530
    
    
    
    1,242
    
    
    
    1,867Research and development, net
    
    
    
    
    (18,296
    )
    
    
    (11,605
    )
    
    
    (10,811
    )Sales and marketing
    
    
    
    
    (60,902
    )
    
    
    (55,446
    )
    
    
    (50,732
    )General and administrative
    
    
    
    
    (19,320
    )
    
    
    (20,981
    )
    
    
    (16,027
    )Termination of marketing agreement
    
    8C
    
    
    5,443
    
    
    
    22,860
    
    
    
    Other, net
    
    6, 7
    
    
    (867
    )
    
    
    (422
    )
    
    
    Total operating expenses
    
    
    
    
    (93,942
    )
    
    
    (65,594
    )
    
    
    (77,570
    )Operating (loss) profit
    
    
    
    
    (1,835
    )
    
    
    12,710
    
    
    
    (6,695
    )Financial income, net
    
    13
    
    
    4,004
    
    
    
    5,520
    
    
    
    3,980Profit (loss) before taxes on income
and minority share
    
    
    
    
    2,169
    
    
    
    18,230
    
    
    
    (2,715
    )Income tax expense
    
    1R, 14
    
    
    (250
    )
    
    
    (4,548
    )
    
    
    (127
    )Profit (loss) before minority share
    
    
    
    
    1,919
    
    
    
    13,682
    
    
    
    (2,842
    )Minority share in losses of subsidiary
    
    
    
    
    2,087
    
    
    
    1,503
    
    
    
    1,334Net profit (loss)
    
    
    
    $
    4,006
    
    
    $
    15,185
    
    
    $
    (1,508
    )Earnings (loss) per share:Basic Earnings (loss) per Ordinary Share
    
    1N
    
    $
    0.14
    
    
    $
    0.52
    
    
    $
    (0.05
    )Diluted Earnings (loss) per Ordinary Share
    
    
    
    $
    0.13
    
    
    $
    0.49
    
    
    $
    (0.05
    )Weighted average number of Ordinary
Shares used to compute basic Earnings
(loss) per Ordinary Share
    
    1N
    
    
    29,254,035
    
    
    
    28,961,968
    
    
    
    28,053,849Weighted average number of Ordinary
Shares used to compute diluted Earnings
(loss) per Ordinary Share
    
    1N
    
    
    30,798,360
    
    
    
    31,030,459
    
    
    
    28,053,849
   5




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##### Table of Contents



Given Imaging Ltd. and its subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 (In thousands except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherOrdinary shares
    
    
    Paid-In
    
    
    Capital
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Reserve
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance
as of December 31, 2005
    
    
    27,950,281
    
    
    $
    327
    
    
    $
    148,955
    
    
    $
    2,166
    
    
    $
    
    
    
    $
    (49,404
    )
    
    $
    102,044Changes during the year 2006:Exercise of stock options
    
    
    591,010
    
    
    
    7
    
    
    
    2,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,036Restricted shares issued
    
    
    100,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Stock based compensation
    
    
    
    
    
    
    
    
    
    
    5,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,213Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,508
    )
    
    
    (1,508
    )Balance as of December 31, 2006
    
    
    28,641,291
    
    
    
    335
    
    
    
    156,197
    
    
    
    2,166
    
    
    
    
    
    
    
    (50,912
    )
    
    
    107,786Changes during the year 2007:Exercise of stock options
    
    
    589,262
    
    
    
    8
    
    
    
    4,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,280Excess tax benefits related to
stock based compensation
    
    
    
    
    
    
    
    
    
    
    693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    693Exercise of warrants
    
    
    5,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares issued
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    5,651
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,651Net profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,185
    
    
    
    15,185Balance as of December 31, 2007
    
    
    29,241,785
    
    
    
    343
    
    
    
    166,813
    
    
    
    2,166
    
    
    
    
    
    
    
    (35,727
    )
    
    
    133,595Changes during the year 2008:Exercise of stock options
    
    
    16,000
    
    
    
    *
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252Stock based compensation
    
    
    
    
    
    
    
    
    
    
    6,918
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,918Unrealized losses
on available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    
    
    
    
    (600
    )Net profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,006
    
    
    
    4,006Balance as of December 31, 2008
    
    
    29,257,785
    
    
    $
    343
    
    
    $
    173,983
    
    
    $
    2,166
    
    
    $
    (600
    )
    
    
    (31,721
    )
    
    
    144,171
 *
    
    Represents less than 1.   6




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##### Table of Contents



Given Imaging Ltd. and its subsidiaries
 
 Consolidated Statements of Cash Flows
 (In thousands)
 Year ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net profit (loss)
    
    $
    4,006
    
    
    $
    15,185
    
    
    $
    (1,508
    )Adjustments required to reconcile net profit (loss) to
net cash
provided by operating activities:Minority share in losses of subsidiary
    
    
    (2,087
    )
    
    
    (1,503
    )
    
    
    (1,334
    )Depreciation and amortization
    
    
    5,183
    
    
    
    4,771
    
    
    
    4,237In-process research and development
    
    
    4,700
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    406
    
    
    
    
    
    
    
    Deferred tax assets
    
    
    172
    
    
    
    24
    
    
    
    (155
    )Stock based compensation
    
    
    6,918
    
    
    
    5,651
    
    
    
    5,213Excess tax benefits related to stock based compensation
    
    
    
    
    
    
    (693
    )
    
    
    Other
    
    
    621
    
    
    
    380
    
    
    
    18Net decrease (increase) in trading securities
    
    
    
    
    
    
    5,092
    
    
    
    (5,060
    )Decrease (increase) in accounts receivable  trade
    
    
    1,642
    
    
    
    (4,428
    )
    
    
    (562
    )Decrease (increase) in other accounts receivable
    
    
    5,723
    
    
    
    (8,922
    )
    
    
    4,801Decrease (increase) in prepaid expenses
    
    
    (342
    )
    
    
    51
    
    
    
    (320
    )Decrease (increase) in advances to suppliers
    
    
    (3,350
    )
    
    
    (108
    )
    
    
    250Decrease (increase) in inventories
    
    
    (2,971
    )
    
    
    2,208
    
    
    
    (1,996
    )Increase (decrease) in accounts payable
    
    
    (3,287
    )
    
    
    8,570
    
    
    
    500Decrease in deferred income
    
    
    (7,856
    )
    
    
    (14,903
    )
    
    
    (1,223
    )Net cash provided by operating activities
    
    
    9,478
    
    
    
    11,375
    
    
    
    2,861Cash flows from investing activities:Purchase of fixed assets and intangible assets
    
    
    (6,300
    )
    
    
    (5,772
    )
    
    
    (5,876
    )Purchase of fixed assets, intangible assets, and
goodwill in a business combination
    
    
    (16,660
    )
    
    
    
    
    
    
    Deposits
    
    
    (192
    )
    
    
    (355
    )
    
    
    (41
    )Proceeds from sale of marketable securities
    
    
    67,743
    
    
    
    18,753
    
    
    
    13,120Proceeds from sales of fixed assets
    
    
    61
    
    
    
    
    
    
    
    Investments in marketable securities
    
    
    (61,986
    )
    
    
    (36,584
    )
    
    
    (37,960
    )Net cash used in investing activities
    
    
    (17,334
    )
    
    
    (23,958
    )
    
    
    (30,757
    )Cash flows from financing activities:Principal payments on capital lease obligation
    
    
    (120
    )
    
    
    (37
    )
    
    
    (14
    )Proceeds from the issuance of Ordinary Shares
    
    
    252
    
    
    
    4,280
    
    
    
    2,037Excess tax benefits related to stock based compensation
    
    
    
    
    
    
    693
    
    
    
    Issuance of shares by a consolidated company
    
    
    2,288
    
    
    
    
    
    
    
    4,772Net cash provided by financing activities
    
    
    2,420
    
    
    
    4,936
    
    
    
    6,795Effect of exchange rate changes on cash
    
    
    30
    
    
    
    240
    
    
    
    255Decrease in cash and cash equivalents
    
    
    (5,406
    )
    
    
    (7,407
    )
    
    
    (20,846
    )Cash and cash equivalents at beginning of year
    
    
    37,103
    
    
    
    44,510
    
    
    
    65,356Cash and cash equivalents at end of year
    
    
    31,697
    
    
    
    37,103
    
    
    
    44,510
 Supplementary cash flow information
 Year ended December 31,2008
    
    
    2007
    
    
    2006Income taxes paid
    
    $
    259
    
    
    $
    1,098
    
    
    $
    300Assets acquired under capital lease
    
    $
    109
    
    
    $
    569
    
    
    
    
 
  7




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies
 A. General
    
    
    a single-use, disposable PillCam color-imaging capsule that is ingested by the patient;
 
    
    a portable data recorder and array of sensors that are worn by the patient; and
 
    
    a computer workstation with a proprietary RAPID software for downloading,
processing and analyzing recorded data.
      8




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 B. Basis of presentation
  C. Functional and reporting currency
   D. Cash and cash equivalents
  E. Allowance for doubtful accounts receivable  trade
   9




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 E. Allowance for doubtful accounts receivable  trade (contd)
  Year ended December 31,2008
    
    
    2007
    
    
    2006Opening balance
    
    $
    329
    
    
    $
    787
    
    
    $
    431Provision
    
    
    10
    
    
    
    (79
    )
    
    
    356Write-offs
    
    
    (129
    )
    
    
    (379
    )
    
    
    Closing balance
    
    $
    210
    
    
    $
    329
    
    
    $
    787
 F. Inventories
  G. Assets held for employees severance payments
  H. Marketable securities
       10




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 H. Marketable securities (contd)
  I. Fixed assets
  %Computers and software
    
    
    33Instruments and laboratory equipment
    
    
    15Leasehold improvements
    
    
    10Motor vehicles
    
    
    15Machinery and equipment
    
    
    15Communication equipment
    
    
    15Office furniture and equipment
    
    
    10-15
   J. Definite-life Intangible assets
   Accounting for website development costs
   11




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 K. Goodwill
   L. Stock compensation plans
 Employees and Directors
     12




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 N. Earnings (loss) per Ordinary Share
  Year ended December 31,2008
    
    
    2007
    
    
    2006Net profit (loss) attributable to
Ordinary Shares
    
    $
    4,006
    
    
    $
    15,185
    
    
    $
    (1,508
    )Weighted average number of Ordinary
Shares outstanding
used in basic Earnings (loss) per
Ordinary Share
Calculation
    
    
    29,254,035
    
    
    
    28,961,968
    
    
    
    28,053,849Add assumed exercise of outstanding
dilutive
potential Ordinary Shares
    
    
    1,544,325
    
    
    
    2,068,491
    
    
    
    Weighted average number of Ordinary
Shares outstanding
used in diluted Earnings (loss) per
Ordinary Share
Calculation
    
    
    30,798,360
    
    
    
    31,030,459
    
    
    
    28,053,849Basic Earnings (loss) per Ordinary Share
    
    $
    0.14
    
    
    $
    0.52
    
    
    $
    (0.05
    )Diluted Earnings (loss) per Ordinary
Share
    
    $
    0.13
    
    
    $
    0.49
    
    
    $
    (0.05
    )Number of options excluded from the
diluted Earnings per share calculation
because of anti-dilutive effect
    
    
    5,461,047
    
    
    
    1,881,033
    
    
    
    4,114,604
  13




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 O. Use of estimates
  P. Revenue recognition
      Q. Government-Sponsored Research and Development
  R. Taxes on income
   14




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 R. Taxes on income (contd)
 
 S. Research and development costs
   T. Allowance for product warranty
  U. Concentration of credit risk
 
  V. Comprehensive Income
   15




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##### Table of Contents



Note 1  Organization and Summary of Significant Accounting Policies (contd)
 W. Accounting pronouncements adopted in 2008
   X. Recent accounting pronouncements
     16




---



##### Table of Contents



Note 2  Cash and Cash Equivalents
 December 312008
    
    
    2007Denominated in U.S. dollars
    
    $
    18,401
    
    
    $
    22,877Denominated in New Israeli Shekels
    
    
    3,118
    
    
    
    2,022Denominated in Euros
    
    
    4,422
    
    
    
    6,642Denominated in Australian dollars
    
    
    277
    
    
    
    1,102Denominated in Singapore dollars
    
    
    216
    
    
    
    168Denominated in Japanese Yen
    
    
    5,263
    
    
    
    4,292$
    31,697
    
    
    $
    37,103
 Note 3  Accounts Receivable  Other
 December 312008
    
    
    2007Government institutions
    
    $
    3,434
    
    
    $
    2,118In Scope (Note 8C)
    
    
    
    
    
    
    7,620Other
    
    
    1,228
    
    
    
    647$
    4,662
    
    
    $
    10,385
 Note 4  Inventories
 December 312008
    
    
    2007Raw materials and components
    
    $
    9,651
    
    
    $
    7,733Work-in-progress
    
    
    3,024
    
    
    
    2,941Finished goods
    
    
    6,256
    
    
    
    5,286$
    18,931
    
    
    $
    15,960
 Note 5  Marketable Securities
    17




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##### Table of Contents



Note 5  Marketable Securities (contd)
    Gross
    
    
    Grossunrealized
    
    
    unrealizedCarrying
    
    
    holding
    
    
    holdingamount
    
    
    gains
    
    
    (losses)
    
    
    Fair valueAt December 31, 2008Available- for- sale:U.S government or
government agencies
    
    $
    22,967
    
    
    $
    407
    
    
    $
    
    
    
    $
    23,374Corporate debt securities
    
    
    21,950
    
    
    
    35
    
    
    
    (1,042
    )
    
    
    20,943Total At December 31, 2008
    
    
    44,917
    
    
    
    442
    
    
    
    (1,042
    )
    
    
    44,317Total At December 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    At December 31, 2008:Held- to- maturity:U.S government or
government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total at December 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total at December 31, 2007
    
    
    64,820
    
    
    
    
    
    
    
    (802
    )
    
    
    64,018
  CarryingAmount
    
    
    Fair valueAvailable- for- sale:Current maturities
    
    $
    14,889
    
    
    $
    14,254Due after one year through five years
    
    
    30,028
    
    
    
    30,063$
    44,917
    
    
    $
    44,317
  18




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##### Table of Contents



Note 5  Marketable Securities (contd)
  Less than 12 months
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealizedlosses
    
    
    Fair value
    
    
    losses
    
    
    Fair valueAvailable for sale:U.S government or
government agencies-
    
    
    
    
    
    
    4,629
    
    
    
    
    
    
    
    23,374Corporate debt securities
    
    
    863
    
    
    
    9,624
    
    
    
    1,042
    
    
    
    20,943863
    
    
    
    14,253
    
    
    
    1,042
    
    
    
    44,317
  Note 6  Fixed Assets, at Cost, Less Accumulated Depreciation
 December 312008
    
    
    2007Computers and software
    
    $
    9,026
    
    
    $
    6,957Instruments and laboratory equipment
    
    
    1,367
    
    
    
    1,077Leasehold improvements
    
    
    4,743
    
    
    
    4,600Motor vehicles
    
    
    233
    
    
    
    186Machinery and equipment
    
    
    16,120
    
    
    
    16,060Communication equipment
    
    
    475
    
    
    
    492Office furniture and equipment
    
    
    1,857
    
    
    
    1,797Fixed assets, at cost
    
    
    33,821
    
    
    
    31,169Accumulated depreciation
    
    
    (18,706
    )
    
    
    (15,747
    )Fixed assets at cost, less accumulated depreciation
    
    $
    15,115
    
    
    $
    15,422
    19




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##### Table of Contents



Note 7  Intangible Assets, at Cost, Less Accumulated Amortization
 December 312008
    
    
    2007Capitalized patents and trademarks
    
    $
    6,560
    
    
    $
    5,545Web site development
    
    
    1,214
    
    
    
    1,165Software development
    
    
    647
    
    
    
    647Patents, trademarks and trade names acquired in
a business combination (note 16)
    
    
    6,400
    
    
    
    Customer relationships acquired in a business
combination (note 16)
    
    
    1,800
    
    
    
    Intangible assets at cost
    
    
    16,621
    
    
    
    7,357Accumulated amortization
    
    
    (4,554
    )
    
    
    (3,774
    )Intangible assets, less accumulated amortization
    
    $
    12,067
    
    
    $
    3,583
  Note 8  Commitments and Contingencies
 A. Office of the Chief Scientist Grants
    20




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##### Table of Contents



Note 8  Commitments and Contingencies (contd)
 B. Operating leases
    Capital leases
    
    
    Operating leases2009
    
    $
    149
    
    
    $
    3,9892010
    
    
    149
    
    
    
    3,2612011
    
    
    149
    
    
    
    2,6282012
    
    
    116
    
    
    
    2,1672013 and thereafter
    
    
    26
    
    
    
    5,251$
    589
    
    
    $
    17,296
   C. Agreement with InScope
   21




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##### Table of Contents



Note 8  Commitments and Contingencies (contd)
 C. Agreement with InScope (Contd)
   Termination payments
    
    $
    7,620Reimbursement for certain clinical trials
    
    
    1,200$
    8,820
      Original and additional milestone payments
    
    $
    5,443Reimbursement for certain clinical trials
    
    
    1,200$
    6,643
  D. Agreements with key single  source suppliers and commitments to suppliers
 (1)
    
    In 2002, the Company entered into an agreement with a Canadian company
(Canadian Company) that supplies a component that is integrated into the PillCam
capsules. The agreement also includes non-compete provisions prohibiting the Canadian
company from selling the component to other parties and, for a certain period of time
following termination of the agreement, from transferring any of the intellectual
property and design specifications associated with the development of the component to
any potential competitors in the Companys market.
  22




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##### Table of Contents



Note 8  Commitments and Contingencies (contd)
 D. Agreements with key single  source suppliers and commitments to suppliers
(contd)
  (2)
    
    The Company is a party to a development, manufacturing and supply agreement
with another supplier (Supplier), under which the Supplier has developed a component,
that is integrated into the PillCam capsules and is also manufacturing and supplying
this component exclusively for the Company. Under this contract, the Supplier may not
offer the component as a standard catalog part. In the event that the Supplier ceases
operations or enters into liquidation, the Company is entitled to receive all
information necessary to manufacture the component upon the payment of reasonable
royalties to be agreed upon with the Supplier. The Company has agreed to purchase the
enhanced component only from the Supplier and the Supplier has agreed to sell the
component exclusively to the Company. The agreement permits the Supplier to disregard
the exclusive sales requirement if the Company materially breaches the agreement and
fails to cure such breach within a specified time.
   (3)
    
    The Companys annual commitments under agreements with single source and other
suppliers (including commitments related to the acquisition of the Bravo business as
discussed in Note 16) for the next 5 years are as follows:
 2009
    
    $
    19,1692010
    
    
    3752011
    
    
    7502012
    
    
    1,0002013 and beyond
    
    
    9,125$
    30,419
  23




---



##### Table of Contents



Note 8  Commitments and Contingencies (contd)
 E. Patent Litigation
   F. Other Claims
  G. Registration Rights Agreement
    24




---



##### Table of Contents



Note 9  Accounts Payable  Other
 December 312008
    
    
    2007Government institutions
    
    $
    4,596
    
    
    $
    4,766Liabilities relating to employees
    
    
    8,292
    
    
    
    8,348Advances from customers
    
    
    139
    
    
    
    21Warranty
    
    
    98
    
    
    
    338Commissions
    
    
    826
    
    
    
    1,659Accrued expenses
    
    
    3,661
    
    
    
    5,880$
    17,612
    
    
    $
    21,012
 Note 10  Liability in Respect of Employee Severance Payments
       25




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##### Table of Contents



Note 11  Share Capital
 A. Ordinary shares
  B. Employees and non employees stock options
      26




---



##### Table of Contents



Note 11  Share Capital (contd)
 B. Employees and non employees stock options (contd)
       27




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##### Table of Contents



Note 11  Share Capital (contd)
 B. Employees and non employees stock options (contd)
  1.
    
    Dividend yield of zero percent.
 2.
    
    Risk free average interest rate of 4.75% and 2.59% for the years ended December
31, 2007 and 2008, respectively, which represents the risk free rate of US$ zero -
coupon U.S Government Bonds.
 3.
    
    Weighted average expected life of 3.75 and 3.41 years for the years ended
December 31, 2007 and 2008, respectively, which represents the period for which the
options granted are expected to be outstanding.
  4.
    
    Expected average volatility of 43.17% and 35.06% for the years ended December
31, 2007 and 2008 respectively, which represents a weighted average standard deviation
rate for the price of the Companys Ordinary Shares in the NASDAQ National Market.
  Options outstandingWeighted averageNumber outstanding at
    
    
    remainingExercise price
    
    December 31, 2008
    
    
    contractual life (in years)$1 - $10
    
    
    488,217
    
    
    
    2.95$10.01-$20
    
    
    2,542,100
    
    
    
    3.87$20.01-$30
    
    
    2,275,006
    
    
    
    3.84$30.01-$40
    
    
    500,816
    
    
    
    5.905,806,139
 Options outstandingWeighted averageNumber outstanding at
    
    
    remainingExercise price
    
    December 31, 2007
    
    
    contractual life (in years)$1 - $10
    
    
    438,217
    
    
    
    3.73$10.01-$20
    
    
    1,687,900
    
    
    
    4.64$20.01-$30
    
    
    2,308,687
    
    
    
    4.81$30.01-$40
    
    
    499,066
    
    
    
    6.904,933,870
  28




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##### Table of Contents



Note 11  Share Capital (contd)
 B. Employees and non employees stock options (contd)
  Weighted average
    
    
    Weighted averageNumber of shares
    
    
    exercise price
    
    
    grant date fair valueBalance at
December 31,
2006
    
    
    4,114,604Granted
    
    
    1,453,392
    
    
    $
    26.08
    
    
    $
    10.22Forfeited
    
    
    (44,864
    )
    
    
    24.40
    
    
    
    12.26Exercised
    
    
    (589,262
    )
    
    
    7.26
    
    
    
    5.12Balance at
December 31,
2007
    
    
    4,933,870Balance at
December 31,
2007
    
    
    4,933,870Granted
    
    
    990,350
    
    
    $
    15.91
    
    
    $
    4.98Forfeited
    
    
    (102,081
    )
    
    
    20.79
    
    
    
    8.69Exercised
    
    
    (16,000
    )
    
    
    15.73
    
    
    
    7.91Balance at
December 31,
2008
    
    
    5,806,139
  Weighted average grantNon-vested options
    
    Number of Shares
    
    
    date fair valueBalance at January 1, 2008
    
    
    2,202,466
    
    
    $
    9.18Granted
    
    
    988,850
    
    
    
    4.96Vested
    
    
    (577,545
    )
    
    
    8.71Forfeited
    
    
    (93,395
    )
    
    
    8.58Balance at December 31, 2008
    
    
    2,520,376
    
    
    $
    8.20
  
   29




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##### Table of Contents



Note 11  Share Capital (contd)
 B. Employees and non employees stock options (contd)
  Year ended December 31,2008
    
    
    2007
    
    
    2006Research and development costs
    
    $
    307
    
    
    $
    406
    
    
    $
    569Selling and marketing expenses
    
    
    1,756
    
    
    
    1,889
    
    
    
    1,839General and administrative expenses
    
    
    4,855
    
    
    
    3,356
    
    
    
    2,805$
    6,918
    
    
    $
    5,651
    
    
    $
    5,213
 Note 12  Revenues
 A. Revenues by activities
 Year ended December 31,2008
    
    
    2007
    
    
    2006Workstations and recorders
    
    $
    14,523
    
    
    $
    15,267
    
    
    $
    14,104PillCam SB capsule
    
    
    103,005
    
    
    
    90,614
    
    
    
    76,360PillCam ESO capsule
    
    
    1,213
    
    
    
    1,012
    
    
    
    1,438PillCam Colon capsule
    
    
    1,465
    
    
    
    1,106
    
    
    
    Patency capsules and scanners
    
    
    662
    
    
    
    523
    
    
    
    353Bravo pH monitoring products
    
    
    884
    
    
    
    
    
    
    
    Services
    
    
    3,356
    
    
    
    4,346
    
    
    
    2,774$
    125,108
    
    
    $
    112,868
    
    
    $
    95,029
 B. Revenues by geographic areas
 Year ended December 31,2008
    
    
    2007
    
    
    2006Americas
    
    $
    75,609
    
    
    $
    73,849
    
    
    $
    67,648Europe, Middle East and Asia
    
    
    34,908
    
    
    
    27,299
    
    
    
    21,642Asia Pacific
    
    
    14,591
    
    
    
    11,720
    
    
    
    5,739$
    125,108
    
    
    $
    112,868
    
    
    $
    95,029
  30




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##### Table of Contents



Note 13  Financial Income, net
 Year ended December 31,2008
    
    
    2007
    
    
    2006Currency gains, net
    
    $
    1,504
    
    
    $
    1,456
    
    
    $
    778Interest income
    
    
    753
    
    
    
    1,069
    
    
    
    1,639Income from marketable securities
    
    
    2,115
    
    
    
    3,109
    
    
    
    1,849Other
    
    
    (368
    )
    
    
    (114
    )
    
    
    (286
    )$
    4,004
    
    
    $
    5,520
    
    
    $
    3,980
  Note 14  Taxes on Income
 A. Company
 (1)
    
    Israeli income tax is computed on the basis of the Companys results in New
Israeli Shekels (NIS) determined for statutory purposes. Until 2007, the Company was
assessed for tax purposes under the Income Tax Law (Inflationary Adjustments 1985), the
purpose of which is to prevent taxation on inflationary profits. Starting January 1,
2008, this law was postponed and most of its provisions are not applicable for the 2008
taxable income.
       31




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##### Table of Contents



Note 14  Taxes on Income (contd)
 A. Company (contd)
  a.
    
    Companies that meet the criteria of the Alternative
Path of tax benefits will receive those benefits without prior approval.
In addition, there will be no requirement to file reports with the
Investment Center. Companies will be required to notify the Israeli
Income Tax Authorities regarding the implementation of the Alternative
Path. Audit will take place via the Income Tax Authorities as part of the
tax audits. Request for pre-ruling is possible.
 b.
    
    Tax benefits of the Alternative Path include lower tax
rates or zero tax depending on the investment zone and the path chosen,
lower tax rates on dividends and accelerated depreciation.
 c.
    
    In order to receive benefits in the Grant Path or the
Alternative Path, the Industrial Enterprise must contribute to the
economic independence of Israels economy in one of the following ways:
 1.
    
    Its primary activity is in the Biotechnology
or Nanotechnology fields and pre-approval is received from the head of
research and development at the Office of the Chief Scientist;
 2.
    
    Its revenue from a specific country is not
greater than 75% of its total revenues that year;
 3.
    
