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|      |                                                                         | Page No. |
|-----------|------------------------------------------------------------------------------|----------|
|      |                                                                         |     |
| PART I    |                                                                         |     |
| Item 1.   | Identity of Directors, Senior Management and Advisers                        | 4        |
| Item 2.   | Offer Statistics and Expected Timetable                                      | 4        |
| Item 3.   | Key Information                                                              | 5        |
| Item 4.   | Information on the Company                                                   | 28       |
| Item 4A.  | Unresolved Staff Comments                                                    | 55       |
| Item 5.   | Operating and Financial Review and Prospects                                 | 55       |
| Item 6.   | Directors, Senior Management and Employees                                   | 76       |
| Item 7.   | Major Shareholders and Related Party Transactions                            | 89       |
| Item 8.   | Financial Information                                                        | 96       |
| Item 9.   | The Offer and Listing                                                        | 98       |
| Item 10.  | Additional Information                                                       | 99       |
| Item 11.  | Quantitative and Qualitative Disclosures About Market Risk                   | 123      |
| Item 12.  | Description of Securities Other than Equity Securities                       | 123      |
| PART II   |                                                                         |     |
| Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 123      |
| Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 123      |
| Item 15.  | Controls and Procedures                                                      | 123      |
| Item 16.  | [Reserved]                                                                   | 124      |
| Item 16A. | Audit Committee Financial Expert                                             | 124      |
| Item 16B. | Code of Ethics                                                               | 125      |
| Item 16C. | Principal Accountant Fees and Services                                       | 125      |
| Item 16D. | Exemptions from the Listing Standards for Audit Committees                   | 125      |
| Item 16E. | Purchases of Equity Securities by the Issuer and Associate Purchasers        | 125      |
| Item 16 F | Change in Registrant's Certifying Accountant                                 | 126      |
| Item 16 G | Corporate Governance                                                         | 126      |
| PART III  |                                                                         |     |
| Item 17.  | Financial Statements                                                         | 126      |
| Item 18.  | Financial Statements                                                         | 126      |
| Item 19.  | Exhibits                                                                     | 126      |

----

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

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

----

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

|                                                                                      |   | Years endedDecember 31 |    |
|-------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                      |   | 2008                   |    |   | 2009 |   |
| Income:                                                                                   |   |                   |    |   |   |   |
| Sales of goods                                                                       |   | $                      | 6,237   |   |   | $ | 9,904 |   |
| Gain from disposal of businesses and associates and changes in holding in associates, net |   |                   | 783     |   |   |   | 31,802 |   |
| Financial income                                                                          |   |                   | 6,259   |   |   |   | 1,413 |   |
|                                                                                      |   |                   | 13,279  |   |   |   | 43,119 |   |
| Cost and Expenses:                                                                        |   |                   |    |   |   |   |   |   |
| Cost of sales                                                                             |   |                   | 3,200   |   |   |   | 4,824 |   |
| Research and development expenses, net                                                    |   |                   | 29,911  |   |   |   | 25,699 |   |
| Selling and marketing expenses                                                            |   |                   | 7,525   |   |   |   | 8,985 |   |
| General and administrative expenses                                                       |   |                   | 19,065  |   |   |   | 15,865 |   |
| Equity in losses of associates, net                                                       |   |                   | 40,146  |   |   |   | 10,514 |   |
| Amortization of intangible assets                                                         |   |                   | 1,061   |   |   |   | 1,416 |   |
| Other expenses, net                                                                       |   |                   | 257     |   |   |   | 2,230 |   |
| Financial expenses                                                                        |   |                   | 4,800   |   |   |   | 5,434 |   |
|                                                                                      |   |                   | 105,965 |   |   |   | 74,967 |   |