    25% or more of its revenues are derived from a
specific foreign market of at least 12 million residents.
  (2)
    
    As of December 31, 2008, the Company has net operating loss carryforwards in
Israel of approximately $4,400 and $10,000 which are available to offset future regular
taxable income and taxable capital gains respectively for indefinite period.
 (3)
    
    As explained above, the Israeli Company is exempt from tax for a ten-year
period. Therefore, the Israeli Company has not recorded deferred tax assets and
liabilities.
 (4)
    
    In 2005 tax legislation was passed in Israel which provided a gradual
reduction in the corporate tax rate as follows: 2006  31%, 2007  29%, 2008  27%,
2009  26% and from 2010 onward 25%. Furthermore, as from 2010, upon reduction of the
corporate tax rate to 25%, capital gains will also be subject to tax of 25%.
  32




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##### Table of Contents



Note 14  Taxes on Income (contd)
 B. Foreign subsidiaries
  C. Profit (loss) before tax and income tax benefit (expense) included in the
consolidated statements of operations
 Year ended December 312008
    
    
    2007
    
    
    2006Profit (loss) before taxes on income
and minority share:Israel
    
    $
    2,536
    
    
    $
    13,438
    
    
    $
    3,459Foreign jurisdiction
    
    
    (367
    )
    
    
    4,792
    
    
    
    (6,174
    )$
    2,169
    
    
    $
    18,230
    
    
    $
    (2,715
    )Current taxes:Israel
    
    $
    (286
    )
    
    $
    (3,669
    )
    
    $
    (200
    )Foreign jurisdiction
    
    
    208
    
    
    
    (855
    )
    
    
    (82
    )$
    (78
    )
    
    $
    (4,524
    )
    
    $
    (282
    )Deferred taxes:Israel
    
    $
    
    
    
    $
    
    
    
    $
    Foreign jurisdiction
    
    $
    (172
    )
    
    
    (24
    )
    
    
    155$
    (172
    )
    
    $
    (24
    )
    
    $
    155Income tax expense
    
    $
    (250
    )
    
    $
    (4,548
    )
    
    $
    (127
    )
 D. Deferred taxes
    33




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##### Table of Contents



Note 14  Taxes on Income (contd)
 D. Deferred taxes (contd)
  December 312008
    
    
    2007Tax loss carryforwards of subsidiaries
    
    $
    11,076
    
    
    $
    7,636Other timing differences
    
    
    1,109
    
    
    
    2,397Total gross deferred tax assets
    
    
    12,185
    
    
    
    10,003Valuation allowance
    
    
    (11,007
    )
    
    
    (8,683
    )Net deferred tax asset
    
    $
    1,178
    
    
    $
    1,350
   E. Reconciliation of the statutory tax benefit (expense) to actual income tax
benefit (expense)
 Year ended December 31,2008
    
    
    2007
    
    
    2006Profit (loss) before taxes on income
and minority share
    
    $
    2,169
    
    
    $
    18,230
    
    
    $
    (2,715
    )Tax rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Computed expected tax
    
    
    
    
    
    
    
    
    
    
    Increase in unrecognized tax benefits
    
    
    (320
    )
    
    
    (2,901
    )
    
    
    Permanent difference related to
share based compensation expenses
and Other
    
    
    2,034
    
    
    
    1,256
    
    
    
    (200
    )Change in valuation allowance
    
    
    (2,324
    )
    
    
    (1,446
    )
    
    
    (789
    )Foreign tax rate differential
    
    
    360
    
    
    
    (1,457
    )
    
    
    862Income tax expense
    
    $
    (250
    )
    
    $
    (4,548
    )
    
    $
    127
    )
  34




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##### Table of Contents



Note 14  Taxes on Income (contd)
 F. Accounting for income tax uncertainties
      2008
    
    
    2007Balance at January 1
    
    $
    6,771
    
    
    
    3,870Additions based on tax positions related to the current year
    
    
    180
    
    
    
    2,901Additions for tax positions of prior years
    
    
    140
    
    
    
    Reductions for tax positions of prior years
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    Balance at December 31
    
    $
    7,091
    
    
    
    6,771
    35




---



##### Table of Contents



Note 15  Fair Value of Financial Instruments
  Note 16  Acquisition and Investment
 A. Acquisition of Bravo pH monitoring business
       36




---



##### Table of Contents



Note 16  Acquisition and Investment (contd)
 A. Acquisition of Bravo pH monitoring business (Contd)
  Property, plant and equipment
    
    $
    250Identifiable intangible assets:Patents of core technology
    
    
    5,000Customer relationships
    
    
    1,800Trademarks and trade name
    
    
    1,400In-process research and development
    
    
    4,700Goodwill
    
    
    3,510Total assets acquired
    
    
    16,660Prepayments for inventory supply and future R&D services
    
    
    3,841Purchase price allocated (including transaction costs of $501)
    
    $
    20,501
    B. Investment in the Japanese Subsidiary
   37




---



##### Table of Contents



Note
17  Dividend
  Note 18  Subsequent Events
   38




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##### Table of Contents



NETVISION LTD. AND ITS SUBSIDIARIES
 
 Consolidated Financial Statements
 As of December 31, 2008




---



##### Table of Contents



NETVISION LTD. AND ITS SUBSIDIARIES
 Consolidated Financial Statements as of December 31, 2008
 Table of Contents
 PageAuditors report
    
    
    2Consolidated
financial statementsConsolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statements of recognized income and expense
    
    
    5Statement of changes in shareholders equity
    
    
    6Consolidated statements of cash flows
    
    
    7-10Notes to the consolidated financial statements
    
    
    11-130
  1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
 Netvision Ltd.
     Kost Forer Gabay & KasiererA member firm of Ernst & Young Global Limited
   2




---



##### Table of Contents



NETVISION LTD.
 
 Consolidated Balance Sheets
 December 312008
    
    
    2007Note
    
    
    NIS in thousandsCurrent assetsCash and cash equivalents
    
    
    4
    
    
    
    230,866
    
    
    
    95,515Short-term deposits
    
    
    5
    
    
    
    
    
    
    
    37,937Trade receivables, net
    
    
    6
    
    
    
    290,077
    
    
    
    245,170Other receivables
    
    
    7
    
    
    
    42,007
    
    
    
    51,671Inventory of purchased products
    
    
    
    
    
    
    6,543
    
    
    
    8,616569,493
    
    
    
    438,909Non-current assetsLong-term receivables
    
    
    
    
    
    
    4,306
    
    
    
    2,293Rights to use lines of communication
    
    
    
    
    
    
    229,203
    
    
    
    207,173Fixed assets, net
    
    
    9
    
    
    
    180,443
    
    
    
    166,311Goodwill
    
    
    10
    
    
    
    540,373
    
    
    
    540,126Other intangible assets, net
    
    
    10
    
    
    
    70,337
    
    
    
    129,013Deferred taxes
    
    
    20
    
    
    
    32,714
    
    
    
    30,0681,057,376
    
    
    
    1,074,9841,626,869
    
    
    
    1,513,893Current liabilitiesBank credit
    
    
    11
    
    
    
    85,819
    
    
    
    32,713Trade payables
    
    
    12
    
    
    
    216,820
    
    
    
    254,560Other payables
    
    
    13
    
    
    
    112,234
    
    
    
    93,482Current maturities of long-term liabilities
    
    
    17
    
    
    
    3,179
    
    
    
    1,710Current maturities of convertible debentures (Series B)
    
    
    14
    
    
    
    16,556
    
    
    
    434,608
    
    
    
    382,465Long-term liabilitiesConvertible debentures (Series A)
    
    
    14
    
    
    
    
    
    
    
    72,018Convertible debentures (Series B)
    
    
    14
    
    
    
    30,344
    
    
    
    Warrants (Series 1)
    
    
    15
    
    
    
    
    
    
    
    11,573Deferred income in respect of rights to use
lines of communication
    
    
    16
    
    
    
    64,136
    
    
    
    67,752Long-term trade payables
    
    
    17
    
    
    
    5,964
    
    
    
    7,711Employee benefits
    
    
    19
    
    
    
    16,155
    
    
    
    14,461116,599
    
    
    
    173,515Equity attributable to equity holders of the Company
    
    
    22Share capital
    
    
    
    
    
    
    30,086
    
    
    
    29,641Share premium
    
    
    
    
    
    
    998,556
    
    
    
    981,775Warrants (Series 1)
    
    
    
    
    
    
    9,727
    
    
    
    Convertible feature of debentures (Series B)
    
    
    
    
    
    
    8,206
    
    
    
    Retained earnings (accumulated losses)
    
    
    
    
    
    
    29,087
    
    
    
    (53,787
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    284Total equity
    
    
    
    
    
    
    1,075,662
    
    
    
    957,9131,626,869
    
    
    
    1,513,893
 March 9, 2009Date of approval of 
financial statements
    
    Ami Erel
Chairman of the Board of
Directors
    
    Richard Hunter
Chief Executive Officer
    
    Ofir Sarid
Chief Financial Officer
 The accompanying notes are an integral part of these consolidated financial statements.
  3




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##### Table of Contents



NETVISION LTD.
 
 Consolidated Statements of Operations
 Year ended December 312008
    
    
    2007NIS in thousandsNote
    
    
    (Except earnings per share data)Revenues
    
    
    
    
    
    
    1,234,584
    
    
    
    1,147,088Cost of revenues
    
    
    24A
    
    
    
    981,822
    
    
    
    1,024,720Gross profit
    
    
    
    
    
    
    252,762
    
    
    
    122,368Selling and marketing expenses
    
    
    24B
    
    
    
    52,108
    
    
    
    45,742General and administrative expenses
    
    
    24C
    
    
    
    75,118
    
    
    
    57,061Impairment of intangible assets
    
    
    
    
    
    
    14,143
    
    
    
    26,543Operating profit (loss)
    
    
    
    
    
    
    111,393
    
    
    
    (*)    (6,978
    )Financing income
    
    
    24E
    
    
    
    10,733
    
    
    
    20,140Financing expenses
    
    
    24E
    
    
    
    (19,395
    )
    
    
    (20,654
    )Other income, net
    
    
    24D
    
    
    
    382
    
    
    
    39,582Profit before taxes on income
    
    
    
    
    
    
    103,113
    
    
    
    32,090Taxes on income
    
    
    20
    
    
    
    16,359
    
    
    
    12,685Net income
    
    
    
    
    
    
    86,754
    
    
    
    19,405Attributable to:Equity holders of the Company
    
    
    
    
    
    
    86,754
    
    
    
    19,152Minority interest
    
    
    
    
    
    
    
    
    
    
    25386,754
    
    
    
    19,405Earnings per share attributable to the equity holders of the
Company (in NIS)
    
    
    25Basic earnings per share
    
    
    
    
    
    
    2.99
    
    
    
    0.75Diluted earnings per share
    
    
    
    
    
    
    2.70
    
    
    
    0.16
 (*)
    
    The operating loss for the year ended December 31, 2007 includes the effect of merger and
reorganization expenses in the amount of NIS 33.5 million. The accompanying notes are an integral part of these consolidated financial statements.
  4




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##### Table of Contents



NETVISION LTD.
 
 Consolidated Statements of Recognized Income and Expense
 Year ended December 312008
    
    
    2007NIS in thousandsDefined benefit plan actuarial losses, net
    
    
    8,746
    
    
    
    Total expenses recognized directly in equity
    
    
    8,746
    
    
    
    Net income
    
    
    86,754
    
    
    
    19,405Total recognized income
    
    
    78,008
    
    
    
    19,405Attributable to:Equity holders of the Company
    
    
    78,008
    
    
    
    19,152Minority interest
    
    
    
    
    
    
    25378,008
    
    
    
    19,405
 The accompanying notes are an integral part of these consolidated financial statements.
  5




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##### Table of Contents



NETVISION LTD.
 
 Statements of Changes in Shareholders Equity
 Attributable to equity holders of the CompanyConvertible
    
    
    Retainedfeature of
    
    
    earningsNumber

    
    
    Share
    
    
    Share
    
    
    Options
    
    
    debentures
    
    
    (accumulated
    
    
    
    
    
    
    Minority
    
    
    Totalof shares
    
    
    capital
    
    
    premium
    
    
    (Series 1)
    
    
    (Series B)
    
    
    loss)
    
    
    Total
    
    
    interest
    
    
    equityNIS in thousandsBalance as of January 1, 2008
    
    
    28,758,986
    
    
    
    29,641
    
    
    
    981,775
    
    
    
    
    
    
    
    
    
    
    
    (53,787
    )
    
    
    957,629
    
    
    
    284
    
    
    
    957,913Amortization of Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,066
    
    
    
    7,066
    
    
    
    
    
    
    
    7,066Equity component of convertible debentures (see
Note 14C)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,574
    
    
    
    
    
    
    
    9,574
    
    
    
    
    
    
    
    9,574Conversion of debentures into shares
    
    
    293,335
    
    
    
    293
    
    
    
    11,559
    
    
    
    
    
    
    
    (1,368
    )
    
    
    
    
    
    
    10,484
    
    
    
    
    
    
    
    10,484Classification of liability in respect of options
(Series 1) (see Note 15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,971
    
    
    
    
    
    
    
    
    
    
    
    9,971
    
    
    
    
    
    
    
    9,971Exercise of share options (Series 1)
    
    
    21,751
    
    
    
    22
    
    
    
    949
    
    
    
    (244
    )
    
    
    
    
    
    
    
    
    
    
    727
    
    
    
    
    
    
    
    727Exercise of employee share options
    
    
    129,248
    
    
    
    130
    
    
    
    4,273
    
    
    
    
    
    
    
    
    
    
    
    (2,200
    )
    
    
    2,203
    
    
    
    
    
    
    
    2,203Classification of minority interest to goodwill in
respect of put option to minority in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (284
    )
    
    
    (284
    )Defined benefit plan actuarial losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,746
    )
    
    
    (8,746
    )
    
    
    
    
    
    
    (8,746
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,754
    
    
    
    86,754
    
    
    
    
    
    
    
    86,754Balance as of December 31, 2008
    
    
    29,203,320
    
    
    
    30,086
    
    
    
    998,556
    
    
    
    9,727
    
    
    
    8,206
    
    
    
    29,087
    
    
    
    1,075,662
    
    
    
    
    
    
    
    1,075,662Balance as of January 1, 2007
    
    
    12,759,149
    
    
    
    13,640
    
    
    
    157,437
    
    
    
    
    
    
    
    
    
    
    
    (74,908
    )
    
    
    96,169
    
    
    
    
    
    
    
    96,169Issuance of share capital (net of issuance expenses)
    
    
    14,812,887
    
    
    
    14,813
    
    
    
    784,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798,827
    
    
    
    
    
    
    
    798,827Change in holding rate of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    31Amortization of Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,003
    
    
    
    5,003
    
    
    
    
    
    
    
    5,003Conversion of debentures into shares
    
    
    545,389
    
    
    
    545
    
    
    
    26,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,195
    
    
    
    
    
    
    
    27,195Exercise of share options (Series 1)
    
    
    9,755
    
    
    
    10
    
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518
    
    
    
    
    
    
    
    518Exercise of employee share options
    
    
    631,806
    
    
    
    633
    
    
    
    13,166
    
    
    
    
    
    
    
    
    
    
    
    (3,034
    )
    
    
    10,765
    
    
    
    
    
    
    
    10,765Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,152
    
    
    
    19,152
    
    
    
    253
    
    
    
    19,405Balance as of December 31, 2007
    
    
    28,758,986
    
    
    
    29,641
    
    
    
    981,775
    
    
    
    
    
    
    
    
    
    
    
    (53,787
    )
    
    
    957,629
    
    
    
    284
    
    
    
    957,913
 The accompanying notes are an integral part of these consolidated financial statements.
  6




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##### Table of Contents



NETVISION LTD.
 
 Consolidated Statements of Cash Flows
 Year ended December 312008
    
    
    2007NIS in thousandsCash flows from operating activitiesNet income
    
    
    86,754
    
    
    
    19,405Adjustments to reconcile net income to net cash
flows from operating activities (A)
    
    
    56,670
    
    
    
    110,065Net cash from operating activities
    
    
    143,424
    
    
    
    129,470Cash flows from investing activitiesPurchase of fixed assets
    
    
    (72,309
    )
    
    
    (60,643
    )Purchase of intangible assets
    
    
    (6,228
    )
    
    
    (4,281
    )Cash from purchase of companies consolidated for the
first time (B)
    
    
    
    
    
    
    7,330Cash used to purchase operation consolidated for the
first time (C)
    
    
    (23,300
    )
    
    
    Proceeds from sale of marketable securities and short-term deposits
    
    
    37,514
    
    
    
    39,758Proceeds from sale of investment in former subsidiary (D)
    
    
    213
    
    
    
    4,262Net cash used in investing activities
    
    
    (64,110
    )
    
    
    (13,574
    )Cash flows from financing activitiesIssuance of share capital (net of issuance expenses)
    
    
    
    
    
    
    112,489Exercise of options and employee options
    
    
    2,930
    
    
    
    11,089Repayment of short-term shareholders loans
    
    
    
    
    
    
    (18,866
    )Short-term bank credit, net
    
    
    53,107
    
    
    
    (128,670
    )Net cash from (used in) financing activities
    
    
    56,037
    
    
    
    (23,958
    )Increase in cash and cash equivalents
    
    
    135,351
    
    
    
    91,938Balance of cash and cash equivalents at the beginning of
the year
    
    
    95,515
    
    
    
    3,577Balance of cash and cash equivalents at the end of the
year
    
    
    230,866
    
    
    
    95,515
 The accompanying notes are an integral part of these consolidated financial statements.
  7




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##### Table of Contents



NETVISION LTD.
 Consolidated Statements of Cash Flows
 Year ended December 312008
    
    
    2007NIS in thousandsA. Adjustments to reconcile net income to net cash
flows from operating activitiesIncome and expenses not involving cash flows:Depreciation and amortization
    
    
    130,694
    
    
    
    182,880Amortization of Stock-based compensation
    
    
    7,066
    
    
    
    3,227Revaluation (erosion) of short-term deposits
    
    
    423
    
    
    
    (135
    )Increase in convertible debentures (Series A) presented at
market value through profit or loss
    
    
    (5,151
    )
    
    
    (10,586
    )Amortization of discount on convertible
debentures (Series B)
    
    
    91
    
    
    
    Increase in value of options (Series 1), net
    
    
    (1,602
    )
    
    
    (5,706
    )Decrease in liabilities for employee benefits, net
    
    
    (7,052
    )
    
    
    (423
    )Decrease in deferred taxes
    
    
    15,079
    
    
    
    5,882Decrease in value of intangible assets
    
    
    14,143
    
    
    
    26,543Decrease in value of inventory
    
    
    
    
    
    
    1,561Capital gain
    
    
    (382
    )
    
    
    (42,112
    )153,309
    
    
    
    161,131Changes in asset and liability items:Increase in trade receivables
    
    
    (45,159
    )
    
    
    (14,753
    )Decrease in other receivables
    
    
    1,628
    
    
    
    6,682Decrease (increase) in inventory of purchased products
    
    
    2,073
    
    
    
    (196
    )Decrease in trade payables
    
    
    (35,624
    )
    
    
    (11,504
    )Increase in other payables
    
    
    17,790
    
    
    
    558Increase in long-term receivables
    
    
    (2,013
    )
    
    
    (1,340
    )Increase (decrease) in long-term trade payables
    
    
    (278
    )
    
    
    4,615Payment for rights to use lines of communication
    
    
    (38,001
    )
    
    
    (40,441
    )Exercise of rights to lines of communication
    
    
    6,561
    
    
    
    971Increase (decrease) in deferred income in respect of sale
of rights to use lines of communication
    
    
    (3,616
    )
    
    
    4,342(96,639
    )
    
    
    (51,066
    )56,670
    
    
    
    110,065
 The accompanying notes are an integral part of these consolidated financial statements.
  8




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##### Table of Contents



NETVISION LTD.
 Consolidated Statements of Cash Flows
 Year ended December 312008
    
    
    2007NIS in thousandsB. Cash from purchase of companies consolidated for the
first timeAssets and liabilities of the subsidiaries at the date of
purchase:Working capital (excluding cash and cash equivalents)
    
    
    
    
    
    
    216,935Fixed assets, net
    
    
    
    
    
    
    (114,491
    )Intangible assets, net
    
    
    
    
    
    
    (722,936
    )Long-term receivables
    
    
    
    
    
    
    (145,350
    )Long-term liabilities
    
    
    
    
    
    
    85,058Benefit in respect of options to employees of Barak
    
    
    
    
    
    
    1,776Value of issued shares
    
    
    
    
    
    
    686,338
    
    
    
    7,330C. Cash used to purchase operation consolidated for the
first time (see Note 3)Assets and liabilities of the consolidated operation at the
date of purchase:Working capital (excluding cash and cash equivalents)
    
    
    198
    
    
    
    Fixed assets
    
    
    (1,059
    )
    
    
    Intangible assets
    
    
    (22,439
    )
    
    
    (23,300
    )
    
    
    D. Proceeds from sale of investment in former
subsidiariesAssets and liabilities of the subsidiaries at the date of sale:Working capital (excluding cash and cash equivalents)
    
    
    (169
    )
    
    
    (11,226
    )Fixed assets
    
    
    
    
    
    
    1,030Long-term liabilities
    
    
    
    
    
    
    (438
    )Minority interest
    
    
    
    
    
    
    30Other assets
    
    
    
    
    
    
    (27,246
    )Capital gain
    
    
    382
    
    
    
    42,112213
    
    
    
    4,262
 The accompanying notes are an integral part of these consolidated financial statements.
  9




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##### Table of Contents



NETVISION LTD.
 Consolidated Statements of Cash Flows
 Year ended December 312008
    
    
    2007NIS in thousandsE. Material non-cash transactionsConversion of debentures into shares
    
    
    10,484
    
    
    
    27,195Purchase of fixed assets on credit
    
    
    (23,984
    )
    
    
    (25,049
    )Classification of equity component of debentures
convertible into equity
    
    
    9,574
    
    
    
    Classification of receipts on account of options (Series 1)
from liabilities to equity
    
    
    9,971
    
    
    
    Classification of receipts on account of exercised options
    
    
    
    
    
    
    194F. Additional information on cash flowsCash paid during the period in respect of:Interest
    
    
    4,355
    
    
    
    7,993Taxes on income
    
    
    550
    
    
    
    6,527Cash received during the period in respect of:Interest
    
    
    3,980
    
    
    
    3,827
 The accompanying notes are an integral part of these consolidated financial statements.
  10




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NETVISION LTD.
 
 Notes to the Consolidated Financial  Statements
 Note 1  General
 a.
    
    General description of the Group and its activity
      (1)
    
    Internet Services (ISP)(2)
    
    Telephony services(3)
    
    Managed services (network endpoint, national operator and conference call
bridge)
   
 b.
    
    Significant events during and subsequent to the reported period
 1.
    
    Agreement with Med Nautilus
   11




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note
1  General (cont.)
 b.
    
    Significant events during and subsequent to the reported period (cont.)
 1.
    
    Agreement with Med Nautilus (cont.)
  2.
    
    The HOT transaction
    3.
    
    Changes in the terms of the Companys debentures and options
  4.
    
    Employee compensation plan
    12




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note
1  General (cont.)
 b.
    
    Significant events during and subsequent to the reported period (cont.)
 4.
    
    Employee compensation plan (cont.)
   5.
    
    Purchase of the activities of Veidan Conferencing Solutions, Limited
Partnership
  6.
    
    Impairment in intangible assets of Nana 10
   7.
    
    Walla Shopmind transaction
    13




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note
1  General (cont.)
 b.
    
    Significant events during and subsequent to the reported period (cont.)
 8.
    
    Reorganization of the Groups activity
     c.
    
    Definitions
  The Company
    
    
    
    Netvision Ltd.The Group
    
    
    
    Netvision Ltd. and its investees listed in Note 8.Subsidiaries
    
    
    
    Companies in which the Company exercises control
(as defined in IAS 27) and whose financial
statements are consolidated with those of the
Company.Proportionately
consolidated
company
    
    
    
    A company held by a number of parties between
which there is a contractual agreement for joint
control and whose financial statements are
consolidated with those of the Company on a
proportionate basis.Related parties
    
    
    
    As defined in IAS 24.Interested parties
    
    
    
    As defined in the Israeli Securities Regulations
(Preparation of Annual Financial Statements) 
1993.Controlling
shareholders
    
    
    
    As defined in the Israeli Securities Regulations
(Financial Statement Presentation of Transactions
between a Company and its Controlling
Shareholder)  1996.
  14




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies
 a.
    
    Basis of presentation
  Basis of preparation
  1.
    
    International Financial Reporting Standards (IFRS).2.
    
    International Accounting Standards (IAS).3.
    
    Interpretations to these standards of the International Financial Reporting
Interpretations Committee (IFRIC) and interpretations of the Standing Interpretations
Committee (SIC).
     Consistent accounting policy and first-time adoption of IFRS
  Consolidated financial statements
    15




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 a.
    
    Basis of presentation (cont.)
   b.
    
    The principal judgments, estimates and assumptions made in the preparation of the
financial statements
 The judgments
  Estimates and assumptions
   
    
    Legal claims
   16




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 b.
    
    The principal judgments, estimates and assumptions made in the preparation of the
financial statements (cont.)
 
    
    Goodwill impairment
  
    
    Deferred tax assets
  
    
    Pension benefits and other post-employment benefits
  
    
    Development costs
  c.
    
    Functional currency and foreign currency
 1.
    
    Functional currency and foreign currency
    17




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 c.
    
    Functional currency and foreign currency (cont.)
 2.
    
    Transactions and liabilities in foreign currency
  3.
    
    Monetary items linked to the Consumer Price Index
  d.
    
    Cash equivalents
  e.
    
    Short-term deposits
  f.
    
    Provision for doubtful debts
  g.
    
    Inventory
    h.
    
    Financial instruments
   18




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 h.
    
    Financial instruments (cont.)
 1.
    
    Financial assets at fair value through profit or loss
   2.
    
    Financial liabilities at fair value through profit or loss
  3.
    
    Loans and receivables
  4.
    
    Financial liabilities
  5.
    
    Compound financial instruments
    19




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 h.
    
    Financial instruments (cont.)
 5.
    
    Compound financial instruments (cont.)
  i.
    
    Put option to minority shareholders
  j.
    
    Derivative financial instruments
    k.
    
    Operating leases
    20




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 l.
    
    Business combinations and goodwill
     m.
    
    Fixed assets
   %Communication equipment
    
    
    15-20
    
    
    (Mainly 15%)Computers and peripheral equipment
    
    
    33Office furniture and equipment
    
    
    6-10
    
    
    (Mainly 6%)Leasehold improvements
    
    Over the period of the lease
    
    (Mainly 10%)
     21




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 m.
    
    Fixed assets (cont.)
  n.
    
    Rights to use communication lines
   o.
    
    Intangible assets
    Computer programs -
    
    3 yearsCustomer base -
    
    4 yearsBrand -
    
    5 yearsContent -
    
    6 years
 Licenses
   22




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 o.
    
    Intangible assets (cont.)
 Research and development costs
   p.
    
    Impairment of non-financial assets
   1.
    
    Goodwill
   2.
    
    Development costs capitalized during the development period
   23




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 q.
    
    Taxes on income
  1.
    
    Current taxes
  2.
    
    Deferred taxes
     r.
    
    Share-based payment transactions
  Equity settled transactions
    24




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##### Table of Contents



NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 r.
    
    Share-based payment transactions (cont.)
     s.
    
    Employee benefits
  1.
    
    Short-term employee benefitsShort-term employee benefits include salaries, paid vacation, paid sick leave,
recreation and national insurance contributions, and are recognized as an expense as
the related service is provided. A liability is recognized for the amount expected to
be paid under short-term cash bonus or profit-sharing plans if the Group has a
present legal or constructive obligation to pay this amount as a result of past
service provided by the employee and the obligation can be estimated reliably.2.
    
    Post-employment benefitsThe plans are usually financed by deposits with insurance companies and are
classified as defined contribution plans and as defined benefit plans.The Group has defined contribution plans in accordance with Section 14 of the
Severance Pay Law, pursuant to which the Group regularly pays amounts without it
having a legal or constructive obligation to pay any further amounts even if the
amounts accumulated in the fund are not sufficient to pay all the employee benefits
related to the employees service in the current period and in the past. Deposits
with defined contribution plans in respect of severance pay or retirement benefits
are recognized as an expense upon the contribution to the plan parallel to the
receipt of the services from the employee and no additional provision is required in
the financial statements.Furthermore, the Group has a defined benefit plan for the payment of severance pay in
accordance with the Severance Pay Law. According to the law the employees are
entitled to receive severance pay upon their dismissal or retirement. The liability
for employee severance benefits is presented using the actuarial anticipated
eligibility unit.
  25




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 s.
    
    Employee benefits (cont.)
 2.
    
    Post-employment benefits (cont.)The actuarial calculation takes into account future wage increments and employee
departure rates, and is based on the expected timing of the payment.The amounts are presented on the basis of discounted future expected cash flows
according to the interest rates of Government debentures that have maturity dates
approximating the period of the severance pay liability.In respect of some of its employees the Company regularly deposits amounts in respect
of its liabilities for the payment of severance pay in pension funds and insurance
companies (hereinafter  the plan assets).Actuarial gains and losses are recognized directly in equity under retained earnings.The liability for employee benefits that is presented in the balance sheet represents
the present value of the defined benefit obligation less the fair value of the plan
assets.
 t.
    