----

|                                                                                             |   | Years endedDecember 31 |   |
|--------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                             |   | 2008                   |   |   | 2009 |   |
|                                                                                             |   |                   |   |   |   |   |
| Loss before tax                                                                                  |   |                   | 92,686 |   |   |   | 31,848 |   |
|  Tax benefit                                                                                |   |                   | 32     |   |   |   | 2,453 |   |
| Net loss                                                                                         |   |                   | 92,654 |   |   |   | 29,395 |   |
| Net loss attributable to Elron's shareholders                                                    |   |                   | 71,834 |   |   |   | 14,304 |   |
| Net loss attributable to non-controlling interest                                                |   |                   | 20,820 |   |   |   | 15,091 |   |
| Net loss                                                                                         |   | $                      | 92,654 |   |   | $ | 29,395 |   |
| Net loss per share attributable to shareholders:                                                 |   |                   |   |   |   |   |   |   |
| Basic loss per share                                                                             |   |                   | 2.43   |   |   |   | 0.48 |   |
| Weighted average number of ordinaryshares used in computing basic (loss per share (in thousands) |   |                   | 29,650 |   |   |   | 29,650 |   |
| Diluted loss per share                                                                           |   |                   | 2.44   |   |   |   | 0.49 |   |
| Weighted average number of ordinaryshares used in computing diluted loss per share in thousands) |   |                   | 29,650 |   |   |   | 29,650 |   |

|                                                                                                                |   | Years ended December 31 |    |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                |   | 2005                    |    |   | 2006 |   |   | 2007 |   |
|                                                                                                                |   |                    |    |   |   |   |   |   |   |
| Income:                                                                                                             |   |                    |    |   |   |   |   |   |   |
| Net revenues                                                                                                        |   | $                       | 12,646  |   |   | $ | 12,863 |   |   | $ | 4,371 |   |
| Equity in losses of affiliated companies                                                                            |   |                    | (17,522 | ) |   |   | (17,740 | ) |   |   | (20,416 | ) |
| Gain (loss) from disposal of businesses and affiliatedcompanies and changes in holdings inaffiliated companies, net |   |                    | 23,328  |   |   |   | 2,547 |   |   |   | 14,854 |   |
| Other income (expenses), net                                                                                        |   |                    | 58,648  |   |   |   | 29,310 |   |   |   | (3,214 | ) |
| Financial income, net                                                                                               |   |                    | 5,483   |   |   |   | 4,051 |   |   |   | 3,945 |   |
|                                                                                                                |   |                    | 82,583  |   |   |   | 31,031 |   |   |   | (460 | ) |
| Costs and expenses:                                                                                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                                                                    |   |                    | 7,907   |   |   |   | 6,625 |   |   |   | 2,233 |   |
| Research and development costs, net                                                                                 |   |                    | 6,163   |   |   |   | 11,758 |   |   |   | 13,284 |   |
| Marketing and selling expenses, net                                                                                 |   |                    | 2,386   |   |   |   | 4,717 |   |   |   | 2,802 |   |
| General and administrative expenses                                                                                 |   |                    | 9,249   |   |   |   | 12,995 |   |   |   | 13,716 |   |
|                                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Amortization of intangible assets and acquired in- process- research and development write-off                      |   |                    | 392     |   |   |   | 18 |   |   |   | 2,306 |   |
|                                                                                                                |   |                    | 26,097  |   |   |   | 36,113 |   |   |   | 34,341 |   |

----

|                                                                                                         |   | Years ended December 31 |    |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                         |   | 2005                    |    |   | 2006 |   |   | 2007 |   |
|                                                                                                         |   |                    |    |   |   |   |   |   |   |
| Income (loss) before taxes on income from continuing operations                                              |   |                    | 56,486  |   |   |   | (5,082 | ) |   |   | (34,801 | ) |
|  Taxes on income                                                                                        |   |                    | (10,461 | ) |   |   | (1,110 | ) |   |   | (7,544 | ) |
| Net income (loss) from continuing operations                                                                 |   |                    | 46,025  |   |   |   | (6,192 | ) |   |   | (42,345 | ) |
| Net loss from discontinued operations                                                                        |   |                    | (3,850  | ) |   |   | - |   |   |   | - |   |
| Net income (loss)*                                                                                           |   | $                       | 42,175  |   |   | $ | (6,192 | ) |   | $ | (42,345 | ) |
| Net income (loss) attributable to Elron's shareholders*                                                      |   |                    | 47,335  |   |   |   | 3,032 |   |   |   | (37,095 | ) |
| Net income (loss) attributable to non-controlling interest*                                                  |   |                    | (5,160  | ) |   |   | (9,224 | ) |   |   | (5,250 | ) |
| Net income (loss)*                                                                                           |   | $                       | 42,175  |   |   | $ | (6,192 | ) |   | $ | (42,345 | ) |
| Net income (loss) per share:                                                                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Basic -                                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations attributable to Elron's shareholders                           |   | $                       | 1.74    |   |   | $ | 0.10 |   |   | $ | (1.25 | ) |
| Loss from discontinued operations attributable to Elron's shareholders                                       |   |                    | (0.13   | ) |   |   | - |   |   |   | - |   |
| Net income (loss) attributable to Elron's shareholders                                                       |   | $                       | 1.61    |   |   | $ | 0.10 |   |   | $ | (1.25 | ) |
| Weighted average number of ordinaryshares used in computing basic netincome (loss) per share (in thousands)  |   |                    | 29,437  |   |   |   | 29,532 |   |   |   | 29,619 |   |
| Diluted -                                                                                                    |   |                    |    |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations attributable to Elron's shareholders                                |   | $                       | 1.73    |   |   | $ | 0.07 |   |   | $ | (1.27 | ) |
| Loss from discontinued operations attributable to Elron's shareholders                                       |   |                    | (0.13   | ) |   |   | - |   |   |   | - |   |
| Net income (loss) attributable to Elron's shareholders                                                       |   | $                       | 1.60    |   |   | $ | 0.07 |   |   | $ | (1.27 | ) |
| Weighted average number of ordinaryshares used in computing diluted netincome (loss) per share in thousands) |   |                    | 29,550  |   |   |   | 29,624 |   |   |   | 29,619 |   |
| Dividend  paid per share                                                                      |   | $                       | 3.00    |   |   | $ | - |   |   | $ | - |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                          |   | As of January 1,     |    |   | As of December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2008                 |    |   | 2008               |   |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                          |   | ( in thousands of $) |    |
| Cash, cash equivalents and short-term and long term investments                                                                                                                                                                                                                                                                                                                                               |   | $                    | 74,362  |   |               | $      | 17,507 |   |   | $ | 64,807 |   |
| Investments in associate companies and in other companies and long term receivables                                                                                                                                                                                                                                                                                                                           |   |                 | 158,059 |   |               |   | 175,877 |   |   |   | 128,704 |   |
| Total assets                                                                  |   |                 | 243,426 |   |               |   | 219,579 |   |   |   | 213,080 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                     |   |                 | 22,056  |   |               |   | 20,095 |   |   |   | 25,937 |   |
| Long term loans from banks and others                                                                                                                                                                                                                                                                                                                                                                         |   |                 | 2,244   |   |               |   | 35,141 |   |   |   | 36,981 |   |
| Long term loans from shareholders                                                                                                                                                                                                                                                                                                                                                                             |   |                 | -       |   |               |   | 6,176 |   |   |   | 16,737 |   |
| Employee benefits                                                                                                                                                                                                                                                                                                                                                                                             |   |                 | 561     |   |               |   | 991 |   |   |   | 194 |   |
| Total equity                                                                  |   |                 | 212,656 |   |               |   | 146,051 |   |   |   | 122,093 |   |
| Equity attributable to Elron's shareholders                                                                                                                                                                                                                                                                                                                                                                   |   |                 | 209,613 |   |               |   | 139,506 |   |   |   | 126,465 |   |
| Capital stock                                                                 |   |                 | 208,338 |   |               |   | 209,558 |   |   |   | 209,968 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                         |   | As of December 31,   |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2005                 |    |   | 2006 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                         |   | ( in thousands of $) |    |
| Cash, cash equivalents and short-term and long term investments                                                                                                                                                                                                                                                                                                                                              |   | $                    | 143,798 |   |   | $ | 128,733 |   |
| Investments in affiliated companies and in other companies and long term receivables                                                                                                                                                                                                                                                                                                                         |   |                 | 176,711 |   |   |   | 168,607 |   |
| Total assets                                                                 |   |                 | 353,773 |   |   |   | 326,249 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                    |   |                 | 19,044  |   |   |   | 20,535 |   |
| Long term loans from banks and others                                                                                                                                                                                                                                                                                                                                                                        |   |                 | 1,477   |   |   |   | 2,113 |   |
| Long term loans from shareholders                                                                                                                                                                                                                                                                                                                                                                            |   |                 | -       |   |   |   | - |   |
| Accrued severance pay and retirement obligations                                                                                                                                                                                                                                                                                                                                                             |   |                 | 2,635   |   |   |   | 2,089 |   |
| Total equity*                                                                                                                                                                                                                                                                                                                                                                                                |   |                 | 321,123 |   |   |   | 299,984 |   |
| Equity attributable to Elron's shareholders*                                                                                                                                                                                                                                                                                                                                                                 |   |                 | 302,116 |   |   |   | 297,504 |   |
| Capital stock                                                                                                                                                                                                                                                                                                                                                                                                |   |                 | 291,445 |   |   |   | 283,801 |   |