    Revenue recognition
   Revenues from services
  Revenues from software transactions
   26




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 t.
    
    Revenue recognition (cont.)
 Reporting on revenues on a gross basis or on a net basis
  Customer discounts
   u.
    
    Earnings per share
  v.
    
    Provisions
   27




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 v.
    
    Provisions (cont.)
  Legal claims
  Onerous contracts
  w.
    
    Disclosure of new IFRS in the period prior to their implementation
 1.
    
    IFRS 8, Operating SegmentsIFRS 8 (hereinafter  the Standard) discusses operating segments and replaces IAS 14.
The Standard shall apply to companies whose securities are listed for trade on a
stock exchange or are in the process of being listed. The Standard is effective for
annual financial statements for periods beginning on or after January 1, 2009 and
early adoption is permitted. The Standard is to be applied retrospectively, by means
of restatement, unless the information it requires is not available and cannot
practically be located.The Standards determines that the management approach should be used in reporting
the financial results of operating segments. The segment information will be the
information management uses internally in order to assess segment performance and
make decisions on the allocation of resources to the operating segments.Furthermore, information is to be provided regarding revenues deriving from the
products or services of the entity (or from groups of similar products or services),
the countries from which the revenues or assets are derived and principal customers,
without taking into consideration whether management uses this information in its
operating decisions.In the opinion of the Company, the effect of the new standard on the present
presentation of the note on segments will not be material.
  28




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 w.
    
    Disclosure of new IFRS in the period prior to their implementation (cont.)
 2.
    
    IAS 1 (Revised), Presentation of Financial StatementsRevised IAS 1 requires the presentation of an additional statement, a separate
statement of comprehensive income, which besides the net income taken from the
income statement will include all the items that were included directly in equity in
the reported period and do not derive from transactions with the shareholders in
their capacity as shareholders (other comprehensive income), such as adjustments
arising from translating the financial statements of foreign operations, fair value
adjustments of available-for-sale financial assets,








adjustments to the revaluation reserve of fixed assets, etc., as well as the tax
effect of these items which was also included directly in equity, with an appropriate
allocation between the Company and the minority interest. Alternatively, items of
other comprehensive income can be presented together with the items of the statement
of income in a single statement that will be called statement of comprehensive
income that will replace the income statement, with an appropriate allocation
between the Company and the minority interest. Items that were included in equity and
which derive from transactions with the shareholders in their capacity as
shareholders (such as issuance of capital, distribution of dividend, etc.) will be
presented in the statement of changes in shareholders equity, as well as the total
line that will be transferred from the statement of comprehensive income, with an
appropriate allocation between the Company and the minority interest.The revision also provides that if comparative data was changed as a result of a
change in accounting policy that is applied retrospectively, restatement or
reclassification, a balance sheet should be presented also for the beginning of the
period of the comparative data that were changed.The revision to IAS 1 shall apply to annul financial statements for periods beginning
on or after January 1, 2009 and requires the restatement of comparative data. Early
adoption is permitted.The effect of the revision to IAS 1 will require the Company to provide the
aforementioned required disclosure in the financial statements.3.
    
    IFRS 3 (Revised), Business Combinations and IAS 27 (Revised),
Consolidated and Separate Financial StatementsRevised IFRS 3 and Revised IAS 27 (hereinafter  the Standards) shall apply to
financial statements beginning on or after January 1, 2010. Early adoption is
permitted for both standards at the same time as from annual financial statements for
periods beginning on or after January 1, 2008.The principal relevant changes that are expected following adoption of the Standards
are as follows:
 
    
    IFRS 3 presently provides that goodwill, unlike the other
identifiable assets and liabilities of the acquired company, is to be measured
as the excess cost of acquisition over the share of the acquiring company in the
fair value of the net identifiable assets on the date of acquisition. In
accordance with the Standards, for each separate business combination it can be
chosen to measure goodwill on the basis of its full fair value and not only
according to the acquired portion.
 
    
    A contingent consideration in business combinations shall be
measured at fair value and changes in the fair value of the contingent
consideration, which are not adjustments in the period of measurement to the
cost of acquisition, shall not be recognized concurrently as a goodwill
adjustment. The contingent consideration will usually be considered a financial
derivative in the scope of IAS 39 which is presented at fair value with changes
in it being recognized in profit or loss.
  29




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 w.
    
    Disclosure of new IFRS in the period prior to their implementation (cont.)
 3.
    
    IFRS 3 (Revised), Business Combinations and IAS 27 (Revised),
Consolidated and Separate Financial Statements (cont.)
 
    
    Direct acquisition costs that are attributed to the business
combination transaction are to be recognized in profit or loss as incurred, with
the previous requirement to include them as part of the cost of the business
combination being cancelled.
 
    
    A transaction with the minority, whether a sale or a purchase,
shall be accounted for as a transaction on the equity level, and therefore shall
not result in the recognition of any gain or loss or have an effect on the
amount of goodwill, respectively.
 
    
    Losses of a subsidiary, even if they create a shareholders
deficiency for the subsidiary, shall be allocated between the parent company and
the minority interest, even if the minority interest is not a guarantor or has
no contractual obligation to support the subsidiary or make any additional
investment.
 
    
    On the date of loss of control over the subsidiary, the balance
of the investment, if any, shall be remeasured to fair value against any gain or
loss from the disposal and this fair value will constitute the basis for its
cost for purposes of subsequent accounting treatment.
  4.
    
    IFRS 2 (Revised), Share-Based Payment
    5.
    
    IAS 16 (Revised), Property, Plant and Equipment
   30




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 w.
    
    Disclosure of new IFRS in the period prior to their implementation (cont.)
 5.
    
    IAS 16 (Revised), Property, Plant and Equipment (cont.)
   6.
    
    IAS 19 (Revised), Employee Benefits
   7.
    
    IAS 38 (Revised). Intangible Assets
   8.
    
    IFRS 1 (Revised), First-Time Adoption of International Financial Reporting
Standards and IAS 27 (Revised), consolidated and Separate Financial Statements
   31




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 2  Significant Accounting Policies (cont.)
 w.
    
    Disclosure of new IFRS in the period prior to their implementation (cont.)
 8.
    
    IFRS 1 (Revised), First-Time Adoption of International Financial Reporting
Standards and IAS 27 (Revised), consolidated and Separate Financial Statements
(cont.)
  9.
    
    IFRIC 13, Customer Loyalty Programs
      32




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 3  Business Combinations
 Acquisition of the activity of Veidan Conferencing Solutions, Limited Partnership
    Balance in theFair
    
    
    financialvalue
    
    
    statementsNIS in thousandsReceivables
    
    
    84
    
    
    
    84Fixed assets, net
    
    
    1,059
    
    
    
    1,059Intangible assets
    
    
    4,759
    
    
    
    5,902
    
    
    
    1,143Other payables
    
    
    282
    
    
    
    282Assets, net
    
    
    5,620
    
    
    
    861Goodwill created at acquisition
    
    
    17,680Total cost of acquisition
    
    
    23,300
 Note 4  Cash and Cash Equivalents
 December 312008
    
    
    2007NIS in thousandsCash and call deposits
    
    
    29,691
    
    
    
    16,523Short-term deposits
    
    
    201,175
    
    
    
    78,992230,866
    
    
    
    95,515
     33




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NETVISION LTD.
 Notes
to the Consolidated Financial Statements
 Note 5  Short-Term Deposits
 December 312008
    
    
    2007NIS in thousandsBank deposits
    
    
    
    
    
    
    37,937
  Note 6  Trade Receivables, Net
 December 312008
    
    
    2007NIS in thousandsOpen accounts (1) (2)
    
    
    229,722
    
    
    
    200,843Deferred income
    
    
    45,496
    
    
    
    36,303Checks receivable (1)
    
    
    14,859
    
    
    
    8,024290,077
    
    
    
    245,170(1) Net of provision for doubtful debts
    
    
    38,741
    
    
    
    35,072(2) Including trade receivables from interested parties
    
    
    6,188
    
    
    
    10,025
     Presented hereunder is the movement in the provision for doubtful debts:
 NIS in thousandsBalance as at January 1, 2007
    
    
    12,475Companies consolidated for the first time
    
    
    21,455Current year provision
    
    
    10,644Bad debts that were written-off
    
    
    (9,502
    )Balance as at December 31, 2007
    
    
    35,072Current year provision
    
    
    10,393Bad debts that were written-off
    
    
    (6,724
    )Balance as at December 31, 2008
    
    
    38,741
  34




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NETVISION LTD.
 Notes
to the  Financial Statements
 Note 6  Trade Receivables, Net (cont.)
  Neither past
    
    
    Past due but not impaireddue
    
    
    Up to
    
    
    30-60
    
    
    60-90
    
    
    90-120
    
    
    More than(nor aging)
    
    
    30 days
    
    
    days
    
    
    days
    
    
    days
    
    
    120 days
    
    
    TotalNIS in thousandsDecember 31, 2008
    
    
    239,443
    
    
    
    14,845
    
    
    
    9,655
    
    
    
    5,681
    
    
    
    3,229
    
    
    
    17,224
    
    
    
    290,077December 31, 2007
    
    
    187,868
    
    
    
    16,561
    
    
    
    11,467
    
    
    
    7,126
    
    
    
    6,115
    
    
    
    16,033
    
    
    
    245,170
  35




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NETVISION LTD.
 Notes
to the  Financial Statements
 Note 7  Other Receivables
 December 312008
    
    
    2007NIS in thousandsEmployees (1)
    
    
    549
    
    
    
    246Cost of rights to use communication lines
    
    
    24,844
    
    
    
    33,072Prepaid expenses
    
    
    6,837
    
    
    
    8,622Prepaid advertising expenses
    
    
    5,909
    
    
    
    8,100Other receivables and debit balances
    
    
    3,868
    
    
    
    1,63142,007
    
    
    
    51,671
 (1)
    
    Balances of employees are linked and bear interest at 4% per annum.(2)
    
    See Note 18 for details on linkage bases. Note 8  Investments in Investee Companies
 a.
    
    Summary financial information for proportionately consolidated companies
 December 312008
    
    
    2007NIS in thousandsThe Groups share in the balance sheet of the
company according
to the rate of ownership as at balance sheet date:Current assets
    
    
    5,776
    
    
    
    8,284Non-current assets (*)
    
    
    13,003
    
    
    
    30,052Current liabilities
    
    
    (7,336
    )
    
    
    (7,174
    )Long-term liabilities
    
    
    (74
    )
    
    
    (176
    )Net assets
    
    
    11,369
    
    
    
    30,986
 (*)
    
    Including cost of acquisition allocated to intangible assets. Year ended December 312008
    
    
    2007 (*)NIS in thousandsThe Groups share in the results of operations of the
company
according to the rate of ownership during the period:Revenues
    
    
    13,693
    
    
    
    13,622Operating expenses, net (**)
    
    
    (46,899
    )
    
    
    (22,827
    )Operating loss
    
    
    (33,206
    )
    
    
    (9,205
    )Financing expenses, net
    
    
    (631
    )
    
    
    (101
    )Net loss
    
    
    (33,837
    )
    
    
    (9,306
    )
 (*)
    
    Relates to the period from May 1, 2007, the date the company began operations,
until December 31, 2007.(**)
    
    Including amortization of cost of acquisition that was allocated to intangible
assets and impairment losses of intangible assets, as mentioned in Note 10.  36




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NETVISION LTD.
 Notes
to the  Financial Statements
 Note 8  Investments in Investee Companies (cont.)
 b.
    
    List of subsidiaries and proportionately consolidated companies
 December 31, 2007 and 2008Shares
    
    
    Sharesconferring
    
    
    conferringvoting
    
    
    rights torights
    
    
    profitsRate of ownershipName of company013 Netvision Ltd.
    
    
    100
    %
    
    
    100
    %013 Nevision Managed Communication Services Ltd.
    
    
    100
    %
    
    
    100
    %Netwise Applications Ltd.
    
    
    53.4
    %
    
    
    53.4
    %Nana 10 Ltd.
    
    
    50
    %
    
    
    50
    %
 Note 9  Fixed Assets
 a.
    
    Composition and movement
 2008
 Computersand
    
    
    OfficeCommunication
    
    
    peripheral
    
    
    furniture and
    
    
    Leaseholdequipment
    
    
    equipment
    
    
    equipment
    
    
    improvements
    
    
    TotalNIS in thousandsCostBalance as at
January 1, 2008
    
    
    504,928
    
    
    
    261,320
    
    
    
    39,160
    
    
    
    46,454
    
    
    
    851,862Additions during
the year:Acquisitions
    
    
    24,754
    
    
    
    31,784
    
    
    
    4,308
    
    
    
    10,398
    
    
    
    71,244Activity
consolidated
for the first time
    
    
    823
    
    
    
    
    
    
    
    225
    
    
    
    11
    
    
    
    1,059Balance as at
December 31, 2008
    
    
    530,505
    
    
    
    293,104
    
    
    
    43,693
    
    
    
    56,863
    
    
    
    924,165Accumulated
depreciationBalance as at
January 1, 2008
    
    
    412,980
    
    
    
    207,440
    
    
    
    25,542
    
    
    
    39,589
    
    
    
    685,551Additions during
the year:Depreciation
    
    
    25,636
    
    
    
    25,748
    
    
    
    3,045
    
    
    
    3,742
    
    
    
    58,171Balance as at
December 31, 2008
    
    
    438,616
    
    
    
    233,188
    
    
    
    28,587
    
    
    
    43,331
    
    
    
    743,722Depreciated cost as at
December 31, 2008
    
    
    91,889
    
    
    
    59,916
    
    
    
    15,106
    
    
    
    13,532
    
    
    
    180,443
  37




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 9  Fixed Assets (cont.)
 a.
    
    Composition and movement (cont.)
 2007
 Computersand
    
    
    OfficeCommunication
    
    
    peripheral
    
    
    furniture and
    
    
    Leaseholdequipment
    
    
    equipment
    
    
    equipment
    
    
    improvements
    
    
    TotalNIS in thousandsCostBalance as at
January 1, 2007
    
    
    132,269
    
    
    
    82,826
    
    
    
    10,158
    
    
    
    10,193
    
    
    
    235,446Additions during
the year:Companies
consolidated for the
first time
    
    
    345,794
    
    
    
    151,948
    
    
    
    24,970
    
    
    
    30,763
    
    
    
    553,475Acquisitions
    
    
    31,120
    
    
    
    31,712
    
    
    
    4,776
    
    
    
    5,828
    
    
    
    73,436Disposals during
the year
    
    
    (4,255
    )
    
    
    (5,166
    )
    
    
    (744
    )
    
    
    (330
    )
    
    
    (10,495
    )Balance as at
December 31, 2007
    
    
    504,928
    
    
    
    261,320
    
    
    
    39,160
    
    
    
    46,454
    
    
    
    851,862Accumulated
depreciationBalance as at
January 1, 2007
    
    
    93,728
    
    
    
    62,471
    
    
    
    4,698
    
    
    
    4,880
    
    
    
    165,777Additions during
the year:Additions in respect
of companies
consolidated for the
first time
    
    
    260,610
    
    
    
    129,007
    
    
    
    18,658
    
    
    
    30,709
    
    
    
    438,984Depreciation
    
    
    60,282
    
    
    
    19,991
    
    
    
    2,474
    
    
    
    4,330
    
    
    
    87,077Disposals during
the year
    
    
    (1,640
    )
    
    
    (4,029
    )
    
    
    (288
    )
    
    
    (330
    )
    
    
    (6,287
    )Balance as at
December 31, 2007
    
    
    412,980
    
    
    
    207,440
    
    
    
    25,542
    
    
    
    39,589
    
    
    
    685,551Depreciated cost as
at
December 31, 2007
    
    
    91,948
    
    
    
    53,880
    
    
    
    13,618
    
    
    
    6,865
    
    
    
    166,311
 b.
    
    Impairment of fixed assets
   c.
    
    See Note 21d regarding liens.
  38




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 10  Goodwill and Other Intangible Assets
  Rights toCost of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    providelicense for
    
    
    Software
    
    
    Customer
    
    
    
    
    
    
    
    
    
    
    communicationoperating
    
    
    and website
    
    
    base and
    
    
    
    
    
    
    
    
    
    
    services andtelephony
    
    
    development
    
    
    customer
    
    
    
    
    
    
    
    
    
    
    deferredsector
    
    
    costs
    
    
    relations
    
    
    Brand
    
    
    Content
    
    
    expenses
    
    
    Goodwill
    
    
    TotalNIS in thousandsCostBalance as at January 1, 2007
    
    
    1,000
    
    
    
    5,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,188
    
    
    
    12,102Companies
consolidated for the first time
    
    
    
    
    
    
    206
    
    
    
    141,589
    
    
    
    16,698
    
    
    
    
    
    
    
    5,118
    
    
    
    560,777
    
    
    
    724,388Additions  created internally
    
    
    
    
    
    
    5,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,267Additions  purchased separately
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,807
    
    
    
    62
    
    
    
    1,077
    
    
    
    29,946Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (858
    )
    
    
    (858
    )Balance as at December 31, 2007
    
    
    1,000
    
    
    
    11,387
    
    
    
    141,589
    
    
    
    16,698
    
    
    
    28,807
    
    
    
    5,180
    
    
    
    566,184
    
    
    
    770,845Additions  created internally
    
    
    
    
    
    
    6,228
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,228Additions  purchased separately
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    412Activity
consolidated for the first time (Note 3)
    
    
    
    
    
    
    
    
    
    
    4,272
    
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    17,680
    
    
    
    22,439Recognition
of deferred tax against decrease in goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,845
    )
    
    
    (17,845
    )Balance as at December 31, 2008
    
    
    1,000
    
    
    
    17,615
    
    
    
    145,861
    
    
    
    17,185
    
    
    
    28,807
    
    
    
    5,180
    
    
    
    566,431
    
    
    
    782,079
  39




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 10  Goodwill and Other Intangible Assets (cont.)
  Rights toCost of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    providelicense for
    
    
    Software
    
    
    Customer
    
    
    
    
    
    
    
    
    
    
    communicationoperating
    
    
    and website
    
    
    base and
    
    
    
    
    
    
    
    
    
    
    services andtelephony
    
    
    development
    
    
    customer
    
    
    
    
    
    
    
    
    
    
    deferredsector
    
    
    costs
    
    
    relations
    
    
    Brand
    
    
    Content
    
    
    expenses
    
    
    Goodwill
    
    
    TotalNIS in thousandsAccumulated amortization and
accumulated impairment lossesBalance as at January 1, 2007
    
    
    100
    
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572Current year amortization
    
    
    900
    
    
    
    3,093
    
    
    
    61,719
    
    
    
    4,905
    
    
    
    2,400
    
    
    
    1,574
    
    
    
    
    
    
    
    74,591Impairment of intangible assets
    
    
    
    
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,058
    
    
    
    26,543Balance as at December 31, 2007
    
    
    1,000
    
    
    
    4,050
    
    
    
    61,719
    
    
    
    4,905
    
    
    
    2,400
    
    
    
    1,574
    
    
    
    26,058
    
    
    
    101,706Current year amortization
    
    
    
    
    
    
    2,465
    
    
    
    43,912
    
    
    
    4,152
    
    
    
    4,800
    
    
    
    191
    
    
    
    
    
    
    
    55,520Impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,143
    
    
    
    
    
    
    
    
    
    
    
    14,143Balance as at December 31, 2008
    
    
    1,000
    
    
    
    6,515
    
    
    
    105,631
    
    
    
    9,057
    
    
    
    21,343
    
    
    
    1,765
    
    
    
    26,058
    
    
    
    171,369Amortized costAs at December 31, 2008
    
    
    
    
    
    
    11,100
    
    
    
    40,230
    
    
    
    8,128
    
    
    
    7,464
    
    
    
    3,415
    
    
    
    540,373
    
    
    
    610,710As at December 31, 2007
    
    
    
    
    
    
    7,337
    
    
    
    79,870
    
    
    
    11,793
    
    
    
    26,407
    
    
    
    3,606
    
    
    
    540,126
    
    
    
    669,139
  40




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 10  Goodwill and Other Intangible Assets (cont.)
 Intangible assets created in business combinations
      The key assumptions that were used to perform the valuation:
 1.
    
    The valuation of Nana 10 was performed in accordance with the discounted cash
flow (DCF) valuation model on the basis of three scenarios of development (at different
probabilities) as required in light of the uncertainty and the risk associated with the
activity.2.
    
    Discount rate: 14.1%.3.
    
    Permanent growth rate: 4% in the base scenario, 5% in the high scenario.4.
    
    Residual percentage from total value (on the basis of five forecasted years):
about 100%.5.
    
    Data used as basis for comparison: The business plan of Nana 10 was compared to
the financial statements of Israeli internet companies that are traded on the stock
exchange.
  41




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 10  Goodwill and Other Intangible Assets (cont.)
 Intangible assets created in business combinations (cont.)
 Additions during the year
   Amortization expenses
  Year ended December 312008
    
    
    2007NIS in thousandsCost of sales
    
    
    51,368
    
    
    
    69,686Selling and marketing expenses
    
    
    4,152
    
    
    
    4,905Impairment of intangible assets
    
    
    14,143
    
    
    
    26,54369,663
    
    
    
    101,134
 Note 11  Bank Credit
 a.
    
    Composition
 Weighted interest rate
    
    December 31December 31, 2008
    
    2008
    
    
    2007%
    
    NIS in thousandsOverdrafts
    
    
    
    
    312
    
    
    
    746Short-term bank credit linked
to the
Prime interest rate:Prime + 0.1%
    
    
    29,000
    
    
    
    Prime-0.1%
    
    
    50,000
    
    
    
    Short-term unlinked bank credit
    
    3.7%
    
    
    6,507
    
    
    
    31,96785,819
    
    
    
    32,713
 b.
    
    See Note 21d regarding collateral.
  42




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##### Table of Contents



NETVISION LTD.
 Notes
to the  Financial Statements
 Note 12  Trade Payables
 December 312008
    
    
    2007NIS in thousandsOpen accounts (1)
    
    
    216,352
    
    
    
    253,791Checks payable
    
    
    468
    
    
    
    769216,820
    
    
    
    254,560(1) Including trade payables from interested parties
    
    
    1,830
    
    
    
    4,317
   Note 13  Other Payables
 December 312008
    
    
    2007NIS in thousandsLiabilities to employees and other salary related liabilities
    
    
    47,961
    
    
    
    45,552Accrued expenses
    
    
    42,441
    
    
    
    37,546Institutions
    
    
    8,089
    
    
    
    1,089Deferred income in respect of rights to use communication lines
    
    
    7,256
    
    
    
    7,256Deferred income
    
    
    6,487
    
    
    
    2,039112,234
    
    
    
    93,482
  Note 14  Convertible Debentures
 a.
    
    Composition
 December 31, 2008
 Balance net ofAmount of
    
    
    Nominal
    
    
    Effective
    
    
    
    
    
    
    currentprincipal
    
    
    interest rate
    
    
    interest rate
    
    
    Balance
    
    
    maturitiesNIS in thousands
    
    
    %
    
    
    %
    
    
    NIS in thousands
    
    
    NIS in thousandsConvertible
debentures
(Series
B)
    
    
    47,024
    
    
    
    7
    %
    
    
    7.25
    %
    
    
    46,900
    
    
    
    30,344
  43




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 14  Convertible Debentures (cont.)
 a.
    
    Composition (cont.)
 December 31, 2007
 Balance net ofAmount of
    
    
    Nominal
    
    
    Effective
    
    
    
    
    
    
    currentprincipal
    
    
    interest rate
    
    
    interest rate
    
    
    Balance
    
    
    maturitiesNIS in thousands
    
    
    %
    
    
    %
    
    
    NIS in thousands
    
    
    NIS in thousandsConvertible
debentures
(Series
A)
    
    
    53,891
    
    
    
    4
    %
    
    
    7.1
    %
    
    
    72,018
    
    
    
    72,018
 (*) See c below regarding changes in the terms of the debentures. b.
    
    Maturity dates subsequent to balance sheet date as at December 31, 2008
 First year
    
    
    Second year
    
    
    Third year
    
    
    TotalNIS in thousandsConvertible debentures (Series B)
    
    
    16,556
    
    
    
    16,182
    
    
    
    14,162
    
    
    
    46,900
 c.
    
    Convertible debentures
     44




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 14  Convertible Debentures (cont.)
 c.
    
    Convertible debentures (cont.)
 Change in the terms of the convertible debentures
    
    
    The principal of the Series B convertible debentures are not index-linked.
 
    
    The unpaid principal of the Series B convertible debentures bear
interest at 7% per annum, not linked to the Israeli CPI.
      Conversion of debentures into shares in the reported period
   45




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 14  Convertible Debentures (cont.)
 c.
    
    Convertible debentures (cont.)
     Note 15  Options (Series 1)
 th th
      46




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 16  Deferred Income in respect of Rights to Use Lines of Communication
  Note 17  Long-Term Trade Payables
 a.
    
    CompositionDecember 31, 2008
 Balance netof currentBalance
    
    
    maturitiesNIS in thousands
    
    
    NIS in thousandsLong-term trade payables
    
    
    9,143
    
    
    
    5,964
 December 31, 2007
 Balance netof currentBalance
    
    
    maturitiesNIS in thousands
    
    
    NIS in thousandsLong-term trade payables
    
    
    9,421
    
    
    
    7,711
  47




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note
17  Long-Term Trade Payables (cont.)
 b.
    
    Maturity dates subsequent to balance sheet date as at December 31, 2008
 SeventhFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    Fifth
    
    
    Sixth
    
    
    year andyear
    
    
    year
    
    
    year
    
    
    year
    
    
    year
    
    
    year
    
    
    thereafter
    
    
    TotalNIS in thousandsLong-term liabilitiesLong-term trade payables (1)
    
    
    33
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227Long-term trade payables (2)
    
    
    1,849
    
    
    
    514
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,363Long-term trade payables (3)
    
    
    1,297
    
    
    
    1,365
    
    
    
    1,281
    
    
    
    1,229
    
    
    
    799
    
    
    
    521
    
    
    
    61
    
    
    
    6,553Total
    
    
    3,179
    
    
    
    2,073
    
    
    
    1,281
    
    
    
    1,229
    
    
    
    799
    
    
    
    521
    
    
    
    61
    
    
    
    9,143
 (1)
    
    The liability is linked to the dollar and bears interest of 4.5%.(2)
    
    The liability is linked to the dollar and is presented at present value according to a discount
rate of 4.5% per annum.(3)
    
    The liability is presented at present value according to an average discount rate of 7% per
annum.  48




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments
 a.
    
    Financial risk factors
 The Groups activities expose it to various financial risks, such as market risks
(currency risk, CPI-linkage risk and interest risk), credit risk and liquidity risk.
The Company holds discussions regularly every quarter with all the relevant people
in the Company and the Board of Directors regarding the financial risk factors and
makes decisions relevant to the matter.
 1.
    
    Current riskSome of the Groups revenues, expenses, assets and liabilities are linked to
foreign currencies (mainly the U.S. dollar), and therefore, the Company has an
exposure to changes in the rates of the currencies in which the Group operates
in relation to the NIS.The Company takes steps to reduce the exposure in respect
of excess liabilities in U.S. dollars by dollar-linked deposits and from time
to time, enters into hedging transactions on the exchange rate of the dollar.As at December 31, 2008 the Company has dollar liabilities in the amount of
NIS 70 million mainly with respect to international communication suppliers.
The Company has dollar-linked current assets in the amount of NIS 31.1
million. It also has liabilities in other currencies in the amount of NIS 6.2
million and on the other hand current assets in the amount of NIS 5.3 million.2.
    
    CPI-linkage riskThe rate of inflation affects the Companys cost of sales. An increase in the
rate of inflation may cause an increase in the prices of equipment and
products the Company purchases while on the other hand the selling prices to
the consumer are determined on the basis of market competition. Therefore, an
increase in costs, as well as a cost-of-living increase that will affect
salary costs, may result in erosion of the Companys income if the competitive
situation of the market does not make it possible to raise prices for the
consumer.3.
    
    Credit riskAs at December 31, 2008 the cash and cash equivalents amounted to NIS 230,866
thousand. The Companys cash balances are deposited with some of the largest
financial institutions in Israel.The Companys revenues arise mainly from customers in Israel. The Company
regularly monitors the debts of customers and the financial statements include
provisions for doubtful debts that adequately reflect, in the Companys
opinion, the loss inherent in debts the collection of which is doubtful.4.
    
    Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Companys approach to managing
liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due. Typically the Company
ensures that it has sufficient cash on demand to meet expected operational
expenses, including the servicing of financial obligations; this excludes the
potential impact of extreme circumstances that cannot reasonably be predicted.5.
    
    Interest riskThe Companys interest rate risk is attributable mainly to the balance of
long-term trade payables and from interest on debentures. The balances of
long-term trade payables and debentures of the Company bear interest at fixed
rates, and expose the Company to interest rate risk in respect of fair value.
  49




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 18  Financial Instruments (cont.)
 b.
    
    Summary of liquidity riskThe following table presents the maturity dates of the Groups financial
liabilities:December 31, 2008
 Less than
    
    
    One to
    
    
    Two to
    
    
    Three to
    
    
    Four to
    
    
    More thanone year
    
    
    two years
    
    
    three years
    
    
    four years
    
    
    five years
    
    
    five years
    
    
    TotalNIS in thousandsBank loans
    
    
    85,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,819Trade payables
    
    
    216,820
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    216,820Payables
    
    
    98,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,491Convertible debentures (Series B) (**)
    
    
    (*) 17,046
    
    
    
    17,869
    
    
    
    16,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,687Long-term liabilities
    
    
    3,179
    
    
    
    2,073
    
    
    
    1,281
    
    
    
    1,229
    
    
    
    799
    
    
    
    582
    
    
    
    9,143421,355
    
    
    
    19,942
    
    
    
    18,053
    
    
    
    1,229
    
    
    
    799
    
    
    
    582
    
    
    
    461,960
 (*)
    
    The amount does not include accumulated interest expenses which are presented under payables.(**)
    
    The balances represent undiscounted amounts payable.  50




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 b.
    
    Summary of liquidity risk (cont.)December 31, 2007
 Less than
    
    
    One to
    
    
    Two to
    
    
    Three to
    
    
    Four toone year
    
    
    two years
    
    
    three years
    
    
    four years
    
    
    five years
    
    
    TotalNIS in thousandsBank loans
    
    
    32,713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,713Trade payables
    
    
    254,560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254,560Payables
    
    
    85,370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,370Convertible
debentures (Series
A) (**)
    
    
    (*) 943
    
    
    
    21,133
    
    
    
    20,378
    
    
    
    19,560
    
    
    
    
    
    
    
    62,014Long-term liabilities
    
    
    2,018
    
    
    
    2,257
    
    
    
    1,466
    
    
    
    1,348
    
    
    
    2,332
    
    
    
    9,421375,604
    
    
    
    23,390
    
    
    
    21,844
    
    
    
    20,908
    
    
    
    2,332
    
    
    
    444,078
 (*)
    
    The amount does not include accumulated interest expenses which are presented under
payables.(**)
    
    The balances represent undiscounted amounts payable, before replacement of the debentures.
These balances are not identical to the amount presented on the balance sheet at fair value. c.
    
    Fair valueThe table below provides the carrying amount and fair value of groups of financial instruments
that are not presented in the financial statements at fair value:
 December 31, 2008Balance
    
    
    Fair valueNIS in thousandsFinancial liabilitiesSeries B debentures (*)
    
    
    46,900
    
    
    
    49,234
 (*)
    
    The fair value is based on quoted prices in an active market as at balance sheet date. The carrying amount of the cash and cash equivalents, short-term deposits, trade receivables,
other receivables, credit from banks and others, trade payables and other payables is the same
as their fair value.d.
    
    DerivativeOn April 5, 2007, the Company entered into a dollar transaction to acquire call options to
purchase $ 10 million at a rate of NIS 4.2 = $ 1, against put options to sell $ 10 million at
a rate of NIS 4.02 = $ 1. This transaction was repaid on January 9, 2008. In 2007, the Company
recorded financing expenses of NIS 1.7 million in respect of this transaction. As of the
balance sheet date, the Company has no open positions in respect of hedging transactions. This
derivative is not considered an accounting hedge.
  51




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 e.
    
    Linkage bases of balance sheet balances
 December 31, 2008Linked to
    
    
    Linked to
    
    
    Linked to
    
    
    
    
    
    
    Non-monetarythe US dollar
    
    
    the euro
    
    
    the SDR (*)
    
    
    Unlinked
    
    
    items
    
    
    TotalReported NIS in thousandsCurrent assetsCash and cash
equivalents
    
    
    6,263
    
    
    
    889
    
    
    
    
    
    
    
    223,714
    
    
    
    
    
    
    
    230,866Trade receivables
    
    
    24,729
    
    
    
    1,009
    
    
    
    3,292
    
    
    
    261,047
    
    
    
    
    
    
    
    290,077Other receivables
    
    
    162
    
    
    
    59
    
    
    
    
    
    
    
    4,132
    
    
    
    37,654
    
    
    
    42,007Inventory of
purchased products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,543
    
    
    
    6,543Non-current assetsLong-term trade and
other receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,473
    
    
    
    2,833
    
    
    
    4,306Rights to use lines of
communication
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,203
    
    
    
    229,203Fixed assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,443
    
    
    
    180,443Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540,373
    
    
    
    540,373Other intangible
assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,337
    
    
    
    70,337Deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,714
    
    
    
    32,71431,154
    
    
    
    1,957
    
    
    
    3,292
    
    
    
    490,366
    
    
    
    1,100,100
    
    
    
    1,626,869Current liabilitiesBank credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,819
    
    
    
    
    
    
    
    85,819Trade payables
    
    
    66,306
    
    
    
    4,758
    
    
    
    1,441
    
    
    
    144,315
    
    
    
    
    
    
    
    216,820Other payables
    
    
    1,121
    
    
    
    
    
    
    
    
    
    
    
    97,370
    
    
    
    13,743
    
    
    
    112,234Current maturities of
long-term trade
payables
    
    
    1,882
    
    
    
    
    
    
    
    
    
    
    
    1,297
    
    
    
    
    
    
    
    3,179Convertible
debentures (Series B)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,556
    
    
    
    
    
    
    
    16,556Long-term liabilitiesConvertible
debentures (Series B)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,344
    
    
    
    
    
    
    
    30,344Deferred income
from rights to use
lines of
communication
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,136
    
    
    
    64,136Long-term liabilities
    
    
    708
    
    
    
    
    
    
    
    
    
    
    
    5,256
    
    
    
    
    
    
    
    5,964Employee benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,155
    
    
    
    16,155Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,075,662
    
    
    
    1,075,66270,017
    
    
    
    4,758
    
    
    
    1,441
    
    
    
    380,957
    
    
    
    1,169,696
    
    
    
    1,626,869
 (*)
    
    A basket of currencies comprised of the US dollar, euro, pound sterling and Japanese yen.  52




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 e.
    
    Linkage bases of balance sheet balances (cont.)
 December 31, 2007Linked to
    
    
    Linked to
    
    
    Linked to
    
    
    
    
    
    
    Non-monetarythe US dollar
    
    
    the euro
    
    

the SDR (*)
    
    
    Unlinked
    
    
    items
    
    
    TotalReported NIS in thousandsCurrent assetsCash and cash equivalents
    
    
    7,835
    
    
    
    2
    
    
    
    
    
    
    
    87,678
    
    
    
    
    
    
    
    95,515Short-term deposits
    
    
    37,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,937Trade receivables
    
    
    23,035
    
    
    
    1,648
    
    
    
    3,850
    
    
    
    216,637
    
    
    
    
    
    
    
    245,170Other receivables
    
    
    1,758
    
    
    
    13
    
    
    
    
    
    
    
    2,283
    
    
    
    47,617
    
    
    
    51,671Inventory of purchased products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,616
    
    
    
    8,616Non-current assetsLong-term trade and other receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,458
    
    
    
    835
    
    
    
    2,293Rights to use lines of communication
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,173
    
    
    
    207,173Fixed assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166,311
    
    
    
    166,311Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540,126
    
    
    
    540,126Other intangible assets, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,013
    
    
    
    129,013Deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,068
    
    
    
    30,06870,565
    
    
    
    1,663
    
    
    
    3,850
    
    
    
    308,056
    
    
    
    1,129,759
    
    
    
    1,513,893
 (*)
    
    A basket of currencies comprised of the US dollar, euro, pound sterling and Japanese yen.  53




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 e.
    
    Linkage bases of balance sheet balances (cont.)
 December 31, 2007Linked to
    
    
    Linked to
    
    
    Linked to
    
    
    Linked to
    
    
    
    
    
    
    Non-monetarythe CPI
    
    

the US dollar
    
    
    the euro
    
    

the SDR (*)
    
    
    Unlinked
    
    
    items
    
    
    TotalReported NIS in thousandsCurrent liabilitiesBank credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,713
    
    
    
    
    
    
    
    32,713Trade payables
    
    
    
    
    
    
    67,495
    
    
    
    10,498
    
    
    
    9,368
    
    
    
    167,199
    
    
    
    
    
    
    
    254,560Other payables
    
    
    1,328
    
    
    
    2,420
    
    
    
    
    
    
    
    
    
    
    
    81,622
    
    
    
    8,112
    
    
    
    93,482Current maturities of long-term trade payables
    
    
    
    
    
    
    860
    
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    
    
    
    
    1,710Long-term liabilitiesConvertible debentures (Series A)
    
    
    72,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,018Options (Series 1)
    
    
    11,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,573Deferred income from rights to use lines of
communication
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,752
    
    
    
    67,752Long-term trade payables
    
    
    
    
    
    
    1,641
    
    
    
    
    
    
    
    
    
    
    
    6,070
    
    
    
    
    
    
    
    7,711Employee benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,461
    
    
    
    14,461Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    957,913
    
    
    
    957,91384,919
    
    
    
    72,416
    
    
    
    10,498
    
    
    
    9,368
    
    
    
    288,454
    
    
    
    1,048,238
    
    
    
    1,513,893
 (*)
    
    A basket of currencies comprised of the US dollar, euro, pound sterling and Japanese yen.  54




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 f.
    
    Sensitivity tests to changes in market factors
 1.
    
    Sensitivity test of profit or loss to changes in interest rates
 Profit (loss) from changeIncrease of
    
    
    Decrease of10% in
    
    
    10% ininterest rate
    
    
    interest rateNIS in thousandsEffect of the changes in:2008
    
    
    357
    
    
    
    (357
    )2007
    
    
    (79
    )
    
    
    79
 The sensitivity test to interest risk reflects the change in revenues from cash equivalents
and short-term deposits and the change in expenses in respect of bank loans assuming change
in the variable component of interest in 2008 and 2007.
 2.
    
    Sensitivity test of profit or loss and equity to changes in the US dollar exchange rate
 Profit (loss) from changeIncrease of
    
    
    Decrease of10% in
    
    
    10% inexchange rate
    
    
    exchange rateNIS in thousandsEffect of the changes in:2008
    
    
    (8,623
    )
    
    
    8,6232007
    
    
    285
    
    
    
    (1,923
    )
 Some of the Companys revenues and expenses are linked to the dollar exchange rate. The
Company has revenues from transferring international call traffic from overseas
communication operators. Such revenues are denominated in foreign currency, and therefore
there is exposure to a decline in sales as a result of a decline in the exchange rates of
foreign currencies vis-à-vis the NIS.The Companys expenses with respect to international communication are mainly denominated
in dollars and local communication expenses are partly denominated in dollars on the date
of the transaction and are translated into NIS on the date of issuing the invoice (as from
this date the amount is not linked to the dollar). Therefore, the Company is exposed to an
increase in the exchange rate of the dollar.In 2008 the Company is exposed to devaluation of the NIS (increase in the dollar exchange
rate). In this situation an increase in the dollar exchange rate erodes the Companys
equity.
  55




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 f.
    
    Sensitivity tests to changes in market factors (cont.)In 2007 the Company executed forward transactions of buying and selling dollars
against NIS, in which it acquired call options to purchase $ 10 million at a rate of
NIS 4.2 = $ 1, against put options to sell $ 10 million at a rate of NIS 4.02 = $ 1.
As a result of the transactions the Company recorded a general loss in the amount of
NIS 1.7 million in 2007.
 3.
    
    Sensitivity test of profit or loss to changes in market
prices of derivatives that were measured at fair value
 Profit (loss) from changeIncrease of
    
    
    Decrease of10% in
    
    
    10% inmarket prices
    
    
    market pricesNIS in thousandsEffect of the changes in:2008
    
    
    (7,581
    )
    
    
    7,5812007
    
    
    (8,492
    )
    
    
    8,492
 The Series A convertible debentures and Series 1 options that do not have a fixed exercise
price were presented at fair value and changes therein were recognized in profit or loss.
The sensitivity test to changes in market prices of marketable securities reflects the
additional financing income or financing expenses that would have been recognized in profit
or loss in respect of the revaluation of the Series A debentures and Series 1 options in
2007 and in 2008 until January 15, 2008, the date of replacing the Series A convertible
debentures with the Series B convertible debentures, as described in Note 14, until the
date of changing the linkage terms of the Series 1 options exercise price, as described in
Note 15.Sensitivity tests and principal work assumptionsThe changes that were included in the relevant risk variables were determined on the basis
of managements assessment regarding possible reasonable changes in these risk variables.The Company performed sensitivity tests for principal market risk factors that can affect
the reported results of operations or financial position. The risk factors were examined on
the basis of the materiality of the exposure of the results of operations or financial
position to each risk factor in the functional currency and assuming all other variables
remain constant.The interest rate sensitivity test of long-term loans bearing variable interest was
performed only with respect to the variable component of the interest.
  56




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NETVISION LTD.
 Notes to the Financial Statements
 Note
18  Financial Instruments (cont.)
 g.
    
    Company capital managementThe Companys capital management purposes are as follows:To ensure an adequate return to the shareholders at a risk level that corresponds
with the activity on the market in which the Company operates, in accordance with
the policies established by the Companys Board of Directors from time to time.In 2008 the Companys bank credit is only short-term. The terms of this credit do
not require the Company to comply with a certain ratio of net debt to adjusted
capital. Net debt is calculated as total debt less cash and cash equivalents.
Adjusted capital includes the components of equity: share capital, premium, minority
interests, retained earnings and capital reserves as well as shareholders loans.Compliance with financial covenants:With respect to bank credit in the amount of NIS 6 million, a subsidiary undertook
towards the bank, inter alia, that as at the end of 2008 its tangible equity would
not be less than NIS 3,500 thousand and that it would be no lower than 10% of total
balance sheet.In addition the subsidiary undertook to increase its tangible equity each year by
NIS 500 thousand until the equity amounts to 15% of total balance sheet linked to
the CPI in respect of December 2006. In addition, the total amount of the
subsidiarys liabilities towards that bank will not be higher than 60% of the trade
receivables on the balance sheet.As at December 31, 2008 the subsidiary is in compliance with the aforementioned
financial covenants.
 Note 19  Assets and Liabilities for Employee Benefits
 Employee benefits include short-term benefit, post-employment benefits and other long-term
benefits.
 a.
    
    Post-employment benefitsThe Israeli labour laws and Severance Pay Law require the Company to pay severance pay
to an employee who is dismissed or retires, or to make current deposits in a defined
contribution plan in accordance with Section 14 of the Severance Pay Law as described
hereunder. The Companys liability in respect thereto is accounted for as a
post-employment benefit. The Companys liability for employee benefits is calculated on the
basis of the employment agreement in effect and is based on the employees salary and period
of employment that create the entitlement to receive severance pay.b.
    
    Defined contribution plansPart of the severance payments are subject to the provisions of Section 14 of the
Severance Pay Law  1963, according to which the current deposits of the Group in
pension funds and/or insurance policies exempt it from any further liability to the
employees for whom the said amounts were deposited. These deposits and the deposits
for retirement savings constitute defined contribution plans.
 Year ended December 312008
    
    
    2007NIS in thousandsExpenses in respect of defined contribution plans
    
    
    2,318
    
    
    
    1,489
  57




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NETVISION LTD.
 Notes to the Financial Statements
 Note 19  Assets and Liabilities for Employee Benefits (cont.)
 c.
    
    Defined benefit plansThe portion of the severance payments that is not covered by deposits in defined
contribution plans, as aforementioned, is accounted for by the Group as a defined
benefit plan, according to which a liability is recognized in respect of employee
benefits and the Group deposits amounts in central severance pay funds and
appropriate insurance policies.
 1.
    
    Expense recognized in profit or loss
 Year ended December 312008
    
    
    2007NIS in thousandsCurrent service cost
    
    
    6,215
    
    
    
    5,904Interest costs in respect of liability for benefits
    
    
    2,015
    
    
    
    1,622Expected return on plan assets
    
    
    (844
    )
    
    
    912Total expenses in respect of employee benefits
    
    
    7,386
    
    
    
    8,438Actual return on plan assets
    
    
    (5,455
    )
    
    
    1,927The expenses were presented in the statement of operations as follows:Cost of revenues
    
    
    3,108
    
    
    
    3,129General and administrative expenses
    
    
    3,107
    
    
    
    2,775Financing expenses
    
    
    1,171
    
    
    
    2,5347,386
    
    
    
    8,438
 2.
    
    Plan assets
(liabilities), net
 December 312008
    
    
    2007NIS in thousandsLiability in respect of defined benefit plan
    
    
    (35,023
    )
    
    
    (33,103
    )Fair value of plan assets
    
    
    23,045
    
    
    
    23,416Total liabilities, net
    
    
    (11,978
    )
    
    
    (9,687
    )
 (*)
    
    Accumulated amounts in respect of the value of the liability and the value of the
rights in the plan assets.  58




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NETVISION LTD.
 Notes to the Financial Statements
 Note 19  Assets and Liabilities for Employee Benefits (cont.)
 c.
    
    Defined benefit plans (cont.)
 3.
    
    Changes in the present value of the defined benefit plan
liability
 2008
    
    
    2007NIS in thousandsBalance as at January 1
    
    
    33,103
    
    
    
    18,232Companies consolidated for the first time
    
    
    
    
    
    
    15,225Interest expenses
    
    
    1,902
    
    
    
    4,461Current service cost
    
    
    6,215
    
    
    
    6,600Benefits paid
    
    
    (8,757
    )
    
    
    (11,415
    )Net actuarial loss
    
    
    2,560
    
    
    
    Balance as at December 31
    
    
    35,023
    
    
    
    33,103
 4.
    
    Plan assets
 a)
    
    Plan assetsPlan assets include assets held in a long-term employee benefits fund and in
appropriate insurance policies.b)
    
    Movement in fair value of plan assets
 2008
    
    
    2007NIS in thousandsBalance as at January 1
    
    
    23,416
    
    
    
    10,912Companies consolidated for the first time
    
    
    
    
    
    
    9,790Expected return
    
    
    1,454
    
    
    
    1,236Employers contribution to the plan
    
    
    10,676
    
    
    
    8,402Benefits paid
    
    
    (5,592
    )
    
    
    (7,615
    )Transition of return between severance pay and
retirement benefits
    
    
    (723
    )
    
    
    691Net actuarial gain (loss)
    
    
    (6,186
    )
    
    
    Balance as at December 31
    
    
    23,045
    
    
    
    23,416
  59




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NETVISION LTD.
 Notes to the Financial Statements
 Note 19  Assets and Liabilities for Employee Benefits (cont.)
 c.
    
    Defined benefit plans (cont.)
 5.
    
    Principal assumptions used in determining the defined
benefit plan liability
 2008
    
    
    2007%Discount rate
    
    
    3.4%-4.2
    %
    
    
    6.30
    %Expected return on plan assets
    
    
    3.55%-4.7
    %
    
    
    5.90
    %Future salary increasesMonthly employees
    
    
    2%-4
    %
    
    
    5.60
    %Hourly employees
    
    
    2
    %
    
    
    2.90
    %
 6.
    
    Amounts in respect of the current year and prior years
 2008
    
    
    2007NIS in thousandsPresent value of defined benefit liability
    
    
    (35,023
    )
    
    
    (33,103
    )Fair value of plan assets
    
    
    23,045
    
    
    
    23,416Plan deficit
    
    
    (11,978
    )
    
    
    (9,687
    )Adjustments deriving from past experience regarding:Plan liabilities
    
    
    (2,560
    )
    
    
    Plan assets
    
    
    (6,186
    )
    
    
    
  60




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NETVISION LTD.
 Notes to the Financial Statements
 Note 19  Assets and Liabilities for Employee Benefits (cont.)
 d.
    
    Other long-term benefits
 December 312008
    
    
    2007NIS in thousandsAdaptation bonus
    
    
    (3,102
    )
    
    
    (4,774
    )Liability for employee compensation plan (*)
    
    
    (1,075
    )
    
    
    
 (*)
    
    Liability in respect of a comprehensive plan for managers of the Company who are not
senior officers (hereinafter  medium level managers and the compensation plan,
respectively). The compensation plan replaced the compensation awarded to the medium level
managers by means of an option plan and makes it possible to grant a one-time bonus on the
condition that they work with the Company three and a half years as from June 2008 (until
December 2011) and that they meet certain threshold conditions, including EBITDA objectives,
a minimum market price of the Companys shares and a manager recommendation. A medium level
manager who does not meet the minimum threshold will not be entitled to a proportionate part
of the bonus specified in the compensation plan.The compensation will be paid to the medium level managers only after the approval
of the financial statements for 2011. This compensation is in addition to the
current bonuses the Company regularly grants to its employees and managers on the
basis of the annual results of the Company and their employment agreements. The
Company assesses that the compensation will be fully paid to 60% of the medium level
managers included in the compensation plan. According to the assessment, the expense in
respect of the compensation plan will amount to NIS 7.4 million (NIS 2.1 million per
year), which will be recognized as an expense by the straight line method over the
period of service. Note 20  Taxes on income
 a.
    
    Tax laws applicable to the Group companiesIncome Tax Law (Adjustments for Inflation), 1985Pursuant to the law, until the end of 2007 results were measured for tax purposes after
adjustment for changes in the Israeli CPI.In February 2008, an amendment to the Income Tax Law (Adjustments for Inflation), 1985, was
approved in the Knesset, restricting the application of the Adjustments Law from 2008 and
thereafter. With effect from 2008, the results for tax purposes are measured in nominal
value, except for certain adjustments in respect of changes in the Israeli CPI for the
period up to December 31 2007. The amendment to the law includes, inter alia, the
cancellation of the addition and the deduction for inflation and the additional depreciation
deduction with effect from 2008.
  61




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NETVISION LTD.
 Notes to the Financial Statements
 Note 20  Taxes on income (cont.)
 a.
    
    Tax laws applicable to the Group companies (cont.)Capital gains /lossesPursuant to the provisions of the law for the amendment of the Income Tax Ordinance
(No. 132), 2003 (hereinafter   the Reform Law), tax at a reduced rate of 25% applies to
capital gains arising from January 1, 2003, instead of the ordinary tax rate. On the sale of
assets purchased before the introduction of the reform law, the reduced tax rate will apply
only on the components of the gain that arose after the introduction of the law, which will
be calculated in accordance with the provisions of the law. In addition the Reform Law
provides that capital losses carried forward for tax purposes will not be available for
utilization against capital gains without a time limit. The Reform Law also arranges the
possibility for the offset of capital losses from the sale of assets outside Israel against
capital gains within Israel.b.
    
    Tax rates applicable to the revenues of the Group companiesIn June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision),
was approved in the Knesset, and on July 25, 2005, a further law was passed in the Knesset,
the Law amending the Income Tax Ordinance (No. 147), 2005, which determine, inter alia, that
the companies tax rate will be gradually reduced to the following levels: 2007  29%, 2008 
27%, 2008  27%, 2009  26% and 2010 and thereafter  25%.c.
    
    Final tax assessmentsThe Company has received tax assessments, which are considered final, for years up to and
including the 2004 tax year. The subsidiary 013 Netvision Ltd. has tax assessments
considered final up to and including the 2004 tax year. The subsidiaries 013 Netvision
Managed Communication Services Ltd. and Netwise Applications Ltd. have tax assessments
considered final up to and including the 2003 tax year. The proportionately consolidated company has
not yet received tax assessments since its incorporation.d.
    
    Tax planning that requires reportingAs of August 1, 2007 (hereinafter  the determining date), all of Netvisions activities in
the area of internet and international telephony services were concentrated in the
subsidiary 013 Netvision. In view of the aforesaid, the assets and liabilities of the
Company connected to this activity were transferred to 013 Netvision. As at the determining
date, the fixed assets were transferred to 013 Netvision for an allotment of shares in 013
Netvision to the Company, in accordance with Section 104A of the Income Tax Ordinance (New
Version) and subject to the restrictions specified in it.The current assets and liabilities of the Company, as at the determining date, were
transferred to 013 Netvision against a cash consideration. Furthermore, the Companys direct
and indirect holdings in 013 Netvision MCS were also concentrated in 013 Netvsion. In
accordance with Income Tax Regulations (Tax Planning that Requires Reporting) (Temporary
Provision)  2006, the Company reported the acquisition of 013 Netvision and of 013
Netvision MCS in its tax returns for 2007, which were submitted in 2008, and noted, in
accordance with Section 2(8) of the regulation, that the acquired companies have tax losses
of more than NIS 3 million that were created before the acquisition.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 20  Taxes on income (cont.)
 e.
    
    Carryforward tax losses and other temporary differencesThe Company has carryforward business losses for tax purposes that as at December 31, 2008
amount to NIS 3 million. Subsidiaries have carryforward tax losses as at the same date in
the amount of NIS 328 million and the proportionately consolidated company has tax losses in
the amount of NIS 40 million. In respect of these balances and in respect of other
deductible temporary differences, the Company presented in the financial statements net
deferred tax assets in the amount of NIS 32.7 million (due to the expectation of their
future utilization as a result of the existence of taxable income in the future against
which the deferred tax assets will be utilized).No deferred tax asset was created in respect of carryforward business losses in the amount
of NIS 70 million due to the uncertainty regarding their utilization in the foreseeable
future.f.
    
    Deferred taxesComposition:
 Balance sheet
    
    
    Statement of operationsDecember 31
    
    
    Year ended December 312008
    
    
    2007
    
    
    2008
    
    
    2007NIS in thousandsDeferred tax liabilitiesFair value adjustments on
acquisition
    
    
    (10,666
    )
    
    
    (23,350
    )
    
    
    12,684
    
    
    
    19,137Deferred tax assetsFair value adjustments on
acquisition
    
    
    2,125
    
    
    
    3,988
    
    
    
    (1,863
    )
    
    
    (3,122
    )Carryforward tax losses
    
    
    16,682
    
    
    
    49,430
    
    
    
    (40,429
    )
    
    
    (21,897
    )Provision for doubtful doubts
    
    
    9,364
    
    
    
    
    
    
    
    7,111
    
    
    
    Employee benefits
    
    
    3,587
    
    
    
    
    
    
    
    2,660Vacation and recuperation
    
    
    2,570
    
    
    
    
    
    
    
    1,915
    
    
    
    Other temporary differences
    
    
    9,052
    
    
    
    
    
    
    
    2,843
    
    
    
    Deferred tax assets, net
    
    
    32,714
    
    
    
    30,058Deferred tax expenses
    
    
    
    
    
    
    
    
    
    
    (15,079
    )
    
    
    (5,882
    )
 The deferred taxes are computed at an average tax rate of 26% on the basis of the tax rates
expected to be in force at the date of realization.No deferred taxes were recognized in respect of temporary differences relating to investments in
investee companies and rights in joint ventures, because these investments are not expected to be
realied in the foreseeable future.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 20  Taxes on income (cont.)
 g.
    
    Taxes on income included in the statement of operations
 Year ended December 312008
    
    
    2007NIS in thousandsCurrent taxes
    
    
    (1,280
    )
    
    
    (6,803
    )Change in deferred taxes, net
    
    
    (15,079
    )
    
    
    (5,882
    )(16,359
    )
    
    
    (12,685
    )
 h.
    