----

----

----

----

----

|   | ● | the continued current global economic slowdown; |
|--------|---------|-------------------------------------------------|

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

|   | ● | low trading volume of our ordinary shares, which is anticipated to decrease following our delisting from Nasdaq; |
|--------|---------|------------------------------------------------------------------------------------------------------------------|

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

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

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

|   | ● | factors that generally affect the market for stocks of medical device, telecommunications 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. |
|--------|---------|-----------------------------------------------------------|

----

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

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

|   | ● | 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 obtain continued financing from its shareholders or otherwise, if and when required; or |
|--------|---------|----------------------------------------------------------------------------------------------------------|

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

----

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

|   | ● | 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; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

|   | ● | 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 intellectual property 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). |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

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

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

|   | ● | political and economic instability; |
|--------|---------|-------------------------------------|

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

|   | ● | acts of terror. |
|--------|---------|-----------------|

----

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

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

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

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

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

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

|   | ● | political instability. |
|--------|---------|------------------------|

----

----

----

----

----

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

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

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

----

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

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

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

----

----

----

|   | ● | The need for substantial resources which it may be unable to raise on commercially reasonable terms or at all; |
|--------|---------|----------------------------------------------------------------------------------------------------------------|

|   | ● | The ability to establish and maintain reliable, manufacturing capacity without prior experience in manufacturing its product in significant quantities, having only manufactured a limited number of units for prototypes, clinical trials and initial sales of its SoloTM System; |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Building and managing an effective sales and marketing infrastructure; |
|--------|---------|------------------------------------------------------------------------|

|   | ● | Attracting, hiring and retaining sufficient and suitable personnel to meet its current and future needs. |
|--------|---------|----------------------------------------------------------------------------------------------------------|

|   | ● | the failure of Medingo's SoloTM System to achieve acceptance among opinion -forming leaders in the diabetes treatment community, insulin-prescribing physicians, third-party payors and people with insulin-dependent diabetes; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | manufacturing problems including building material production capacity; |
|--------|---------|-------------------------------------------------------------------------|

|   | ● | changes in reimbursement rates or policies relating to products such as the SoloTM System by third-party payors; |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------|

|   | ● | claims that any portion of Medingo's SoloTM System infringes on patent rights or other intellectual property rights owned by other parties; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | adverse regulatory or legal actions relating to products such as Medingo's SoloTM System; |
|--------|---------|------------------------------------------------------------------------------------------------|

|   | ● | damage, destruction or loss of any of Medingo's automated assembly units; |
|--------|---------|---------------------------------------------------------------------------|

|   | ● | competitive pricing and related factors; and |
|--------|---------|---------------------------------------------------|

|   | ● | if future clinical studies or other articles are published, or diabetes associations or other organizations announce positions that are unfavorable to Medingo's SoloTM System. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