    Theoretical taxPresented hereunder is a reconciliation of the amount of tax that would have applied if all
the revenues, expenses, profits and losses in the statement of operations were liable to tax
at the statutory tax rate, to the amount of taxes on income recorded in the statement of
operations:
 Year ended December 312008
    
    
    2007NIS in thousandsIncome before taxes on income
    
    
    103,113
    
    
    
    32,090Statutory tax rate
    
    
    27
    %
    
    
    29
    %Tax computed at the statutory tax rate
    
    
    27,841
    
    
    
    9,306Increase (decrease) in taxes on income arising from the following
factors:Expenses that are not deductible for tax purposes
    
    
    6,107
    
    
    
    3,128Increase in tax losses for which deferred taxes have not been provided
    
    
    9,733
    
    
    
    20,489Utilization of tax losses for which deferred taxes were not
provided in the past
    
    
    (12,793
    )
    
    
    (18,554
    )Creation of deferred taxes in respect of temporary differences, for
which deferred taxes were not provided in the past
    
    
    (14,529
    )
    
    
    Income subject to special tax rates
    
    
    
    
    
    
    (1,684
    )Taxes on income
    
    
    16,359
    
    
    
    12,685Average effective tax rate
    
    
    15.7
    %
    
    
    39.5
    %
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens
 a.
    
    ClaimsVarious claims were filed against Group companies in the ordinary course of business as well
as claims to which requests for their authorization as class actions were attached.In the opinion of management of the Company, which is based, inter alia, on the opinion of
its legal counsel regarding the chances of the claims, including the requests to authorize
the claims as class actions, appropriate provisions in the amount of NIS 8 million have been
included in the financial statements with respect to claims that require provisions in order
to cover the exposure arising from such claims.Presented hereunder are details of the material claims in which there have been changes
since December 31, 2007:
 1.
    
    In January 2005, a claim was made in the Tel Aviv-Jaffa District Court against
013 Netvision and three other communication companies in respect of a breach of an
Israeli patent, involving the method of operating prepaid calling cards, by those
claiming to own the patent. The reliefs sought in the claim are the provision of
accounts, compensation and penalties.The claim noted that it was not possible, at this stage, to estimate the amount of
the claim against 013 Netvision and against the three other communication companies,
and for the purposes of the court fee alone, it was estimated at NIS 10 million
against all of the defendants together. On July 17, 2005, 013 Netvision submitted a
statement of defence and a third-party notice to Nortel Networks Israel Ltd.
(hereinafter Nortel) and Sigoalio Technologies Ltd. (hereinafter, Sigoalio), to
receive indemnity and compensation in the event that 013 Netvision would be liable
within the framework of the claim made against it, and in respect of the damage
incurred as a result of the submission of the claim, based on the provisions of
agreements between the parties. On October 6, 2005 and December 19, 2005, Sigoalio
and Nortel, respectively, submitted statements of defence. In the statements, they
raise a number of arguments against the original claim submitted against 013
Netvision and against
the claims of the group against them. On April 11, 2006, 013 Netvision submitted a
request to submit an amended third-party notice also against Telrad Networks Ltd.,
as a result of various claims that had been raised by Nortel. On July 30, 2006, an
amended third-party notice was submitted, as aforesaid. On September 10, 2006, an
amended statement of defence was submitted on behalf of the third party  Sigoalio
and on December 7, 2006, Telrad and Nortel did likewise. On December 24, 2006, a
statement of response was submitted on behalf of 013 Netvision within the framework
of the third-party notice proceeding. On November 19, 2007, the court approved the
joint request on behalf of the defendants, including 013 Netvision, to cancel the
preliminary hearing scheduled for December 17, 2007, in order to allow the parties
to explore the possibility of reaching a compromise arrangement. The attempts at
reaching a compromise were unsuccessful and the representative of the plaintiff
filed with the court a request to schedule new dates for completing the preliminary
proceedings.A pre-trial hearing was postponed and rescheduled for April 23, 2009, following the
request of the parties (mutual) to postpone the pre-trial in order to allow the
parties to reach a new procedural arrangement that will determine the date for
completing the preliminary proceedings on the matter (exchange of document
disclosure affidavits, replies to questionnaires, etc.), and also so that the
parties may fully exploit the compromise talks being held between them outside of
court.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 1.
    
    (cont.)It is noted that defence proceedings from creditors of Nortel are currently being
held. These proceedings may impair the chances of the Group to collect the debt from
Nortel if the third party notice filed against it is successful. On the basis of the
opinion of its legal counsel, the Group management considers that the provision
included in the financial statements is adequate to cover the estimated expenses of
the claim.2.
    
    In June 2004 the liquidator of Mastop Ltd, as part of its liquidation file,
submitted a request to order cancellation of the transaction whereby the Company
acquired the activities of Mastop on November 12, 2001, in which it is alleged that it
involves a preference of creditors and that the low price paid by the Company, US$ 12.5
thousand, does not reflect the value of the sold activities, which it estimates at NIS
1.6 million. Alternatively, the liquidator demands that the Company pay the real value
of the activities as they were at the acquisition date. According to the Company the
consideration that it paid including the activity required for investment, reflects the
value of the activity as it was then.In his opinion from March 12, 2008, the court-appointed valuer states that it is
reasonable to value the activities of Mastop on the date of the transaction at
zero. Nevertheless, the valuer continues and states that since Netvision chose to
use all the equipment including the intellectual property, its cost does indeed
constitute value which he estimates to be NIS 1,033 thousand (NIS 1.6 million in
terms of June 30, 2008).Netvision claimed that the valuation included significant deficiencies and defects
and requested its annulment. On January 1, 2009 the Court appointed another valuer
in order to estimate the value of the company on the date of the transaction. At
this point
the parties are holding negotiations to reach a compromise. A new valuer has not yet
been approached.Accordingly, the Companys legal counsel presently believes that it is probable
(meaning, a probability of more than 50%) that the claim will succeed, and therefore
the Company included the necessary provision in its financial statements.On April 1, 2008 all the Companys holdings in Mastop were sold for the price of NIS
305 thousand. The transaction was approved by the Court on June 16, 2008 and was
completed on June 30, 2008.3.
    
    On January 9, 2008, a claim was submitted against Company in the Regional
Labour Court in Haifa by those serving as Chief Executive Officer or assistant Chief
Executive Officer of the Company from May 2001 through March 2007 and April 2007,
respectively, in which the complainants request a number of financial rights, which,
they claim, they are entitled to according to their contracts of employment and/or
resolutions of the Board of Directors passed in respect thereof. At the centre of the
claim is the complainants contention that, according to their contracts of employment,
each of them is entitled to payment of a bonus amounting to US$ 1.54 million at the
exchange rate of NIS 4.54 to US$ 1, which is NIS 6,507 thousand for each complainant,
in respect of the transaction in which the Company acquired the entire issued share
capital of 013 Netvision and 013 Netvision MCS.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 3.
    
    (cont.)
    4.
    
    In September 2007, a claim was submitted to the Group, together with a request
for it to be approved as a class action, which were filed with the Tel Aviv-Jaffa
District Court, against the Company, Nana 10 Ltd. and other companies that operate
electronic trading sites and other suppliers. The claim relates to online auctions on
the Internet (hereinafter: Auctions).
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 4.
    
    (cont.)
      5.
    a.

    
    On April 16, 2008 a claim and a request to authorize the claim as a class
action were filed against 013 Netvision (hereinafter  the Arpit request). The request
involves calling cards to Thailand and comprises two main allegations. The first is
that the time charged for the plaintiffs calls was longer than the actual time of the
calls; the second is that 013 Netvision uses misleading language when it advertises
benefits in the form of units, without explaining the time included in each unit.
The plaintiff assesses the claim at NIS 138 million.
 b.
    
    On April 14, 2008 a claim and a request to authorize the claim as
a class action were filed by 7 plaintiffs (hereinafter  the Myrna request)
against Bezeq International Ltd., 013 Netvision and 012 Smile Communication Ltd.
The request involves calling cards to the Philippines, and mainly alleges that
the time charged for the plaintiffs calls was longer than the actual time of
the calls.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 5.
    
    (cont.)
   c.
    
    On June 1, 2008 a claim and a request to authorize the claim as a
class action were filed with the Tel Aviv District Court against 013 Netvision
and Bezeq International (hereinafter: the defendants) by a foreign worker from
Thailand (hereinafter: the Neret request).
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 5.
    
    (cont.)
     6.
    
    On April 27, 2008 a claim and a request to authorize the claim as a class
action were filed against 013 Netvision and 012 Smile communication Ltd. (hereinafter:
the Dolores request). The request alleges that 013 Netvision calculates the time of
calls from Israel to foreign countries and from foreign countries to Israel, on the
different cards, on the basis of minutes, whereas according to the license of the
Ministry of Communication for providing international telephone services it is
requested to calculate the calls on the basis of seconds. Furthermore, it is alleged
that 013 Netvision did not disclose the aforementioned method of calculation to its
customers. In addition, the plaintiffs allege that the defendants charge for calls that
were not actually made and that the calculation of the time of the calls is inaccurate,
so that the length of the call that is deducted from the card is longer than the actual
time of the call. The plaintiffs allegations are in respect of Pre-paid, Post-paid and
cellular phone Pre-paid cards.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 6.
    
    (cont.)
   7.
    
    On May 25, 2008 a claim and a request to authorize the claim as a class action
were filed against 013 Nevision (hereinafter: the Livay request). In the Livay request,
it is alleged, inter alia, that 013 Netvision misled the users of Global Card and
Home Card international calling cards regarding the use and charging method of the
calling cards and did not disclose material details regarding the use and charging
method.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 7.
    
    (cont.)
  8.
    
    Two separate claims and a request to authorize each as a class action were
filed in July 2008 against 013 Netvision with the Tel Aviv-Jaffa District Court by
Aviad Sadan Management Ltd. and Universal Mobile.
     9.
    
    On February 24, 2009 the Company received a request to authorize a claim as a
class action according to the Class Actions Law  2007 (hereinafter: the claim). The
claim was filed against Netvision with the District Court of Central Region. In the
claim it is alleged, inter alia, that 013 Netivsion misled the plaintiff and presented
to him a misrepresentation, by which as a result of him joining a campaign in February
2007 he is entitled to a rate of NIS 0.17 (including VAT) per one minute of call to 28
international destinations for a fixed monthly payment of NIS 4.25 (not including VAT)
(the campaign), whereas as from the middle of February 2008 he was actually charged
higher rates per minute. The plaintiff alleges that it is justified to authorize the
claim as a class action against 013 Netvision, in the name of a group that includes all
the customers of 013 Netvision who joined the campaign.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 9.
    
    (cont.)
   10.
    
    On December 15, 2008 the Company received a claim and a request to authorize
the claim as a class action (hereinafter: the claim). The claim was filed against 013
Netvision and other companies (the defendants) with the District Court of Central
Region.
    11.
    
    The Company has a number of additional claims in the total amount of NIS 570
thousand, where in the opinion of the Company and its legal counsel, their chances
cannot be assessed at this stage.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 a.
    
    Claims (cont.)
 Other contingent liabilities
 
 b.
    
    Guarantees given
  c.
    
    Commitments
 1.
    
    The Company has signed agreements to rent offices and premises for periods
ending 2009-2013 (including options for early cancellation in some of the cases). The
rent commitment, including rent payable by subsidiaries and a proportionately
consolidated company, is as follows:
 2008
    
    
    2007NIS in thousandsFirst year
    
    
    13,548
    
    
    
    10,275Second year to fifth year
    
    
    26,020
    
    
    
    3,02739,568
    
    
    
    13,302
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 c.
    
    Commitments (cont.)
 2.
    
    In 2003 Netvision and Barak signed framework agreements with Med Nautilus for
the purchase of user rights of underwater communication lines. Pursuant to the
agreement, the user rights of the international communication lines will be made
available to Netvision and Barak gradually, until 2017, with the option of extending
the user rights by an additional 5 years.
      3.
    
    In May 2008 the Company entered into an additional agreement with Med-Nautilus
by which the Company will be able to acquire irrevocable user-rights in international
capacity operated by Med-Nautilus and to use it until May 1, 2017 (hereinafter  the
Med-Nautilus agreement). After that date, the Company will have two option periods of
five years each to extend use for no additional cost (other than the payment of annual
maintenance fees in respect of the extension period).
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 c.
    
    Commitments (cont.)
 3.
    
    (cont.)
     2008
    
    
    2007NIS in thousandsFirst year
    
    
    35,944
    
    
    
    42,656Second year to fifth year
    
    
    43,343
    
    
    
    44,69379,287
    
    
    
    87,349
 4.
    
    The Company has agreements with suppliers of infrastructure and international
communication lines to pay maintenance fees in the amount of $ 4-5 million per year
(the last is until 2027) for rights to use infrastructures and lines of communication.5.
    
    The Company has vehicle rental agreements under operating leases for a period
of 36 months at an annual rent of NIS 14 million.6.
    
    The Company has a liability to pay royalties to the Government of Israel at a
rate of 2% in 2008 (2.5% and 3% in 2007 and 2006, respectively) from most of the
international communication services, net of transhipment fees, account settlement fees
for foreign operators and bad debts. The aggregate amount of the royalties and the
period for which they will be paid are unlimited. The percentage of royalties is
expected to fall by half a percentage point each year until a rate of 1% in 2010.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 21  Contingent Liabilities, Commitments and Liens (cont.)
 c.
    
    Commitments (cont.)
 6.
    
    (cont.)
  d.
    
    Liens
     Note 22  Shareholders Equity
 a.
    
    In May 2005, prior to the issue of the Companys securities to the public, the following
transactions were carried out in the Company:
 1.
    
    The rights of the ordinary shares were equalized to the rights of the preferred
 shares and the two classes of shares were unified into one class  ordinary shares of
NIS 1 par value each. Each ordinary share confers voting rights at general meetings of
the Company, the right to a dividend, the distribution of bonus shares and
participation in a distribution of the Companys asset surplus in a liquidation.2.
    
    Immediately prior to the issue of securities to the public, the Company
distributed 6,414,437 bonus shares to its shareholders out of the balance of the share
premium. All of the net income per share data were retroactively adjusted to reflect
the distribution of the bonus shares.3.
    
    Shareholders loans totalling NIS 27 million were converted by controlling
shareholders in the Company to 960,000 ordinary shares.
 b.
    
    In May 2005, the Company completed an initial public offering of securities to the public:
 1.
    
    An issue of 1,800,000 ordinary shares of NIS 1 par value each.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 22  Shareholders Equity (cont.)
 b.
    
    (cont.)
 2.
    
    An issue of 100,000,000 par value of Series A debentures bearing interest at 4%
per annum, such that every NIS 32 par value of Series A debentures are convertible to
one ordinary share of the Company with a par value of NIS 1. (See Note 14 for more
details on the replacement of the debentures.)3.
    
    An issue of 900,000 Series 1 options, each of which is exercisable to one
ordinary share of the Company with a par value of NIS 1 on every business day, from
their registration on the stock exchange through May 22, 2009, except for the days
between the 12th and 16th of each calendar month, against a cash
payment of an exercise price of NIS 32 linked to the known Israeli CPI on the date of
issue. Any option not exercised up to and including May 22, 2009 will be cancelled, and
will not entitle the holder to any right whatsoever. (See Note 15 for more details on
the options arrangement.)
 c.
    
    As part of the merger transaction with Barak and Globecall, on January 25, 2007, the Company
issued 12,192,887 shares to the former shareholders of Barak and Globecall in consideration
for the entire issued share capital of Barak and Globecall. For further details, see Note 1a.d.
    
    On June 6, 2007, the Board of Directors of the Company approved a private placement of
ordinary shares of NIS 1 par value each of the Company to investors from the Harel Insurance
Group Ltd. (the offerees). The Company allotted to the offerees 1,220,000 ordinary shares of
NIS 1 par value each of the Company (the issued shares). The issued shares represent
approximately 4.74% of the Companys issued and paid-up capital and voting rights therein
before the issue (4.16% on full dilution) and 4.52% of the Companys issued and paid-up
capital of the Company and voting rights therein after the issue (3.99% on full dilution). The
 shares were issued in consideration for NIS 42.86 per share (the issue price) and for an
aggregate total of NIS 52,289 thousand. The offerees did not become interested parties in the
Company as a result of the issue.e.
    
    On December 4, 2007, the Board of Directors of the Company approved the execution of a
private placement to Ofer Hi-Tech Investments Ltd. (the Fund). The Company issued 1,400,000
ordinary shares of NIS 1 par value each of the Company (the issued shares) to the Fund. The
issued shares are listed for trading on the stock exchange and are equal in rights to the
Companys NIS 1 ordinary shares. The issued shares represent approximately 5.13% of the
Companys issued and paid-up capital and voting rights therein before the issue (4.58% on full
dilution) and 4.88% of the Companys issued and paid-up capital of the Company and voting
rights therein after the issue (4.38% on full dilution). The shares were issued in
consideration for NIS 43 per share (the issue price) and for an aggregate total of NIS
60,200 thousand. The offerees did not become interested parties in the Company as a result of
the issue.f.
    
    Composition of share capital
 December 31, 2008
    
    
    December 31, 2007Issued and
    
    
    
    
    
    
    Issued andAuthorized
    
    
    paid-in
    
    
    Authorized
    
    
    paid-inNumber of sharesOrdinary shares of NIS 1 par
value each
    
    
    40,000,000
    
    
    
    29,203,320
    
    
    
    40,000,000
    
    
    
    28,758,986
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NETVISION LTD.
 Notes to the Financial Statements
 Note 22  Shareholders Equity (cont.)
 g.
    
    Rights attached to the shares
  1.
    
    Rights to participate and vote in the Companys general meeting, the right to
receive profits and funds according to the relative par value of each, liquidation
rights and the right to appoint directors.2.
    
    The shares are traded on the Tel Aviv Stock Exchange.
 h.
    
    Options
   Note 23  Share-Based Payment
 a.
    
    Expense recognized in the financial statements
 Year ended December 312008
    
    
    2007NIS in thousandsTotal expense recognized from share-based payment transactions
    
    
    7,066
    
    
    
    3,227
  b.
    
    Share-based payment plans
 1.
    
    1996-2001 option plan
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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 1.
    
    1996-2001 option plan (cont.)
  Year ended December 312008
    
    
    2007Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exerciser price
    
    
    Number of
    
    
    exerciser priceoptions
    
    
    in dollars
    
    
    options
    
    
    in dollarsShare options at the beginning of
the year
    
    
    20,352
    
    
    
    5.23
    
    
    
    523,041
    
    
    
    3.76Share options exercised during
the
year (1)
    
    
    
    
    
    
    
    
    
    
    (502,689
    )
    
    
    3.7Share options at the end of the
year
    
    
    20,352
    
    
    
    5.23
    
    
    
    20,352
    
    
    
    5.23Share options exercisable at the
end
of the year
    
    
    20,352
    
    
    
    5.23
    
    
    
    20,352
    
    
    
    5.23
 (1)
    
    The weighted average share price on the exercise date of the options in 2007 is
NIS 58. 2.
    
    2004 option plan
     80




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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 2.
    
    2004 option plan (cont.)
  Year ended December 312008
    
    
    2007Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exercise price
    
    
    Number of
    
    
    exercise priceoptions
    
    
    in NIS
    
    
    options
    
    
    in NISShare options at the beginning of
the year
    
    
    184,197
    
    
    
    20.62
    
    
    
    297,078
    
    
    
    20.62Share options exercised during the
year (1)
    
    
    (26,762
    )
    
    
    20.62
    
    
    
    (112,881
    )
    
    
    20.62Share options expired or forfeited
during the year
    
    
    (13,427
    )
    
    
    20.62
    
    
    
    
    
    
    
    20.62Share options at the end of the
year
    
    
    144,008
    
    
    
    20.62
    
    
    
    184,197
    
    
    
    20.62Share options exercisable at the
end
of the year
    
    
    81,687
    
    
    
    20.62
    
    
    
    95,432
    
    
    
    20.62
 (*)
    
    Subsequent to the balance sheet date, 11,390 options were exercised for 11,390
shares for the consideration of NIS 256 thousand.(1)
    
    The weighted average share price on the exercise date of the options in 2007
and 2008 is NIS 55.6 and NIS 38.4, respectively. 3.
    
    2006 option plan
        81




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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 3.
    
    2006 option plan (cont.)
     Year ended December 312008
    
    
    2007Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exercise price
    
    
    Number of
    
    
    exercise priceoptions
    
    
    in NIS
    
    
    options
    
    
    in NISShare options at the beginning of
the year
    
    
    198,045
    
    
    
    34.31
    
    
    
    212,670
    
    
    
    34.31Share options exercised during the
year (1)
    
    
    (22,225
    )
    
    
    34.31
    
    
    
    (4,725
    )
    
    
    34.31Share options expired or forfeited
during the year
    
    
    (35,450
    )
    
    
    34.31
    
    
    
    (9,900
    )
    
    
    34.31Share options at the end of the
year
    
    
    140,370
    
    
    
    34.31
    
    
    
    198,045
    
    
    
    34.31Share options exercisable at the
end
of the year
    
    
    70,184
    
    
    
    34.31
    
    
    
    55,666
    
    
    
    34.31
 (1)
    
    The weighted average share price on the exercise date of the options in 2007
and 2008 is NIS 51.4 and NIS 40.5, respectively.  82




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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 4.
    
    Option plan for employees of Barak
         Year ended December 312008
    
    
    2007Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageNumber of
    
    
    exercise price
    
    
    Number of
    
    
    exercise priceoptions
    
    
    in NIS
    
    
    options
    
    
    in NISShare options at the beginning of
the year
    
    
    233,195
    
    
    
    16.04
    
    
    
    244,705
    
    
    
    16.55Share options granted during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share options exercised during the
year (1)
    
    
    (80,262
    )
    
    
    10.28
    
    
    
    (11,510
    )
    
    
    26.88Share options expired or forfeited
during the year
    
    
    (58,818
    )
    
    
    18.33
    
    
    
    
    
    
    
    Share options at the end of the
year
    
    
    94,115
    
    
    
    19.51
    
    
    
    233,195
    
    
    
    16.04Share options exercisable at the
end
of the year
    
    
    62,745
    
    
    
    19.51
    
    
    
    78,923
    
    
    
    14.08
 (*)
    
    Subsequent to the balance sheet date, 19,398 options were exercised for 19,398
shares for the consideration of NIS 173 thousand.(1)
    
    The weighted average share price on the exercise date of the options in 2007
and 2008 is NIS 46.8 and NIS 31, respectively. 
  83




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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 5.
    
    2008 option plan
         84




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NETVISION LTD.
 Notes to the Financial Statements
 Note 23  Share-Based Payment (cont.)
 b.
    
    Share-based payment plans (cont.)
 5.
    
    2008 option plan (cont.)
  6.
    
    Data on the balance of the options exercisable under the blocking conditions
prescribed are as follows:
 December 31, 2008Number ofFair value
    
    
    
    
    
    OptionsExercise
    
    
    
    
    
    per option
    
    
    
    
    
    available forincrement
    
    Standard
    
    
    at grant
    
    Expiry
    
    
    exerciseOption plan
    
    Number of options
    
    

per option
    
    deviation
    
    
    date
    
    date
    
    
    (vested)1996-2001
plans
    
    
    20,352
    (1)
    
    US$5.23
    
    
    123.6
    %
    
    $20.3
    
    
    2,010
    
    
    
    20,3522004 plan
    
    
    144,008
    (1) (3)
    
    Linked to the CPI 34.31
    
    
    53.9
    %
    
    NIS 65
    
    
    2,014
    
    
    
    81,6872006 plan
    
    
    140,370
    (2)
    
    Linked to the CPI
    
    
    31%-64
    %
    
    NIS 8.67%
    
    
    2,016
    
    
    
    70,184Barak plan
    
    
    94,115
    (3)
    
    NIS 19.51
    
    
    30%-46
    %
    
    NIS 15.62
    
    
    2,016
    
    
    
    62,7452008 plan
    
    
    1,000,000
    
    
    NIS 41.73
    
    
    29%-37
    %
    
    NIS 12.59
    
    
    2,010-2,012
    
    
    
    1,398,845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,968
 (1)
    
    After adjustment of the benefit component.(2)
    
    The fair value of the options was determined using the computation formula
based on the binomial model.(3)
    
    The fair value of each option was determined using the Black & Scholes formula
with an annual standard deviation calculated at the grant date on the basis of the
estimated share price at the grant date. 7.
    
    In January 2001, the subsidiary, Netwise, granted 1,900,000 options to its
employees. The options are exercisable to 1,900,000 ordinary shares of Netwise, for an
exercise price of US$ 0.01 per option. Through the end of 2008, 1,500,000 options
expired. The number of options remaining held by the employees amounts to 400,000
options. The vesting period of the options is 4 years and they expire 10 years after
the date of their grant. In the event of all of the options granted to the employees of
the company being exercised, the Companys shareholding percentage in Netwise will fall
to 53.2%. At the grant date, the value of an ordinary share of Netwise was negligible.
Netwise has obtained approval from the Israeli tax authorities for the option plan
pursuant to Section 102 of the Income Tax Ordinance.
  85




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NETVISION LTD.
 Notes to the Financial Statements
 Note 24  Additional Statement of Operations Data
 Year ended December 312008
    
    
    2007NIS in thousandsA. Cost of revenuesSalaries and related expenses
    
    
    253,506
    
    
    
    252,631Communication
    
    
    147,389
    
    
    
    131,964Purchase of minutes and products
    
    
    380,919
    
    
    
    402,214Depreciation and amortization
    
    
    126,503
    
    
    
    177,003Rental expenses, maintenance and other
    
    
    63,551
    
    
    
    53,130Other
    
    
    9,954
    
    
    
    7,778981,822
    
    
    
    1,024,720B. Selling and marketing expensesSalaries and related expenses
    
    
    10,330
    
    
    
    8,952Commissions paid
    
    
    55
    
    
    
    136Advertising
    
    
    37,265
    
    
    
    31,595Depreciation and amortization
    
    
    4,112
    
    
    
    4,905Other
    
    
    346
    
    
    
    15452,108
    
    
    
    45,742C. General and administrative expensesSalaries and related expenses
    
    
    33,343
    
    
    
    26,062Professional services
    
    
    17,104
    
    
    
    11,601Bad and doubtful debts
    
    
    11,408
    
    
    
    10,566Depreciation and amortization
    
    
    79
    
    
    
    972Other
    
    
    13,069
    
    
    
    7,835Rent and related expenses
    
    
    115
    
    
    
    2575,118
    
    
    
    57,061D. Other incomeCapital gain on reduction in holding rate
    
    
    (382
    )
    
    
    (42,112
    )Other expenses
    
    
    
    
    
    
    2,530(382
    )
    
    
    (39,582
    )E. Financing income (expenses)Financing incomeRemeasurement of financial liabilities at fair value
    
    
    6,753
    
    
    
    16,292Financing income from deposits
    
    
    3,980
    
    
    
    2,545Income from marketable securities
    
    
    
    
    
    
    1,30310,733
    
    
    
    20,140
  86




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 24  Additional Statement of Operations Data (cont.)
 Year ended December 312008
    
    
    2007NIS in thousandsFinancing expensesBank and credit card commissions
    
    
    6,781
    
    
    
    6,574Financing expenses in respect of short-term credit
    
    
    2,182
    
    
    
    5,427Financing expenses in respect of long-term liabilities, net
    
    
    4,368
    
    
    
    3,163Exchange rate and linkage differences
    
    
    2,545
    
    
    
    2,940Financing expenses in respect of convertible debentures
    
    
    3,519
    
    
    
    2,326Interest and linkage on shareholders loans
    
    
    
    
    
    
    22419,395
    
    
    
    20,654
 Note 25  Net Earnings Per Share
 a.
    
    The number of shares and income (loss) that were used to calculate the net earnings (loss)
per share
 Year ended December 312008
    
    
    2007Net income
    
    
    
    
    
    
    Net incomeWeighted
    
    
    attributable to
    
    
    Weighted
    
    
    attributable tonumber of
    
    
    the Companys
    
    
    number of
    
    
    the Companysshares
    
    
    shareholders
    
    
    shares
    
    
    shareholdersThousands
    
    
    NIS in thousands
    
    
    Thousands
    
    
    NIS in thousandsNumber of shares and net
income for purposes of
calculating
basic net earnings
    
    
    28,994
    
    
    
    86,754
    
    
    
    25,669
    
    
    
    19,152Effect of dilutive potential
ordinary
sharesOptions
    
    
    76
    
    
    
    (1,602
    )
    
    
    282
    
    
    
    (5,706
    )Employee option in share-based
payment plan
    
    
    139
    
    
    
    
    
    
    
    341
    
    
    
    Convertible debentures
    
    
    1,437
    
    
    
    (2,557
    )
    
    
    2,002
    
    
    
    (8,935
    )1,652
    
    
    
    (4,159
    )
    
    
    2,625
    
    
    
    (14,641
    )For purposes of calculating
diluted net earnings
    
    
    30,646
    
    
    
    82,595
    
    
    
    28,294
    
    
    
    4,511
 b.
    
    The diluted net earnings per share for 2008 does not include 985 options to employees in
share-based payment plans since their inclusion increases the basic earnings per share from
continuing operations (anti-dilutive effect).
  87




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 26  Business Segments
 a.
    
    General
  Connectivity to the Internet
segment, and related products and
services
    
    
    
    Most of the activity in this
segment includes the
provision of connectivity to
the Internet and related
products and services to
customers.Telephony segment
    
    
    
    Activity in this segment
includes the provision of
telephone call services.Managed services segment
    
    
    
    Activity includes the
provision of network endpoint
services, the sale of network
endpoint equipment (Neser),
and national operator
services (Mapa)Other segment
    
    
    
    Including mainly the
provision of content
services, electronic trading,
planning and supply of
Internet applications,
support and outsourcing
services.
 b.
    
    Primary business segments report
 1.
    
    Revenues:
 Year ended December 312008
    
    
    2007NIS in thousandsRevenues from external parties:Connectivity to the Internet, and related products and
services
    
    
    537,900
    
    
    
    485,935Telephony
    
    
    519,596
    
    
    
    493,444Managed services
    
    
    92,371
    
    
    
    79,071Other
    
    
    84,717
    
    
    
    88,6381,234,584
    
    
    
    1,147,088Inter-segment revenues:Connectivity to the Internet, and related products and
services
    
    
    3,783
    
    
    
    4,148Telephony
    
    
    3,655
    
    
    
    4,523Managed services
    
    
    6,863
    
    
    
    2,49614,301
    
    
    
    11,167Total revenues
    
    
    1,248,885
    
    
    
    1,158,255Adjustments
    
    
    (14,301
    )
    
    
    (11,167
    )Total in statements of operations
    
    
    1,234,584
    
    
    
    1,147,088
  88




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NETVISION LTD.
 Notes to the Financial Statements
 Note 26  Business Segments (cont.)
 b.
    
    Primary business segments report (cont.)
 2.
    
    Segment results and adjustment to net income (loss):
 Year ended December 312008
    
    
    2007 (*)NIS in thousandsConnectivity to the Internet, and related products and
services
    
    
    85,505
    
    
    
    65,791Telephony
    
    
    101,091
    
    
    
    64,436Managed services
    
    
    (4,542
    )
    
    
    (48,805
    )Other
    
    
    (29,893
    )
    
    
    (8,678
    )Adjustments
    
    
    (40,768
    )
    
    
    (79,722
    )Operating profit (loss)
    
    
    111,393
    
    
    
    (6,978
    )Financing expenses, net
    
    
    8,662
    
    
    
    514Other income, net
    
    
    382
    
    
    
    39,582Taxes on income, net
    
    
    16,359
    
    
    
    12,685Net income
    
    
    86,754
    
    
    
    19,405
 (*)
    
    In 2007 the results of the connectivity to the internet and
related products and services segment, the telephony segment and managed
services segment include reorganization expenses in the amount of NIS 21.2
million, NIS 11 million and NIS 1.3 million, respectively. 3.
    
    Segment assets:
 December 312008
    
    
    2007NIS in thousandsConnectivity to the Internet, and related products and
services
    
    
    521,280
    
    
    
    591,177Telephony
    
    
    199,623
    
    
    
    554,043Managed services
    
    
    156,765
    
    
    
    132,274Other
    
    
    39,694
    
    
    
    63,722917,362
    
    
    
    1,341,216Unallocated assets
    
    
    709,507
    
    
    
    172,677Total assets
    
    
    1,626,869
    
    
    
    1,513,893
  89




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 26  Business Segments (cont.)
 b.
    
    Primary business segments report (cont.)
 4.
    
    Liabilities of the segment:
 December 312008
    
    
    2007NIS in thousandsConnectivity to the Internet, and related products and
services
    
    
    172,086
    
    
    
    191,475Telephony
    
    
    63,840
    
    
    
    81,416Managed services
    
    
    22,659
    
    
    
    46,354Other
    
    
    36,452
    
    
    
    53,932295,037
    
    
    
    373,177Unallocated liabilities
    
    
    256,170
    
    
    
    182,803Total liabilities
    
    
    551,207
    
    
    
    555,980
 5.
    
    Cost of acquiring long-term assets:
 Year ended December 312008
    
    
    2007NIS in thousandsConnectivity to the Internet, and related products and
services
    
    
    45,345
    
    
    
    195,224Telephony
    
    
    21,724
    
    
    
    481,495Managed services
    
    
    29,001
    
    
    
    121,571Other
    
    
    4,254
    
    
    
    34,749100,324
    
    
    
    833,039
 6.
    
    Depreciation and amortization:
 Year ended December 312008
    
    
    2007NIS in thousandsConnectivity to the Internet, and related products and
services
    
    
    65,297
    
    
    
    86,888Telephony
    
    
    49,143
    
    
    
    58,934Managed services
    
    
    8,589
    
    
    
    57,814Other
    
    
    21,808
    
    
    
    5,787144,837
    
    
    
    209,423
  90




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 26  Business Segments (cont.)
 c.
    
    Additional detailsTransfers between the segmentsSegment revenues, expenses and results include transfers between the segments. In the
opinion of management of the Company, these transfers are recorded at the accepted market
price for external customers in respect of similar products.d.
    
    Principal suppliers
 Year ended December 312008
    
    
    2007Percentage of total purchasesBezeq
    
    
    11
    %
    
    
    11
    %Med-Nautilus
    
    
    6
    %
    
    
    7
    %Cellcom
    
    
    3
    %
    
    
    4
    %Partner
    
    
    3
    %
    
    
    3
    %HOT
    
    
    3
    %
    
    
    2
    %Pelephone
    
    
    1
    %
    
    
    1
    %27
    %
    
    
    28
    %
 Note 27  Balances and Transactions with Interested and Related Parties
   1.
    
    It is not an extraordinary transaction (within its meaning in the Companies Law).2.
    
    The effect of the relevant parameter (as stated hereunder) is less than 1%.
With respect to each transaction or undertaking that is being tested for significance,
the relevant parameters will be examined on the basis of the Companys consolidated
financial statements for the last reporting year: (a) total assets; (b) total
liabilities; (c) sales turnover. Thus for example a transaction for the sale of
services will be considered insignificant if the Companys revenue from the transaction
is lower than 1% of its sales turnover, in accordance with the aforementioned
consolidated financial statements.
  91




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##### Table of Contents



NETVISION LTD.
 
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 3.
    
    The transaction is insignificant also from a qualitative point of view. Thus
for example, a transaction will not be considered insignificant if the controlling
shareholder or a relative of the controlling shareholder are expected to receive
benefits from the transaction that it is important they be reported to the public.
   a.
    
    Balance with interested and related parties
 1.
    
    Composition:December 31, 2008
 Interestedparty andother relatedpartiesNIS in thousandsTrade receivables
    
    
    6,188Trade payables
    
    
    (1,830
    )Highest balance of trade receivables during the year
    
    
    14,351Highest balance of trade payables during the year
    
    
    (8,452
    )
 December 31, 2007
 Interestedparty andother relatedpartiesNIS in thousandsTrade receivables
    
    
    10,025Trade payables
    
    
    4,317Highest balance of trade receivables during the year
    
    
    26,435Highest balance of trade payables during the year
    
    
    (19,591
    )
  92




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 b.
    
    Benefits to related and interested parties
 Year ended December 312008
    
    
    2007NIS in thousandsSalary and related expenses to parties employed by the
Company
    
    
    2,940
    
    
    
    (*)   198Directors remuneration to parties not employed by the
Company
    
    
    1,147
    
    
    
    860Number of people to which the salary and benefits relate:Interested parties employed by the Company
    
    
    1
    
    
    
    1Directors not employed by the Company
    
    
    9
    
    
    
    9
 (*)
    
    Including the salary of the Companys CEO until her resignation
on March 8, 2007, including retirement benefits.    93




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 c.
    
    Benefits to key management personnel
 Year ended December 312008
    
    
    2007NIS in thousandsBonus
    
    
    160
    
    
    
    Salary
    
    
    1,655
    
    
    
    198Share-based payment
    
    
    1,125
    
    
    
    2,940
    
    
    
    198
  d.
    
    Transactions with interested and related parties
 For the year ended December 31, 2008
 Interestedparty andother relatedpartiesNIS in thousandsSales
    
    
    53,175Purchases
    
    
    29,62623,549
 For the year ended December 31, 2007
 Interestedparty andother relatedpartiesNIS in thousandsSales
    
    
    36,419Purchases
    
    
    53,663(17,244
    )
  94




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 e.
    
    Income and expenses with related parties
 Terms of transactions with related parties
  f.
    
    Commitments
 1.
    
    The Company has a number of agreements and transactions with
Cellcom, which is a related party, as follows:
 a.
    
    An agreement for the provision of roaming services
as follows: (a) forward services  the overseas call of a user in Israel
dialing an Israeli cellular subscriber who is in a foreign country; (b)
roaming services  the call of a cellular subscriber of a non-local
network that is made from Israel to any user overseas, and (c) signals
services  a service provided to cellular operators by GSM technology so
that the cellular phone located outside the boundaries of its home
network will be able to receive roaming services. The contract is renewed
automatically every twelve months.b.
    
    Connectivity agreement from 1997 that arranges the
various aspects of connectivity between the Group and Cellcom, the method
of pricing incoming and outgoing international calls through Cellcom
lines and the companies settling of accounts in respect thereto, and the
matter of collection. The agreement enables the subscribers of Cellcom to
make international calls using the 013 prefix of the Group or
attribution (00 prefix).c.
    
    In the framework of connectivity agreements from
1997, the Company pays Cellcom in respect of the air time of minutes of
calls from overseas that end on the Cellcom network.d.
    
    A transaction for the provision of outsourcing
services by which the Company shall establish and manage for Cellcom a
support center based on the outsourcing method. The agreement ended in
January 2009.e.
    
    In 2008 the Company provided to Cellcom, in the
ordinary course of business, internet and information security services.
The undertaking is for a specific period of time, usually one or two
years.f.
    
    The Company purchases from Cellcom domestic
transmission lines for its customers. As part of this activity, the
Company undertakes towards Cellcom to purchase transmission lines for
customers, at a capacity of 2 to 10 mega and for a period of 12 to 24
months. In respect of these lines the Company charges its customers
directly. These agreements are signed from time to time, according to
requests the Company receives from its customers.
  95




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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 f.
    
    Commitments (cont.)
 1.
    
    (cont.)
 g.
    
    The Company purchases from Cellcom domestic
transmission lines for its domestic back bone. These lines mainly have E1
capacity and 155 megabyte capacity. These transactions are executed in
the ordinary course of business and at market prices.h.
    
    As part of the managed communication services the
Company provides to its customers, the Company pays Cellcom for the calls
that are transferred through it to the Cellcom network.i.
    
    The Company purchases from Cellcom organizational
internal communication services that include cellular phones used by the
organization and cellular services.j.
    
    In December 2008 the Group entered into a
collaboration agreement with Cellcom, pursuant to which Cellcom shall
sell to customers, who are not connectivity customers of 013 Netvision
and do not have a period of commitment to Cellcom, a package of services
that includes cellular services of Cellcom together with high-speed
internet services (2.5 megabytes) of 013 Netvision. According to the
collaboration agreement, Cellcom acts as a distributor of the group and
the customers who join the internet services are considered customers of
the group in its internet connectivity business.
 2.
    
    In 2007 the Company acquired human resources and service center
services from a related party company.
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies
Law)
 1.
    
    Acquisition of 013 Netvision (formerly Barak) and 013
Netvision MCS (formerly Globecall)On January 25, 2007 the transaction was completed in which the Company
acquired, in consideration of an allotment of its shares to the former
shareholders of Barak and Globecall, the following: (a) the entire issued
share capital of 013 Nevision (then Barak); (b) the entire issued share
capital of Tevel Telecom, which holds 50% of the issued share capital of 013
Netvision MCS (then Globecall); and (c) all the holdings of Discount
Investment Corporation, at the time another shareholder of Globecall, which
held the other 50% of the issued share capital of Globecall.2.
    
    Nana Shops transactionOn March 30, 2008, Nana 10 entered into an agreement with Shopmind, pursuant
to which the movables electronic commerce activity on the Nana Shops website
will be managed and operated by Shopmind.
  96




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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies Law)
(cont.)
 2.
    
    Nana Shops transaction (cont.)The transaction was approved as a controlling shareholder transaction, since
50% of the shares of Shopmind are held by Walla Shops Communication
Ltd1. and 50% of its shares are held by Sifertech Ltd., which is
directly and indirectly held and controlled by Messrs. Amir Adler, Ilan Fadlon
and Shay Livnat. Mr. Avraham Livnat and his son Tzvi Livnat, indirect
controlling shareholders of the Company2, have a personal interest
in the transaction because their relative, Shay Livnat (who indirectly holds
16% of the share capital of Shopmind), is the son of Avraham Livnat and the
brother of Tzvi Livnat.The agreement provides, inter alia, that in consideration for the right
granted to Shopmind to manage the movables electronic commerce activity on the
Nana Shops website, as from the determining date Shopmind shall transfer to
Nana 10 an amount of NIS 2 million per year (hereinafter: the minimum payment)
or 3% of the sales turnover of the Nana Shops website (hereinafter:
participation fee), whichever higher. For 2008 alone the amount is NIS 1.8
million.It was also determined that if beginning from three years after the
determining date, Nana 10 should confirm that it is competing with the
electronic commerce activity of the Nana Shops website or if an arbitrator
should decide that Nana 10 is operating such competing activity, the
participation fee will amount to 2% of the sales turnover on the Nana Shops
website and the minimum payment will be cancelled.On April 2, 2008 the Companys audit committee and Board of Directors approved
the Nana Shops transaction. On May 21, 2008 the Companys general meeting
approved the Nana Shops transaction at the majority required in accordance
with Sections 270(4) and 275 of the Companies Law.On September 28, 2008, after the approval of the Companys audit committee and
Board of Directors, Nana 10 and Shopmind signed an amendment to the Nana Shops
agreement (hereinafter: the amendment). On November 17, 2008 the Companys
general meeting approved the Nana Shops transaction, including the amendment,
at the majority required in accordance with Sections 270(4) and 275 of the
Companies Law. The main amendments are as follows:
 (a)
    
    As from the determining date and for as long as the
sales turnover of Nana Shops is less than NIS 40 million, the difference
between the minimum payment and the participation fee will be invested in
the promotion and advertising of the Nana Shops website on the various
media;
  1
    
    Walla Shops Communication Ltd. is a public company
whose shares are traded on the stock exchange.2
    
    Mr. Avraham Livnat is a controlling shareholder of the
Company (indirectly) because of his control over Avraham Livnat Ltd., a private
company, which directly and through Avraham Livnat Investments (2002) Ltd., a
wholly owned private company, holds 12.36% of the share capital and voting
power in IDB Holding, the indirect controlling shareholder of the Company.  97




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NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies Law)
(cont.)
 2.
    
    Nana Shops transaction (cont.)
 (b)
    
    Most of the advertising and marketing budget of the
Nana Shops website will be managed by Nana 10 and be fully coordinated
between the parties. The discount component to customers will be managed
by Shopmind;(c)
    
    Nana 10 shall continue to fulfill the Global Shops
and Glat Shops operating agreements at its expense and to bear part of
the marketing expenses of the Nana Shops website, for as long as the
annual sales turnover of the Nana Shops website is less than NIS 60
million.On November 19, 2008 the Nana Shops transaction was completed and as from
December 1, 2008 Shopmind is exclusively responsible for the electronic
commerce activity on the Nana Shops website.
 3.
    
    Med-Nautilus transactionOn April 2, 2008, the Companys audit committee and Board of Directors
approved an agreement between the Group (by means of 013 Netvision) and
Med-Nautilus, pursuant to which 013 Netvision will be able to acquire
irrevocable user-rights in international capacity operated by Med-Nautilus and
to use it until May 1, 2017 (hereinafter  the Med-Nautilus agreement). After
that date, the Company will have two options to extend the use period for no
additional cost (other than the payment of annual maintenance fees). On May
13, 2008 the Companys general meeting approved the Med-Nautilus
transaction.
The transaction was approved as a transaction with a person in whom the
controlling shareholder has a personal interest, as mentioned in Section
270(4) of the Companies Law, due to the personal interest of the Companys
controlling shareholders, as follows:
 (a)
    
    Clal Industries and Investments Ltd., a controlling
shareholder of the Company3, has a personal interest in the
transaction because of its agreement from July 8, 2005, by means of
Clalcom, with Med Nautilus for the provision of marketing and selling
services to Med-Nautilus (hereinafter: the service agreement). The
service agreement was signed in the framework of selling the share
capital of Med-Nautilus by its then shareholders, including Clalcom
(hereinafter: the sellers) to the present shareholders of Med-Nautilus.
  3
    
    Clal Industries and Investments is a controlling
shareholder of the Company because of its 25.75% holdings in the issued share
capital of the Company (as at the date of approving the Med-Nautilus
transaction), and because it is a party to the shareholders agreement. IDB
Development is the controlling shareholder and as at the date of approval of
the Med-Nautilus transaction, it held 60.5% of the issued share capital of Clal
Industries and Investments.  98




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NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies Law)
(cont.)
 3.
    
    Med-Nautilus transaction (cont.)
 The service agreement is in effect until December 31, 2015, and in it
Med-Nautilus undertook to pay to the sellers (including Clalcom, which
is controlled by Clal Industries and Investments) commissions in
respect of the representation of Med-Nautilus in the State of Israel,
and for promoting the sales of products and services provided by
Med-Nautilus. Clalcom is expected to receive the amount of $ 2 million
from the Ned-Nautilus transaction4.(b)
    
    Mr. Avraham Livnat, an indirect controlling
shareholder of the Company5, has a personal interest in the
transaction because his son, Mr. Shay Livnat, is a controlling
shareholder of B.V. Yamcom Holdings (hereinafter: Yamcom), which is one
of the sellers and therefore is also entitled to the commissions
according to the service agreement. Yamcom is expected to receive the
amount of $ 2.33 million from the transaction.(c)
    
    As part of the aforementioned sale of shares of
Med-Nautilus, the sellers undertook that until July 8, 2007, they, the
companies they control, their controlling shareholders, and the companies
controlled by such controlling shareholders (including the Company) would
not compete or assist in competition to the services Med-Nautilus
provides to its customers in Israel. If the Company had constructed and
operated in Israel a parallel independent capacity line, as it had
considered doing, the sellers would have had to pay an agreed amount of
compensation in the amount of $ 15 million, in accordance with the terms
of the said commitment, and also in this respect Clal Industries and
Investments and Mr. Avraham Livnat may be considered having a personal
interest in the transaction.(d)
    
    The personal interest of Clal Industries and
Investments and Mr. Avraham Livnat is also because according to the
service agreement, if the Company had constructed and operated in Israel
a parallel independent capacity line, the rate of the commissions payable
to Clal Industries and Investments would have decreased.
  4
    
    The commissions payable to the sellers are derived
linearly from the monetary scope of the transaction.5
    
    See footnote 2 above.  99




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NETVISION LTD.
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies Law)
(cont.)
 3.
    
    Med-Nautilus transaction (cont.)
 (e)
    
    Discount Investment Corporation Ltd., Elron
Electronic Industries Ltd., IDB Development Corporation Ltd. (the
controlling shareholder of Discount Investment Corporation Ltd. and Elron
Electronic Industries Ltd.), IDB Holding Corporation Ltd. (the
controlling shareholder of IDB Development Corporation Ltd.) and the
controlling shareholders of IDB Holding Corporation Ltd., are all
considered or may be considered controlling shareholders of the Company
and having a personal interest in the transaction, as a result of the
Companys shareholders agreement between Discount Investment Corporation
Ltd., Elron Electronic Industries Ltd., Clal Industries and Investments
Ltd. and Clalcom Ltd.
 See Note 21C for more details on the provisions of the
agreement.4.
    
    Adjustment of the Companys controlling shareholders
directors remunerationIn accordance with a decision of the general meeting from January 16, 2006 and
the decision of the Companys Board of Directors from October 24, 2007, the
remuneration of the ordinary directors who are controlling shareholders will
be the maximum amount provided in the remuneration regulations, as amended
from time to time, according to the level of the Company, as it was according
to the Companys balance sheet as at December 31, 2006, meaning level C.5.
    
    Directors and officers liability insuranceOn March 30, 2004 an extraordinary general meeting approved, subject to the
provisions of the Companies Law, for the Company to enter into an officers
insurance policy with respect to any liability imposed on the officers as a
result of any action taken in the performance of their duties. On August 11,
2004 the Company purchased an officers liability insurance policy having a
liability limit of $ 10 million, for all the officers per event and insurance
period, subject to the payment of a deductible. In an extraordinary general
meeting held on May 10, 2005 it was decided as follows: 1. The insurance
coverage of the officers liability insurance policy will amount to no less
than $ 20 million and no more than $ 30 million; 2. The annual premium shall
not exceed $ 400 thousand; 3. The Companys audit committee and Board of
Directors shall determine the amount of the insurance coverage and the amount
of the premium, after verifying that the amounts are reasonable under the
circumstances of the matter taking into consideration the exposures of the
Company and market conditions; 4. The Companys audit committee and Board of
Directors shall determine that any new policy meets the aforementioned
conditions; 5. This framework decision is in effect until December 31, 2015.
On May 10, 2005 the insurance policy was expanded to the amount of $ 20
million for all the officers per event and insurance period.
  100




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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 27  Balances and Transactions with Interested and Related Parties (cont.)
 g.
    
    Transactions with controlling shareholder or a party in which the
controlling shareholder has a personal interest (Section 270(4) of the Companies Law)
(cont.)
 5.
    
    Directors and officers liability insurance (cont.)On January 25, 2007, as part of the Companys liabilities in the framework of
the acquisition transaction, the Company purchased Run Off type insurance, for
a period of seven years from the determining date of the acquisition
transaction (January 25, 2007), for directors and officers of 013 Netvision
(then Barak) and 013 Netvision MCS (then Globecall), as they were at the time
of signing the acquisition agreements, in respect pf insurance events that
occurred before the determining date, at an insurance coverage of $ 20
million.6.
    
    Indemnity and releaseOn May 10, 2005 the Companys general meeting approved providing an advance
indemnity commitment to officers, as they are from time to time, including
those who are considered controlling shareholders of the Group on the date of
the decision or in the future, according to the conditions detailed in the
release and indemnity letter.
 Note 28  Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS
     Reliefs from retroactive implementation of IFRS that were adopted by the Group
  Employee benefits
   101




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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 Business combinations
  Share-based payments
  Designation of financial asset
 Financial Instruments: Recognition and Measurement
 a.
    
    Reconciliation of the balance sheets
 January 1, 2007
    
    
    December 31, 2007Effect of
    
    
    
    
    
    
    
    
    
    
    Effect ofIsraeli
    
    
    transition
    
    
    
    
    
    
    Israeli
    
    
    transitionGAAP
    
    
    to IFRS
    
    
    IFRS
    
    
    GAAP
    
    
    to IFRS
    
    
    IFRSNote
    
    
    NIS in thousandsCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    17,027
    
    
    
    (13,450
    )
    
    
    3,577
    
    
    
    95,515
    
    
    
    
    
    
    
    95,515Short-term deposits
    
    
    8
    
    
    
    77,560
    
    
    
    
    
    
    
    77,560
    
    
    
    37,937
    
    
    
    
    
    
    
    37,937Trade receivables
    
    
    
    
    
    
    242,454
    
    
    
    (144,389
    )
    
    
    98,065
    
    
    
    248,824
    
    
    
    (3,654
    )
    
    
    245,170Other receivables
    
    
    9, 2b
    
    
    
    32,293
    
    
    
    (14,785
    )
    
    
    17,508
    
    
    
    55,894
    
    
    
    (4,223
    )
    
    
    51,671Inventory
    
    
    
    
    
    
    8,558
    
    
    
    (4,587
    )
    
    
    3,971
    
    
    
    8,616
    
    
    
    
    
    
    
    8,616377,892
    
    
    
    (177,211
    )
    
    
    200,681
    
    
    
    446,786
    
    
    
    (7,877
    )
    
    
    438,909Non-current assetsTrade and long-term receivables
    
    
    9
    
    
    
    6,569
    
    
    
    (5,681
    )
    
    
    708
    
    
    
    5,338
    
    
    
    (3,045
    )
    
    
    2,293Rights to use lines of
communication
    
    
    9
    
    
    
    
    
    
    
    103,051
    
    
    
    103,051
    
    
    
    
    
    
    
    207,173
    
    
    
    207,173Fixed assets, net
    
    
    9
    
    
    
    448,521
    
    
    
    (378,852
    )
    
    
    69,669
    
    
    
    442,570
    
    
    
    (276,259
    )
    
    
    166,311Goodwill
    
    
    10
    
    
    
    243,587
    
    
    
    (237,940
    )
    
    
    5,647
    
    
    
    243,604
    
    
    
    296,522
    
    
    
    540,126Other intangible assets, net
    
    
    10
    
    
    
    120,202
    
    
    
    (113,847
    )
    
    
    6,355
    
    
    
    94,473
    
    
    
    34,540
    
    
    
    129,013Deferred taxes
    
    
    2
    
    
    
    14,702
    
    
    
    (8,974
    )
    
    
    5,728
    
    
    
    12,773
    
    
    
    17,295
    
    
    
    30,068833,581
    
    
    
    (642,423
    )
    
    
    191,158
    
    
    
    798,758
    
    
    
    276,226
    
    
    
    1,074,984Total assets
    
    
    
    
    
    
    1,211,473
    
    
    
    (819,634
    )
    
    
    391,839
    
    
    
    1,245,544
    
    
    
    268,349
    
    
    
    1,513,893
  102




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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 a.
    
    Reconciliation of the balance sheets (cont.)
 January 1, 2007
    
    
    December 31, 2007Effect of
    
    
    
    
    
    
    
    
    
    
    Effect ofIsraeli
    
    
    transition
    
    
    
    
    
    
    Israeli
    
    
    transitionGAAP
    
    
    to IFRS
    
    
    IFRS
    
    
    GAAP
    
    
    to IFRS
    
    
    IFRSNote
    
    
    NIS in thousandsCurrent liabilitiesCredit from banks
    
    
    
    
    
    
    163,634
    
    
    
    (122,213
    )
    
    
    41,421
    
    
    
    32,713
    
    
    
    
    
    
    
    32,713Current maturities of long-term
trade payables
    
    
    9
    
    
    
    49,760
    
    
    
    (46,667
    )
    
    
    3,093
    
    
    
    44,367
    
    
    
    (42,657
    )
    
    
    1,710Shareholders loans
    
    
    
    
    
    
    14,610
    
    
    
    (14,610
    )
    
    
    Trade payables
    
    
    
    
    
    
    268,267
    
    
    
    (210,766
    )
    
    
    57,501
    
    
    
    254,560
    
    
    
    
    
    
    
    254,560Other payables
    
    
    9,10
    
    
    
    69,566
    
    
    
    (13,697)
    )
    
    
    55,869
    
    
    
    78,877
    
    
    
    14,605
    
    
    
    93,482565,837
    
    
    
    (407,953
    )
    
    
    157,884
    
    
    
    410,517
    
    
    
    (28,052
    )
    
    
    382,465Long-term liabilitiesDebentures convertible to
shares
(Series A)
    
    
    3a
    
    
    
    66,192
    
    
    
    43,608
    
    
    
    109,800
    
    
    
    52,795
    
    
    
    19,223
    
    
    
    72,018Options (Series 1)
    
    
    3b
    
    
    
    
    
    
    
    17,478
    
    
    
    17,478
    
    
    
    
    
    
    
    11,573
    
    
    
    11,573Deferred income from rights to
use lines of communication
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,752
    
    
    
    67,752Liabilities for employee
benefits
    
    
    5
    
    
    
    15,715
    
    
    
    (6,938
    )
    
    
    8,777
    
    
    
    18,417
    
    
    
    (3,956
    )
    
    
    14,461Long-term liabilities
    
    
    
    
    
    
    48,519
    
    
    
    (46,788
    )
    
    
    1,731
    
    
    
    52,096
    
    
    
    (44,385
    )
    
    
    7,711130,426
    
    
    
    7,360
    
    
    
    137,786
    
    
    
    123,308
    
    
    
    50,207
    
    
    
    173,515Shareholders equityIssued share capital
    
    
    
    
    
    
    25,833
    
    
    
    (12,193
    )
    
    
    13,640
    
    
    
    29,641
    
    
    
    
    
    
    
    29,641Share premium
    
    
    
    
    
    
    573,341
    
    
    
    (415,904
    )
    
    
    157,437
    
    
    
    714,145
    
    
    
    267,630
    
    
    
    981,775Options (Series 1)
    
    
    
    
    
    
    2,303
    
    
    
    (2,303
    )
    
    
    
    
    
    
    2,278
    
    
    
    (2,278
    )
    
    
    Accumulated loss
    
    
    10
    
    
    
    (99,793
    )
    
    
    24,885
    
    
    
    (74,908
    )
    
    
    (46,114
    )
    
    
    (7,673
    )
    
    
    (53,787
    )Capital reserve from employee
benefit plan
    
    
    
    
    
    
    6,369
    
    
    
    (6,369
    )
    
    
    
    
    
    
    5,823
    
    
    
    (5,823
    )
    
    
    Convertible feature of
debentures
    
    
    
    
    
    
    5,291
    
    
    
    (5,291
    )
    
    
    
    
    
    
    3,996
    
    
    
    (3,996
    )
    
    
    513,344
    
    
    
    (417,175
    )
    
    
    96,169
    
    
    
    709,769
    
    
    
    247,860
    
    
    
    957,629Minority interest
    
    
    10, 4d
    
    
    
    1,866
    
    
    
    (1,866
    )
    
    
    
    
    
    
    1,950
    
    
    
    (1,666
    )
    
    
    284Total shareholders equity
    
    
    
    
    
    
    515,210
    
    
    
    (419,041
    )
    
    
    96,169
    
    
    
    711,719
    
    
    
    246,194
    
    
    
    957,913Total liabilities and equity
    
    
    
    
    
    
    1,211,473
    
    
    
    (819,634
    )
    
    
    391,839
    
    
    
    1,245,544
    
    
    
    268,349
    
    
    
    1,513,893
  103




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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 b.
    
    Reconciliation of the statements of operations
 Year ended December 31, 2007Effect ofIsraeli
    
    
    transition toGAAP
    
    
    IFRS
    
    
    IFRSNote
    
    
    NIS in thousandsRevenues
    
    
    9
    
    
    
    1,209,196
    
    
    
    (62,108
    )
    
    
    1,147,088Cost of revenues
    
    
    9
    
    
    
    1,072,849
    
    
    
    (48,129
    )
    
    
    1,024,720Gross profit
    
    
    
    
    
    
    136,347
    
    
    
    (13,979
    )
    
    
    122,368Selling and marketing expenses
    
    
    4
    
    
    
    47,199
    
    
    
    (1,457
    )
    
    
    45,742General and administrative expenses
    
    
    4
    
    
    
    37,588
    
    
    
    19,473
    
    
    
    57,061Impairment of intangible assets
    
    
    
    
    
    
    26,543
    
    
    
    
    
    
    
    26,543Operating profit (loss)
    
    
    
    
    
    
    25,017
    
    
    
    (31,995
    )
    
    
    (6,978
    )Financing income
    
    
    6
    
    
    
    
    
    
    
    20,140
    
    
    
    20,140Financial expenses
    
    
    6
    
    
    
    (14,917
    )
    
    
    (5,737
    )
    
    
    (20,654
    )Other income
    
    
    
    
    
    
    36,317
    
    
    
    3,265
    
    
    
    39,582Profit before taxes on income
    
    
    
    
    
    
    46,417
    
    
    
    (14,327
    )
    
    
    32,090Taxes on income (tax benefit)
    
    
    
    
    
    
    (7,315
    )
    
    
    20,000
    
    
    
    12,685Profit after taxes on income
    
    
    
    
    
    
    53,732
    
    
    
    (34,327
    )
    
    
    19,405Minority interest in profits of subsidiaries, net
    
    
    
    
    
    
    (53
    )
    
    
    53
    
    
    
    Net income
    
    
    
    
    
    
    53,679
    
    
    
    (34,274
    )
    
    
    19,405Attributable to:Equity holders of the Company
    
    
    
    
    
    
    53,679
    
    
    
    (34,527
    )
    
    
    19,152Minority interest
    
    
    
    
    
    
    53
    
    
    
    200
    
    
    
    25353,732
    
    
    
    (34,327
    )
    
    
    19,405
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 c.
    
    Notes to the reconciliations
 1.
    
    Contingent liabilities and provisions for legal claimsIn accordance with Israeli GAAP, the Company recognized a provision for legal claims
if it is probable that the Companys economic resources will be used to dispose of
the commitment. Furthermore, the provision was measured on the basis of the full
value of the amount at which the claim is expected to be settled.According to the provisions of IAS 37  Provisions, Contingent Liabilities and
Contingent Assets, the Company recognized a provision in respect of these claims
when it is more likely than not that the Company will be required to use economic
resources to dispose of the commitment. Furthermore, when the value of time is
material, the provision is measured at its present value.2.
    
    Deferred taxesIn accordance with Israeli GAAP, deferred taxes expected to be realized in the short
term were presented under other receivables and their balance as at January 1, 2007
and December 31, 2007 amounted to NIS 5,728 thousand and NIS 37,295 thousand,
respectively.Upon the transition to reporting in accordance with IFRS, according to IAS 12,
Income Taxes, the Company has created a balance of deferred taxes totalling NIS
35,436 thousand. In the allocation of the excess cost in respect of the purchase of
the subsidiary, this balance was amortized in 2007, and as at December 31, 2007
amounted to NIS 19,422 thousand. The Company has not created an additional tax asset
in 2007 in accordance with IFRS. As at January 1, 2007 and December 31, 2007, the
Company has classified balances of NIS 5,728 thousand and NIS 17,295 thousand,
respectively, to deferred taxes under the category of non-current assets.3.
    
    Options, convertible debentures and allocation of the proceeds in the
issuance of a parcel of securities
 a)
    
    Convertible debenturesAs described in Note 14 regarding the replacement of the convertible
debentures, until the date of the replacement the Company had Series A
debentures that were convertible into ordinary shares of the Company at a
conversion price that was linked to the CPI. In accordance with the
transitional provisions of Accounting Standard No. 22 of the Israel Accounting
Standards Board, Financial Instruments: Disclosure and Presentation
(hereinafter: Standard 22), the said Series A debentures constitute a
compound financial instrument that includes a liability component as well as
an equity component. Accordingly, the proceeds received in the issue of the
debentures were split between these components in accordance with the
provisions of Standard 22.
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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 3.
    
    Options, convertible debentures and allocation of the proceeds in the
issuance of a parcel of securities (cont.)
 a)
    
    Convertible debentures (cont.)According to IAS 32, Financial Instruments: Presentation, since the conversion
component is linked to the Israeli CPI, and is not fixed in NIS terms (the
Companys functional currency), the conversion feature constitutes a financial
liability and not an equity component. The conversion feature is measured in
accordance with IAS 39, Financial Instruments: Recognition and Measurement, on
the basis of its fair value, with changes in the fair value of this component
being carried to the statement of operations at each reporting period.With the transition to reporting according to IFRS, as at January 1, 2007, the
liabilities presented as convertible Series 1 debentures increased by NIS
43,608 thousand, and the equity component that was allocated to this
instrument in accordance with Standard 22 in the amount of NIS 5,291 thousand,
was cancelled, against a reduction of NIS 38,317 thousand in the balance of
retained earnings.In 2007, the Company recorded financing income in the amount of NIS 10,585
thousand from the remeasurement to fair value of the liabilities presented as
debentures convertible to shares, and recorded an amount of NIS 27,197
thousand under share premium as a result of the exercise of NIS 17,452
thousand par value of debentures for shares.b)
    
    OptionsAccording to Israeli GAAP, pursuant to the provisions of Standard 22 of the
Israel Accounting Standards Board, the consideration of NIS 2,303 thousand,
which was allocated to options, with an exercise price linked to the Israeli
CPI, was presented as part of equity.In accordance with IAS 32, Financial Instruments: Presentation, these options
constitute a financial liability, as their exercise price is not fixed, and
therefore, they are presented within liabilities. The measurement of the
liability is in accordance with IAS 39, Financial Instruments: Recognition and
Measurement,and accordingly, the options are stated at fair value at each
balance sheet date, with changes in fair value being carried to the statement
of operations. See Note 15 of the financial statements for more details
regarding the change in the terms of the Companys options by which the
exercise price is not linked to the CPI.With the transition to reporting in accordance with IFRS, as at January 1,
2007, the consideration in respect of the options in the amount of NIS 2,303
thousand, which was included as part of equity, was recognized as a long-term
liability totalling NIS 17,478 thousand, representing the fair value of the
options at the transition date. The difference of NIS 15,175 thousand is
carried to retained earnings.
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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 3.
    
    Options, convertible debentures and allocation of the proceeds in the
issuance of a parcel of securities (cont.)
 b)
    
    Options (cont.)During 2007, the Company recorded financing income in the amount of NIS 5,706
thousand from the remeasurement of the liabilities to fair value and carried
NIS 199 thousand to share premium as a result of the exercise of 9,755 options
to shares.c)
    
    Issuance of parcel of securitiesIn accordance with Israeli GAAP, pursuant to the provisions of Standard 22 of
the Israel Accounting Standards Board, the Company split the consideration
from the issuance of a parcel of shares, options and debentures according to
the average proportionate value of the parcels components in the first three
trading days after the date of the issuance.Upon the transaction to IFRS, in accordance with IAS 32, Financial
Instruments: Presentation, the consideration received from the issuance of a
parcel of securities is allocated at first to financial liabilities measured
at fair value each period, and then to financial liabilities measured only
upon initial recognition at fair value, and the residual amount is allocated
to the component of shares that is classified as an equity instrument.
Allocation of the value is performed on the first trading day and not on the
basis of the first three trading days as was the practice until then in
Israel.
 4.
    
    Business combinations
 a.
    
    Accounting treatment of the merger transactionIn the financial statements of the Company according to Israeli GAAP the
merger transaction was accounted for in accordance with SAB 2-10 of the
Securities Authority using a method similar to the pooling of interest method.
In accordance with this method the assets and liabilities of Barak and
Globecall were initially consolidated in the Companys consolidated financial
statements at their value in the consolidated financial statements of the
controlling shareholders. The merger transactions were accounted for using the
same method en bloc, together with the minority interest in Barak, due to the
existence of voting agreements between the controlling shareholders.The financial statements of the Company for prior periods were restated in
order to reflect therein the combination of businesses, as if it were effected
on the day on which Barak and Globecall came under the control of the
controlling shareholder, at the actual shareholding percentages in these
companies by the controlling shareholder in the companies presented.
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NETVISION LTD.
 
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according
to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 4.
    
    Business combinations (cont.)
 a.
    
    Accounting treatment of the merger transaction (cont.)In accordance with IFRS, the most appropriate method of accounting for the
merger transaction was examined. According to IFRS 3, which discusses business
combinations, the Company is required to account for all business combinations
falling in the scope of the Standard by means of the purchase method. In
accordance with this method, the assets and liabilities of the acquired entity
are measured according to their fair value at the purchase date.As a consequence of adopting the purchase method for accounting for the
transaction, the Company cancelled the restatement of the prior periods in the
financial statements pursuant to IFRS and these statements are presented as
published before their restatement, and in accordance with the adjustments
required in order to present them according to IFRS.In addition, balances of excess cost, which were recorded at their value in
the books of the controlling shareholders, were cancelled. The cost of the
investment was recalculated using the purchase method and the excess of the
cost of proceeds over the shareholders equity of the acquired companies was
allocated accordingly.The balances of the excess of cost allocated to identifiable intangible assets
(customer database and brand) according to IFRS amount to NIS 158.5 million
and NIS 91.7 million as at January 25, 2007 (date of purchase) and December
31, 2007, respectively, compared to balances of NIS 108.7 million and NIS 57.1
million according to Israeli GAAP.In addition, according to IFRS, negative excess cost in the amount of NIS 26
million and NIS 15.3 million as at January 25, 2007 (date of purchase) and
December 31, 2007, respectively, was allocated in respect of fixed assets and
the purchase of rights to use lines of communication.The amortization of excess costs in the year ended December 31, 2008 was NIS
53.1 million in accordance with IFRS compared to NIS 49.4 million in
accordance with Israeli GAAP.Presented hereunder are the effects on the financial statements for January 1,
2007 of the cancellation of the pooling of interest method:
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between
Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the
reconciliations (cont.)
 4.
    
    Business combinations
(cont.)
 a.
    
    Accounting treatment of
the merger transaction (cont.)The effects on the financial statements as at January 1, 2007 of the cancellation of the pooling
of interest method are as follows:
 January 12007NIS in thousandsCurrent assetsCash and cash equivalents
    
    
    13,450Trade receivables
    
    
    144,389Other receivables
    
    
    21,989Inventory
    
    
    4,587184,415Non-current assetsLong-term trade and other receivables
    
    
    5,861Fixed assets, net
    
    
    236,434Goodwill
    
    
    237,940Other intangible assets, net
    
    
    113,847Deferred taxes
    
    
    14,702608,784Total assets
    
    
    793,199
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 4.
    
    Business combinations (cont.)
 a.
    
    Accounting treatment of the merger transaction (cont.)
 January 12007NIS in thousandsCurrent liabilitiesCredit from banks and other credit providers
    
    
    122,213Current maturities of long-term trade payables
    
    
    30,825Shareholders loans
    
    
    14,610Trade payables
    
    
    210,766Other payables
    
    
    17,594396,008Long-term liabilitiesLiabilities for employee severance benefits
    
    
    5,322Long-term trade payables
    
    
    37,15142,473Shareholders equityIssued share capital
    
    
    12,193Share premium
    
    
    415,904Retained earnings (accumulated loss)
    
    
    (74,928
    )Capital reserve from employee benefit plan
    
    
    1,549Total shareholders equity
    
    
    354,718793,199
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 4.
    
    Business combinations (cont.)
 b.
    
    In accordance with Israeli GAAP, the balance of goodwill arising
on the purchase of a company in a business combination was amortized from the
date of purchase through December 31, 2005. On January 1, 2006, the amortization
of the goodwill was discontinued, in accordance with Accounting Standard No. 20
(amended) of the Israel Accounting Standards Board, which discusses the
accounting treatment of goodwill and intangible assets in the purchase of an
investee company.According to the provisions of IFRS 1, the Company chose a relief whereby the
business combinations that took place through the transition date for
reporting according to IFRS were not amended In accordance with the said
relief the value of the goodwill at the transition date was determined
according to its value pursuant to Israeli GAAP at that date.The balance of the goodwill recorded by the Company from the purchase of
significant subsidiaries (the merger transaction), which was accounted for
according to Israeli GAAP using a method similar to the pooling of interest
method, was NIS 240,131 thousand as at December 31, 2008.According to IFRS, the merger transaction was accounted for using the purchase
method, and the cost of acquisition was calculated according to the value of
the shares issued to the controlling shareholders in the acquired companies at
the closing date. The balance of goodwill created at the acquisition date
pursuant to IFRS standards was NIS 560,776 thousand.In addition, in accordance with International Accounting Standard IAS 36 
Impairment of Assets, the Company is required to examine impairment of
goodwill at the transition date, even in the absence of an indication of
impairment.In the examination of impairment pursuant to Israeli GAAP, the Company reached
the conclusion that there had been no impairment of goodwill. With the
transition to reporting according to IFRS, as at December 31, 2007, goodwill
impairment in the amount of NIS 25,200 thousand was carried to retained
earnings.c.
    
    In accordance with Israeli GAAP, the minority interests in the
purchase of a subsidiary are calculated at the book value of the subsidiarys
assets and liabilities and stated after the liabilities and before shareholders
equity.Pursuant to the provisions of IFRS 3, Business Combinations, the Group will
recognize the minority interests at the purchase date, in the amount of the
minoritys share in the full fair value of the assets and liabilities of a
subsidiary at the purchase date, against the presentation of the said assets
and liabilities in the balance sheet at that date in their full fair value.
The goodwill at the purchase date will continue to be calculated on the basis
of the difference between the purchase cost and the Companys share of the
fair value of the net assets and liabilities of the subsidiary, as calculated
according to Israeli GAAP.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 4.
    
    Business combinations (cont.)
 d.
    
    In accordance with Israeli GAAP, minority interests are stated in
the Companys balance sheets after liability items and before equity items, and
in the consolidated statements of operations as an expense for the purpose of
determining the Groups consolidated net income. According to the provisions of
IAS 1, Presentation of Financial Statements, the Company presents minority
interests in the consolidated balance sheets within its equity, and the
minoritys share is not deducted from the Groups net income.
 5.
    
    Employee benefitsIn accordance with Israeli GAAP, the liability in respect of employee severance
benefits was measured on the basis of the product of the number of years of
employment and the employees last monthly salary at each balance sheet date,
according to the shut-down method, and amounts funded for severance pay are
measured according to their redemption value at each balance sheet date.Pursuant to IAS 19, Employee Benefits, the Companys severance pay plan is
considered a defined benefit plan, and the Company is therefore required to present
the liability for employee severance benefits on an actuarial basis. The actuarial
calculation takes into account future salary increases and the employee turnover
rate, on the basis of an estimate of the timing of the payment.The amounts are presented on the basis of discounted expected future cash flows, at
the interest rates on Government debentures, whose redemption date is close to the
period of the severance pay obligations.Pursuant to the provisions of IFRS 1, the Company chose a relief whereby it
recognized all actuarial net gains and losses as at January 1, 2007.With the transition to reporting according to IFRS, the balance of the employee
severance pay liability was reduced by NIS 1,615 thousand as at January 1, 2007 and
by NIS 3,956 thousand as at December 31, 2007.6.
    
    Financing income and expensesIn accordance with Israeli GAAP the financing expenses and income were presented on a
net basis in the statement of operations. In accordance with IFRS, financing expenses
and financing income are presented separately in the statement of operations, and
therefore financing expenses in the amount of NIS 20,654 thousand and financing
income in the amount of NIS 20,140 thousand were presented in the financial
statements for the year ended December 31, 2007.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 7.
    
    Share-based paymentsIn accordance with the provisions of Accounting Standard No. 24 of the Israel
Accounting Standards Board, Share-Based Payments, the Company had recognized,
pursuant to the transitional provisions set forth therein, a benefit in respect of
grants to employees only with respect to share-based payment transactions settled in
equity instruments that were executed after March 15, 2005 and have not yet vested as
at January 1, 2007.With the transition to reporting according to IFRS, the Company applies the
provisions of IFRS 2, Share-Based-Payments, which provides that the benefit should be
measured also with respect to grants of such equity instruments executed before March
15, 2005 but after November 7, 2002 that have not yet vested as at January 1, 2007.Expenses in respect of share-based payments, which were carried in the financial
statements in accordance with Israeli GAAP to capital reserves, have been classified
to retained earnings. In accordance with the abovementioned, as at January 1, 2007
and December 31, 2007, NIS 4,820 thousand and NIS 5,823 thousand, respectively, have
been classified from the capital reserve from employee benefit plans to retained
earnings.In respect of the said equity instruments, in the year ended December 31, 2007, the
Company recognized additional salary expenses totalling NIS 971 thousand with a
corresponding increase in retained earnings. The net effect on retained earnings is
zero.8.
    
    Financial instrumentsIn accordance with Israeli GAAP, securities are classified into two categories:
permanent investments, which are stated at cost, or current investments, which is
stated at fair value, with changes in the fair value being carried to the statement
of operations.Pursuant to IAS 39  Financial Instruments: Recognition and Measurement, the
accounting treatment of financial instruments is based on their classification to one
of the following groups:
 
    
    Financial assets or financial liabilities measured at fair value through
profit or loss.
 
    
    Loans and debit balances.
 
    
    Available for sale financial assets
 
    
    Investments held to maturity.
 9.
    
    Purchase of user-rights in communication lines
 a.
    
    Purchase of rights for own useIn accordance with Israeli GAAP, agreements of this type are accounted for as
a finance lease, and accordingly the balance sheet includes the assets to
which they relate under the fixed assets category and an appropriate liability
to communication suppliers.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28  Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 9.
    
    Purchase of user-rights in communication lines (cont.)
 a.
    
    Purchase of rights for own use (cont.)Pursuant to IFRS, the nature of the rights according to IAS 38 was examined
and it was found that these rights constitute an intangible asset. As a result
of the aforesaid, the Company cancelled the liability to the communication
suppliers and stated the balance of the asset in respect of rights to use
lines of communication (that was previously recorded as fixed assets)
according to the amounts actually paid These amounts will be amortized over
the period of the agreement or the useful life of the rights as before.
Foreign exchange differences in respect of balances of trade payables were
cancelled against the balance of retained earnings.The effect on the balance sheet balances as at January 1, 2007 and December
31, 2007 as a result of the transition to IFRS is:
 
    
    A reduction in the item of fixed assets totalling NIS 142,418 thousand
and NIS 273,459 thousand as at January 1, 2007 and December 31, 2007,
respectively.
 
    
    A reduction in trade payables, including current maturities totalling
NIS 25,479 thousand and NIS 84,666 thousand as at January 1, 2007 and
December 31, 2007, respectively.
 
    
    An increase in other payables in the amount of NIS 2,376 thousand as
at December 31, 2007.
 
    
    A reduction in retained earnings totalling NIS 2,408 thousand and NIS
10,802 thousand as at January 1, 2007 and December 31, 2007,
respectively.
  
    
    Use rights, as part of short-term receivables and debit balances, in
the amount of NIS 11,481 thousand and NIS 26,357 thousand as at January
1, 2007 and December 31, 2007, respectively.
 
    
    Rights to use lines of communication in the amount of NIS 103,051
thousand and NIS 151,634 thousand as at January 1, 2007 and December 31,
2007, respectively.
 b.
    
    Purchase of rights for their sale:Pursuant to IFRS, the sale of a user right to a third party and the receipt of
proceeds in advance in respect of this future right constitute deferred
income, which will be recognised over the outstanding period of the contract.
As noted above, the expenses related to the purchase of these user rights will
also be spread over the period of use of these user rights.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 28 
    
    Reconciliation between Reporting according to Israeli GAAP and Reporting according to IFRS (cont.)
 c.
    
    Notes to the reconciliations (cont.)
 9.
    
    Purchase of user-rights in communication lines (cont.)
 b.
    
    Purchase of rights for their sale (cont.):
  
    
    A decrease in trade receivables in the amount of NIS 3,654 thousand as
at December 31, 2007.
 
    
    A decrease in long-term trade and other receivables in the amount of
NIS 3,045 thousand as at December 31, 2007.
 
    
    A decrease in retained earnings in respect of the profit not yet
realized on these transactions in the amount of NIS 6,951 thousand as at
December 31, 2007.
  
    
    Deferred income, under the item of short-term other payables, in the
amount of NIS 7,255 thousand as at December 31, 2007.
 
    
    Long-term deferred income in respect of the sale of rights to use
lines of communication in the amount of NIS 67,752 thousand as at
December 31, 2007.
 
    
    Rights to use lines of communication, under short-term other
receivables, in the amount of NIS 6,716 thousand as at December 31.
 
    
    Rights to use lines of communication in the amount of NIS 68,038
thousand as at December 31.
 10.
    
    Put option granted to minority shareholdersIn accordance with IFRS, a liability is recognized in respect of the put option
granted by the Company to the minority shareholders of a subsidiary according to the
fair value of the payment. Revaluation of the liability in respect of the time
component is reflected in financing expenses, and the Company includes in its income
its share in the income of the subsidiary while taking the put option into
consideration. Revaluation of the liability in respect of other changes is recognized
against goodwill.
  
    
    An increase in the liability in respect of the put option to the minority in
a subsidiary in the amount of NIS 3,897 thousand and NIS 4,974 thousand as at
January 1, 2007 and December 31, 2007, respectively.
 
    
    An increase in the balance of goodwill in the amount of NIS 1,077 thousand as
at December 31, 2007.
 
    
    A decrease in the minority interest in the amount of NIS 2,259 thousand as at
January 1, 2007 and December 31, 2007, respectively.
 
    
    A decrease in retained earnings in the amount of NIS 1,638 thousand as at
January 1, 2007 and December 31, 2007.
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NETVISION LTD.
 Notes to the Financial Statements
 Note 29  Condensed Data Relating to the Separate Financial Statements of the Company
 Balance sheets
 December 312008
    
    
    2007NIS in thousandsCurrent assetsCash and cash equivalents
    
    
    20,577
    
    
    
    60,61420,577
    
    
    
    60,614Non-current assetsLoans to subsidiaries
    
    
    95,707
    
    
    
    70,084Investment in subsidiaries and proportionately
consolidated companies
    
    
    897,867
    
    
    
    915,620993,574
    
    
    
    985,7041,014,151
    
    
    
    1,046,318Current liabilitiesOther payables
    
    
    15,360
    
    
    
    11,482Current maturities of convertible debentures
(Series B)
    
    
    16,556
    
    
    
    31.916
    
    
    
    11,482Long-term liabilitiesConvertible debentures (Series A)
    
    
    
    
    
    
    72,018Convertible debentures (Series B)
    
    
    30,344
    
    
    
    Options (Series 1)
    
    
    
    
    
    
    11,573Employee benefits
    
    
    1,480
    
    
    
    2,09731,824
    
    
    
    85,688EquityShare capital
    
    
    30,086
    
    
    
    29,641Share premium
    
    
    998,556
    
    
    
    981,775Options (Series 1)
    
    
    9,727
    
    
    
    Convertible feature of debentures (Series B)
    
    
    8,206
    
    
    
    Retained earnings (accumulated loss)
    
    
    (96,164
    )
    
    
    (62,268
    )Total equity
    
    
    950,411
    
    
    
    949,1481,014,151
    
    
    
    1,046,318
  116




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data
Relating to the Separate Financial Statements of the Company (cont.)
 Statements of operations
 Year ended December 312008
    
    
    2007NIS in thousandsRevenues
    
    
    
    
    
    
    209,133Cost of revenues
    
    
    
    
    
    
    176,453Gross profit
    
    
    
    
    
    
    32,680Selling and marketing expenses
    
    
    
    
    
    
    13,068General and administrative expenses
    
    
    6,661
    
    
    
    22,597Impairment of investment in subsidiaries and
proportionately consolidated companies
    
    
    42,487
    
    
    
    34,954Operating loss
    
    
    (49,148
    )
    
    
    (37,939
    )Financing income
    
    
    14,612
    
    
    
    23,549Financing expenses
    
    
    (3,970
    )
    
    
    (5,542
    )Other income, net
    
    
    21
    
    
    
    43,031Profit (loss) before taxes on income
    
    
    (38,485
    )
    
    
    23,099Taxes on income
    
    
    
    
    
    
    12,430Net income (loss)
    
    
    (38,485
    )
    
    
    10,669
 Statements of recognized income and expense
 Year ended December 312008
    
    
    2007NIS in thousandsDefined benefit plan actuarial losses, net
    
    
    
    
    
    
    (277
    )
    
    
    Total expenses recognized directly in equity
    
    
    
    
    
    
    (277
    )
    
    
    Net income (loss)
    
    
    
    
    
    
    (38,485
    )
    
    
    10,699Total recognized income (expense)
    
    
    
    
    
    
    (38,762
    )
    
    
    10,699
  117




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data Relating to the Separate Financial Statements of the Company (cont.)
 Changes in equity
 Convertible
    
    
    Retainedfeature of
    
    
    earningsNumber
    
    
    Share
    
    
    Share
    
    
    Options
    
    
    debentures
    
    
    (accumulatedof shares
    
    
    capital
    
    
    premium
    
    
    (Series 1)
    
    
    (Series B)
    
    
    loss)
    
    
    TotalNIS in thousandsBalance as of January 1, 2008
    
    
    28,758,986
    
    
    
    29,641
    
    
    
    981,775
    
    
    
    
    
    
    
    
    
    
    
    (62,268
    )
    
    
    949,148Salary benefit in respect of employee optionsEquity component of convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,066
    
    
    
    7,066(see Note 14C)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,574
    
    
    
    
    
    
    
    9,574Conversion of debentures into sharesClassification of liability in respect of options
    
    
    293,335
    
    
    
    293
    
    
    
    11,559
    
    
    
    
    
    
    
    (1,368
    )
    
    
    
    
    
    
    10,484(Series 1) (see Note 15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,971
    
    
    
    
    
    
    
    
    
    
    
    9,971Exercise of share options (Series 1)
    
    
    21,751
    
    
    
    22
    
    
    
    949
    
    
    
    (244
    )
    
    
    
    
    
    
    
    
    
    
    727Exercise of employee share options
    
    
    129,248
    
    
    
    130
    
    
    
    4,273
    
    
    
    
    
    
    
    
    
    
    
    (2,200
    )
    
    
    2,203Defined benefit plan actuarial losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (277
    )
    
    
    (277
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,485
    )
    
    
    (38,485
    )Balance as of December 31, 2008
    
    
    29,203,320
    
    
    
    30,087
    
    
    
    998,556
    
    
    
    9,727
    
    
    
    8,206
    
    
    
    (96,164
    )
    
    
    950,411Balance as of January 1, 2007
    
    
    12,759,149
    
    
    
    13,640
    
    
    
    157,437
    
    
    
    
    
    
    
    
    
    
    
    (74,906
    )
    
    
    96,171Issuance of
share capital (net of issuance expenses)
    
    
    14,812,887
    
    
    
    14,813
    
    
    
    784,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798,827Salary benefit in respect of employee options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,003
    
    
    
    5,003Conversion of debentures into shares
    
    
    545,389
    
    
    
    545
    
    
    
    26,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,195Exercise of share options (Series 1)
    
    
    9,755
    
    
    
    10
    
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Exercise of employee share options
    
    
    631,806
    
    
    
    633
    
    
    
    13,166
    
    
    
    
    
    
    
    
    
    
    
    (3,034
    )
    
    
    10,765Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,669
    
    
    
    10,669Balance as of December 31, 2007
    
    
    28,758,986
    
    
    
    29,641
    
    
    
    981,775
    
    
    
    
    
    
    
    
    
    
    
    (62,268
    )
    
    
    949,148
  118




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data Relating to the Separate Financial Statements of the Company (cont.)
 Statements of cash flows
 Year ended December 312008
    
    
    2007NIS in thousandsCash flows from operating activitiesNet income (loss)
    
    
    (38,485
    )
    
    
    10,669Adjustments to reconcile net income (loss) to
net cash flows from operating activities (A)
    
    
    31,473
    
    
    
    12,038Net cash from (used in) operating activities
    
    
    (7,012
    )
    
    
    22,707Cash flows from investing activitiesPurchase of fixed assets
    
    
    
    
    
    
    (15,580
    )Purchase on intangible assets
    
    
    
    
    
    
    (1,568
    )Cash used in transfer of operation to
subsidiary (B)
    
    
    
    
    
    
    (2,968
    )Proceeds from realization of deposits and
marketable securities
    
    
    
    
    
    
    18,526Proceeds from sale of fixed assets
    
    
    
    
    
    
    2,464Proceeds from sale of investment in former
subsidiary (C)
    
    
    305
    
    
    
    (324
    )Net cash from investing activities
    
    
    305
    
    
    
    550Cash flows from financing activitiesIssuance of share capital (net of issuance
expenses)
    
    
    
    
    
    
    112,487Exercise of options and employee options
    
    
    2,930
    
    
    
    11,089Repayment of short-term shareholders loans
    
    
    
    
    
    
    Repayment of long-term bank loans
    
    
    
    
    
    
    Loans granted to subsidiaries and
proportionately
consolidated companies
    
    
    (36,260
    )
    
    
    (58,475
    )Short-term bank credit, net
    
    
    
    
    
    
    (29,491
    )Net cash from (used in) financing activities
    
    
    (33,330
    )
    
    
    35,610Increase (decrease) in cash and cash equivalents
    
    
    (40,037
    )
    
    
    58,867Balance of cash and cash equivalents at the beginning of the year

    
    
    60,614
    
    
    
    1,747Balance of cash and cash equivalents at the end
of the year
    
    
    20,577
    
    
    
    60,614
  119




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data Relating to the Separate Financial Statements of the Company (cont.)
 Statements of cash flows (cont.)
 Year ended December 312008
    
    
    2007NIS in thousandsA. Adjustments to reconcile net
income (loss) to net cash flows from
operating activitiesIncome and expenses not involving cash flows:Depreciation and amortization
    
    
    
    
    
    
    35,910Salary benefit in respect of employee options
    
    
    (894
    )
    
    
    1,457Revaluation of loans granted to subsidiaries
    
    
    (6,019
    )
    
    
    (4,205
    )Revaluation of short-term deposits and securities
    
    
    
    
    
    
    (2,314
    )Revaluation of convertible debentures (Series A)
    
    
    (5,151
    )
    
    
    (10,586
    )Amortization of discount on convertible
debentures (Series B)
    
    
    91
    
    
    
    Increase in value of options (Series 1), net
    
    
    (1,602
    )
    
    
    (5,706
    )Decrease in liabilities for employee benefits, net
    
    
    
    
    
    
    3,628Impairment of assets and investment in subsidiaries and proportionately consolidated
companies
    
    
    42,487
    
    
    
    34,954Capital gain
    
    
    (21
    )
    
    
    (44,307
    )28,891
    
    
    
    8,831Changes in asset and liability items:Increase in trade receivables
    
    
    
    
    
    
    (10,070
    )Decrease in other receivables
    
    
    
    
    
    
    328Decrease in inventory of purchased products
    
    
    
    
    
    
    1,718Decrease in trade payables
    
    
    
    
    
    
    7,860Increase in other payables
    
    
    2,582
    
    
    
    13,109Decrease in long-term trade payables
    
    
    
    
    
    
    (121
    )Payment for rights to use lines of communication
    
    
    
    
    
    
    (9,615
    )2,582
    
    
    
    3,20731,473
    
    
    
    12,038B. Cash used in transfer of operation to
subsidiaryAssets and liability of the subsidiaries at the
date of sale:Working capital (excluding cash and cash
equivalents)
    
    
    
    
    
    
    54,555Non-current assets
    
    
    
    
    
    
    174,874Long-term liabilities
    
    
    
    
    
    
    (12,842
    )Investment
    
    
    
    
    
    
    (222,281
    )Capital gain
    
    
    
    
    
    
    (2,725
    )
    
    
    
    (2,968
    )
  120




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data Relating to the Separate Financial Statements of the Company (cont.)
 Statements of cash flows (cont.)
 Year ended December 312008
    
    
    2007NIS in thousandsC. Cash used in transfer of operation to subsidiaryAssets and liabilities of the consolidated operation at the
date of purchase:Working capital (excluding cash and cash equivalents)
    
    
    
    
    
    
    (12,433
    )Non-current assets
    
    
    
    
    
    
    2,060Long-term liabilities
    
    
    
    
    
    
    (762
    )Investment
    
    
    284
    
    
    
    (30,771
    )Capital gain
    
    
    21
    
    
    
    41,582305
    
    
    
    (324
    )D. Material non-cash transactionsConversion of debentures into shares
    
    
    10,484
    
    
    
    27,195Issuance of capital against investment
    
    
    
    
    
    
    686,338Classification of equity component of debentures convertible into equity

    
    
    9,574
    
    
    
    Classification of receipts on account of options (Series 1) from liabilities to equity
    
    
    9,971
    
    
    
    
 Year ended December 312008
    
    
    2007NIS in thousandsE. Additional information on cash flowsCash paid during the period in respect of:Interest
    
    
    2,783
    
    
    
    3,150Taxes on income
    
    
    
    
    
    
    5,213Cash received during the period in respect of:Interest
    
    
    1,065
    
    
    
    2,454
  121




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 29 
    
    Condensed Data Relating to the Separate Financial Statements of the Company (cont.)
 Statements of cash flows (cont.)
  
    
    The accounting treatment of investments in shares of investee companies 
in accordance with IAS 27When only data of the parent company is presented (stand-alone), investments in
 shares of subsidiaries and jointly controlled companies are presented on a cost basis
or at fair value in accordance with IAS 39 and not according to the equity method.
The Company has chosen to account for these investments on a cost basis and therefore
the investments in the shares of subsidiaries and jointly controlled companies were
presented at cost.
    
    Impairment was tested with respect to each investment according to that stated in Note 2p.
 Note 30  Subsequent Events
   122




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 31 
    
    Effect of differences between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements
  a.
    
    Reconciliation of consolidated balance sheets from IFRS to U.S GAAP:
 December 31, 2008
    
    
    December 31, 2007NIS In thousandsAs
    
    
    
    
    
    As per
    
    
    As
    
    
    
    
    
    As perNote 32
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAP
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAPAudited
    
    
    UnauditedCurrent assetsCash and cash equivalents
    
    
    H
    
    
    
    230,866
    
    
    
    (906
    )
    
    
    229,960
    
    
    
    95,515
    
    
    
    (918
    )
    
    
    94,597Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,937
    
    
    
    
    
    
    
    37,937Trade receivables
    
    
    H
    
    
    
    290,077
    
    
    
    (4,450
    )
    
    
    285,627
    
    
    
    245,170
    
    
    
    (7,075
    )
    
    
    238,100Other receivables
    
    
    H
    
    
    
    42,007
    
    
    
    (6,326
    )
    
    
    35,681
    
    
    
    51,671
    
    
    
    12,507
    
    
    
    64,178Inventory of purchased products
    
    
    H
    
    
    
    6,543
    
    
    
    (3
    )
    
    
    6,540
    
    
    
    8,616
    
    
    
    (5
    )
    
    
    8,611569,493
    
    
    
    (11,685
    )
    
    
    557,808
    
    
    
    438,909
    
    
    
    4,514
    
    
    
    443,423Long-term receivablesDeferred taxes
    
    
    
    
    
    
    32,714
    
    
    
    
    
    
    
    32,714
    
    
    
    30,068
    
    
    
    (17,295
    )
    
    
    12,773Long-term receivables and debit
balances
    
    
    H
    
    
    
    4,306
    
    
    
    (168
    )
    
    
    4,138
    
    
    
    2,293
    
    
    
    (112
    )
    
    
    2,18137,020
    
    
    
    (168
    )
    
    
    36,852
    
    
    
    32,361
    
    
    
    (17,407
    )
    
    
    14,954Investments in subsidiaries
    
    
    B, H
    
    
    
    
    
    
    
    3,831
    
    
    
    3,831
    
    
    
    
    
    
    
    758
    
    
    
    758Fixed assetsCost
    
    
    H
    
    
    
    924,165
    
    
    
    (4,620
    )
    
    
    919,545
    
    
    
    851,862
    
    
    
    (3,263
    )
    
    
    848,599Accumulated depreciation
    
    
    H
    
    
    
    743,722
    
    
    
    (1,639
    )
    
    
    742,083
    
    
    
    685,551
    
    
    
    (945
    )
    
    
    684,606180,443
    
    
    
    (2,981
    )
    
    
    177,462
    
    
    
    166,311
    
    
    
    (2,318
    )
    
    
    163,993Intangible assets
    
    
    E, F G, H
    
    
    
    610,710
    
    
    
    (242,582
    )
    
    
    368,128
    
    
    
    669,139
    
    
    
    (256,482
    )
    
    
    412.657Rights to use lines of communication
    
    
    
    
    
    
    229,203
    
    
    
    
    
    
    
    229,203
    
    
    
    207,173
    
    
    
    
    
    
    
    207,1731,626,869
    
    
    
    (253,585
    )
    
    
    1,373,284
    
    
    
    1,513,893
    
    
    
    (270,935
    )
    
    
    1,242,958Current liabilitiesShort-term bank credit
    
    
    H
    
    
    
    85,819
    
    
    
    (312
    )
    
    
    85,507
    
    
    
    32,713
    
    
    
    (316
    )
    
    
    32,397Current maturities of long-term
liabilities
    
    
    
    
    
    
    3,179
    
    
    
    
    
    
    
    3,179
    
    
    
    1,710
    
    
    
    
    
    
    
    1,710Trade payables
    
    
    H
    
    
    
    216,820
    
    
    
    (1,533
    )
    
    
    215,287
    
    
    
    254,560
    
    
    
    (1,958
    )
    
    
    252,602Other payables
    
    
    E, H
    
    
    
    112,234
    
    
    
    (11,645
    )
    
    
    100,589
    
    
    
    93,482
    
    
    
    (9,892
    )
    
    
    83,590Current maturities of convertible
debentures (Series B)
    
    
    D
    
    
    
    16,556
    
    
    
    732
    
    
    
    17,288
    
    
    
    
    
    
    
    
    
    
    
    434,608
    
    
    
    (12,758
    )
    
    
    421,850
    
    
    
    382,465
    
    
    
    (12,166
    )
    
    
    370,299Long-term liabilitiesConvertible debentures (Series A)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,018
    
    
    
    (11,756
    )
    
    
    60,262Convertible debentures (Series B)
    
    
    D
    
    
    
    30,344
    
    
    
    1,141
    
    
    
    31.485
    
    
    
    
    
    
    
    
    
    
    
    Deferred income in respect of
rights to use lines of
communication
    
    
    
    
    
    
    64,136
    
    
    
    
    
    
    
    64,136
    
    
    
    67,752
    
    
    
    
    
    
    
    67,752Long-term trade payables
    
    
    
    
    
    
    5,964
    
    
    
    
    
    
    
    5,964
    
    
    
    7,711
    
    
    
    
    
    
    
    7,711Warrants (series 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,573
    
    
    
    
    
    
    
    11,573Accrued severance pay, net
    
    
    B, H
    
    
    
    16,155
    
    
    
    7,219
    
    
    
    23,374
    
    
    
    14,461
    
    
    
    3,539
    
    
    
    18,000Employee benefit liability
    
    
    
    
    
    
    
    
    
    
    1,100
    
    
    
    1,100
    
    
    
    
    
    
    
    3,748
    
    
    
    3,748Contingent liabilities, commitments
and guarantees
    
    
    
    
    
    
    116,599
    
    
    
    9,460
    
    
    
    126,059
    
    
    
    173,515
    
    
    
    (4,469
    )
    
    
    169,046Minority interest
    
    
    B, E, G
    
    
    
    
    
    
    
    8,951
    
    
    
    8,951
    
    
    
    284
    
    
    
    8,294
    
    
    
    8,578Shareholders equity
    
    
    B, C, D, E, F, G, H
    
    
    
    1,075,662
    
    
    
    (259,238
    )
    
    
    816,424
    
    
    
    957,913
    
    
    
    (262,878
    )
    
    
    695,0351,626,869
    
    
    
    (253,585
    )
    
    
    1,373,284
    
    
    
    1,513,893
    
    
    
    (270,935
    )
    
    
    1,242,958
  123




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##### Table of Contents



NETVISION LTD.
 Notes to the Financial Statements
 Note 31 
    
    Effect of differences between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements (cont.)
 b.
    
    Reconciliation of consolidated profit and loss from IFRS to U.S GAAP:
 Year ended December 31, 2008
    
    
    Year ended December 31, 2007NIS In thousandsAs
    
    
    
    
    
    
    As per
    
    
    As
    
    
    
    
    
    
    As perNote 32
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAP
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAPRevenues
    
    
    H
    
    
    
    1,234,584
    
    
    
    (13,693
    )
    
    
    1,220,891
    
    
    
    1,147,088
    
    
    
    (19,779
    )
    
    
    1,127,309Cost of revenues
    
    
    B, C, H
    
    
    
    981,822
    
    
    
    (22,405
    )
    
    
    959,417
    
    
    
    1,024,720
    
    
    
    24,407
    
    
    
    1,001,158Gross profit
    
    
    
    
    
    
    252,762
    
    
    
    8,712
    
    
    
    261,474
    
    
    
    122,368
    
    
    
    3,783
    
    
    
    126,151Selling and marketing
expenses
    
    
    H
    
    
    
    52,108
    
    
    
    (3,825
    )
    
    
    48,283
    
    
    
    45,742
    
    
    
    (922
    )
    
    
    44,820General and
administrative expenses
    
    
    B, C, H
    
    
    
    75,118
    
    
    
    710
    
    
    
    75,828
    
    
    
    57,061
    
    
    
    3,349
    
    
    
    60,410Impairments of
intangible assets
    
    
    F,H
    
    
    
    14,143
    
    
    
    (14,143
    )
    
    
    
    
    
    
    26,543
    
    
    
    (26,543
    )
    
    
    Operating profit
    
    
    
    
    
    
    111,393
    
    
    
    25,970
    
    
    
    137,363
    
    
    
    (6,978
    )
    
    
    28,899
    
    
    
    20,921Financial income
    
    
    B, D E, H
    
    
    
    10,733
    
    
    
    2,283
    
    
    
    13,016
    
    
    
    20,140
    
    
    
    (13,088
    )
    
    
    7,132Financial expenses
    
    
    B, D E, H
    
    
    
    (19,395
    )
    
    
    (5,961
    )
    
    
    (25,356
    )
    
    
    (20,654
    )
    
    
    972
    
    
    
    (19,682
    )Other income, net
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    382
    
    
    
    39,582
    
    
    
    (39,656
    )
    
    
    74Profit before taxes on
income
    
    
    
    
    
    
    103,113
    
    
    
    22,292
    
    
    
    125,405
    
    
    
    32,090
    
    
    
    (23,645
    )
    
    
    8,445Taxes on income
    
    
    
    
    
    
    16,359
    
    
    
    
    
    
    
    16,359
    
    
    
    12,685
    
    
    
    
    
    
    
    12,685Profit (loss) after
taxes on income
    
    
    
    
    
    
    86,754
    
    
    
    22,292
    
    
    
    109,046
    
    
    
    19,405
    
    
    
    (23,645
    )
    
    
    (4,240
    )Equity in earnings of
affiliated company
    
    
    
    
    
    
    
    
    
    
    (14,946
    )
    
    
    (14,946
    )
    
    
    
    
    
    
    (6,866
    )
    
    
    (6,866
    )Net income
    
    
    
    
    
    
    86,754
    
    
    
    7,346
    
    
    
    94,100
    
    
    
    19,405
    
    
    
    (30,511
    )
    
    
    (11,106
    )Attributable to:Equity holders of the
company
    
    
    
    
    
    
    86,754
    
    
    
    6,976
    
    
    
    93,730
    
    
    
    19,152
    
    
    
    (30,511
    )
    
    
    (11,359
    )Minority interest
    
    
    B, E, H
    
    
    
    
    
    
    
    370
    
    
    
    370
    
    
    
    253
    
    
    
    
    
    
    
    25386,754
    
    
    
    7,346
    
    
    
    94,100
    
    
    
    19,405
    
    
    
    (30,511
    )
    
    
    (11,106
    )Net income (loss) per
share (in reported NIS)Basic net income (loss)
    
    
    
    
    
    
    2.99
    
    
    
    0.24
    
    
    
    3.23
    
    
    
    0.75
    
    
    
    (1.19
    )
    
    
    (0.44
    )Diluted net income (loss)
    
    
    
    
    
    
    2.70
    
    
    
    0.33
    
    
    
    3.03
    
    
    
    0.16
    
    
    
    (0.80
    )
    
    
    (0.64
    )
  124




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NETVISION LTD.
 Notes to the Financial Statements
 Note 31 
    
    Effect of differences
between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements (cont.)
 c.
    
    Reconciliation of the statements of change in shareholders equity from
IFRS to U.S. GAAP
 December 31, 2008
    
    
    December 31, 2007NIS In thousandsAs
    
    
    
    
    
    
    
    As per
    
    
    As
    
    
    
    
    
    
    As perreported
    
    
    Adjustment
    
    
    U.S. GAAP
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAPOrdinary shares
    
    
    30,086
    
    
    
    
    
    
    
    30,086
    
    
    
    29,641
    
    
    
    
    
    
    
    29,641Share premium
    
    
    998,556
    
    
    
    (256,846
    )
    
    
    741,710
    
    
    
    981,775
    
    
    
    (254,000
    )
    
    
    727,775Warrants (series 1)
    
    
    9,727
    
    
    
    
    
    
    
    9,727
    
    
    
    
    
    
    
    
    
    
    
    Convertible feature of
debentures (series B)
    
    
    8,206
    
    
    
    (8,206
    )
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    6,635
    
    
    
    6,635
    
    
    
    
    
    
    
    3,082
    
    
    
    3,082Retained earning (accumulated
loss)
    
    
    29,087
    
    
    
    (821
    )
    
    
    28,266
    
    
    
    (53,787
    )
    
    
    (11,676
    )
    
    
    (65,463
    )Total
    
    
    1,075,662
    
    
    
    (259,238
    )
    
    
    816,424
    
    
    
    957,629
    
    
    
    (262,594
    )
    
    
    695,035
 d.
    
    Reconciliation of the statements of consolidated cash flows from IRFS
to U.S. GAAP
 December 31, 2008
    
    
    December 31, 2007NIS In thousandsAs
    
    
    
    
    
    
    As per
    
    
    As
    
    
    
    
    
    
    As perNotes
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAP
    
    
    reported
    
    
    Adjustment
    
    
    U.S. GAAPNet cash flows
provided by
operating
activities
    
    
    
    
    143,424
    
    
    
    13,999
    
    
    
    157,423
    
    
    
    129,470
    
    
    
    (6,016
    )
    
    
    123,454Cash flows used in
investing
activities
    
    
    
    
    (64,110
    )
    
    
    (13,991
    )
    
    
    (78,101
    )
    
    
    (13,574
    )
    
    
    5,414
    
    
    
    (8,160
    )Cash flows from
(used in) financing
activities
    
    
    
    
    56,037
    
    
    
    4
    
    
    
    56,041
    
    
    
    (23,958
    )
    
    
    (316
    )
    
    
    (24,274
    )Increase (decrease)
in cash and cash
equivalents
    
    
    
    
    135,351
    
    
    
    12
    
    
    
    135,363
    
    
    
    91,938
    
    
    
    (918
    )
    
    
    91,020Balance of cash and
cash equivalents at
the beginning of
the year
    
    
    
    
    95,515
    
    
    
    (918
    )
    
    
    94,597
    
    
    
    3,577
    
    
    
    
    
    
    
    3,577Balance of cash and
cash equivalents at
the end of the year
    
    
    
    
    230,866
    
    
    
    (906
    )
    
    
    229,960
    
    
    
    95,515
    
    
    
    (918
    )
    
    
    94,594
  125




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NETVISION LTD.
 Notes to the Financial Statements
 Note 32 
    
    Effect of differences
between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements (cont.)
 A. General
  B. Severance pay
   C. Employee stock option plan
        126




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NETVISION LTD.
 Notes to the Financial Statements
 Note 32 
    
    Effect of differences between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements (cont.)
 D. Convertible debentures
   E. Put option to minority shareholders
   F. Merger with Barak and GlobCall
   127




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NETVISION LTD.
 Notes to the Financial Statements
 Note 32 
    
    Effect of differences between International Financial Reporting Standards (IFRS) and US GAAP in the consolidated financial statements (cont.)
 F. Merger with Barak and GlobCall (cont.)
   Business combinations Definition of Common
Control
 G. Merger between Netvision Application and Edwize Infomanage
    H. Proportional consolidation and capital gain related to Nana 10
 1.
    
    On May 8, 2007 an agreement was signed between Israel 10  New Channel Broadcasts Ltd.
(Channel 10) and the Company, for cooperation through a subsidiary which will be controlled
jointly by Netvision (50%) and Channel 10 (50%).Under IFRS this investment is recorded under the proportionate consolidation method.Under US GAAP proportionate consolidation method is not permitted and consequently this
investment is recorded under the equity method of accounting.
  128




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NETVISION LTD.
 Notes to the Financial Statements
 Note 32 
    
    Significant
Differences Between Israeli GAAP and U.S. GAAP and Their Effect on Netvisions Financial Statements (cont.)
 H. Proportional consolidation and capital gain related to Nana 10 (cont.)
 2.
    
    In May 2007, 50% Nana 10 shares were allocated to Channel 10 in consideration for cash paid
to Nana 10 and other intangibles transferred to Nana 10 and Netivsion.
    129




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NETVISION LTD.
 Notes to the Financial Statements
 List of investee companies
 Shares bearing votingrights and rights toName of company
    
    profitsConsolidated companies:Netvision 013 Barak
    
    
    100
    %Globecall Communication Ltd.
    
    
    100
    %Netvision International Trading (2002) Ltd.
    
    
    100
    %Netwise Applications Ltd.
    
    
    53.4
    %Proportional consolidated companies:Nana 10 Ltd.
    
    
    50
    %
   130




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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit1.1
    
    
    Articles of Association (English translation), consolidated version
including amendments approved by the Companys shareholders on
December 28, 2006, incorporated by reference to Exhibit 1.1 to the
Companys Annual Report on Form 20-F for the year ended December 31,
2006, filed with SEC on June 27, 2007.1.2
    
    
    Memorandum of Association of Elron Electronic Industries Ltd.,
incorporated by reference to Exhibit 1.2 to the Companys Annual
Report on Form 20-F for the year ended December 31, 2000, filed with
the SEC on June 8, 2001.4.1
    
    
    Services Agreement dated as of March 19, 2009 by and between the
registrant and Discount Investment Corporation Ltd., incorporated by
reference to Exhibit 99.2 to Form 6-K, filed with the SEC on March
24, 2009.4.2
    
    
    Joint Venture Agreement, dated as of April 1993, among Discount
Investment Corporation Ltd., PEC Israel Economic Corporation, Rafael
Armament Development Authority Ltd. and Galram Technology Industries
Limited (Joint Venture Agreement), incorporated by reference to
Exhibit 10.4 to Amendment No. 5 to the Companys Registration
Statement on Form F-4, filed with the SEC on March 14, 2002.4.3
    
    

Amendment
to Joint Venture Agreement, dated December 30, 2007,
incorporated by reference to Exhibit 4.2 to the Companys Annual
Report on Form 20-F for the year ended December 31, 2007 filed with
the SEC on June 30, 2008.8.1
    
    
    List of subsidiaries.11.1
    
    
    Code of Ethics, incorporated by reference to Exhibit 11.1 to the
Companys Annual Report on Form 20-F, filed with the SEC on June 29,
2004.12.1
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.12.2
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.12.3
    
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.13.1
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*13.2
    
    
    Certification of the co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*13.3
    
    
    Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*15.1
    
    
    Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, for Elron Electronic Industries Ltd., dated June 25, 2009.15.2
    
    
    Consent of Somekh Chaikin, a member firm of KPMG International, for
Given Imaging Ltd., dated June 25, 2009.15.3
    
    
    Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global, for NetVision Ltd., dated June 24, 2009.
 *
    
    This document is being furnished in accordance with SEC Release No. 33-8212 and 34-47551.