----

----

|   | ● | Dividend Distribution by Given Imaging. On February 10, 2009, Given Imaging declared a special cash dividend of approximately $0.54 per share, or $16 million in the aggregate, of which our and RDC's share was approximately $3.7 million and $1.4 million, respectively. Payment of this dividend was made on March 10, 2009. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Dividend Distribution by NetVision. On March 10, 2009 and on August 12, 2009, NetVision (TASE: NTSN) declared a special cash dividend of approximately NIS3.08 and NIS0.86 per share, respectively (approximately $0.73 and $0.23, respectively as of date of declaration) or NIS90 million and NIS26.0 million, respectively (approximately $21.2 million and $7.0 million, respectively as of date of declaration), in the aggregate. Our share in the above-mentioned dividends amounted to approximately NIS14.2 million and NIS4 million, respectively (approximately $3.3 million and $1 million, respectively, as of date of payment). Payments of these dividends took place on April 7, 2009 and on September 9, 2009, respectively. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Sale of 3DV. On June 2, 2009, 3DV, in which we beneficially owned approximately 51% of the outstanding shares representing all the shares owned by us and RDC (or approximately 36% representing our direct holding and our concatenated share of the holding of RDC) completed the sale of substantially all of its assets to a third party and declared  voluntary liquidation. Further to the sale and following the payment of certain expenses, proceeds from the sale to be distributed to us and RDC are expected to amount to approximately $3.6 million and $4.4 million, respectively. 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds, in the aggregate amount of approximately $18.8 million, of which our and RDC's shares were approximately $3.1 million and $3.7 million, respectively. As a result of the sale of 3DV’s assets, we recorded a gain of approximately $6.1 million in 2009. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Sela Semiconductor Engineering Laboratories Ltd. On September 24, 2009, Camtek Ltd. ("Camtek", an Israeli company, publicly traded on the NASDAQ and the TASE), acquired the entire share capital of SELA, in which we beneficially owned approximately 75% of the outstanding shares representing all the shares owned by us and RDC (or approximately 50% representing our direct holding and our concatenated share of the holding of RDC. As consideration for the shares, Camtek will pay Sela's selling shareholders contingent future payments in the aggregate amount of up to $9.5 million, depending on SELA's future revenues, of which our and RDCs portions are estimated to be up to $1.8 million and $4.5 million, respectively. As a result of the transaction we recorded a gain of approximately $1.1 million in 2009. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Potential Sale of Medingo. On October 26, 2009, the shareholders of Medingo, in which we beneficially own approximately 92% of the outstanding shares representing all the shares owned by us and RDC (or approximately 50% representing our direct holding and our concatenated share of the holding of RDC) received a non-binding indication of interest (the "Indication") of a third party regarding a potential acquisition of Medingo by it. The Indication relates to an acquisition of Medingo's entire share capital for a cash consideration ranging from $150 million to $170 million and a contingent additional cash consideration conditional upon one or more milestone(s) to be mutually agreed, which may bring the total consideration up to between $185 million and $213 million. The transaction would be subject mainly to (i) the parties entering into a mutually agreed definitive agreement; (ii) satisfactory completion of a full due diligence by the third party; and (iii) the parties obtaining applicable corporate and regulatory approvals. In the event of consummation of such a transaction, we would be expected to record a net gain attributable to shareholders initially estimated at this stage to be between approximately $57 million and approximately $86 million. There is no assurance of the occurrence, timing the expected gain amount or terms of any such transaction. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Sale of NetVision. On October 29, 2009, we completed the sale of our holdings in NetVision, then representing 15.24% of NetVision to our associates, DIC and Clal Industries and Investments Ltd., or CII, in consideration of an aggregate amount of NIS 228.7 million (then  approximately $60.7 million). DIC and CII are both majority-owned subsidiaries of IDBD. As a result, we recorded, in the fourth quarter of 2009, a gain of approximately $21.9 million. See "Item 7 – Major Shareholders – Related Party Transactions." |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | ChipX Inc. On November 9, 2009, ChipX, then held 28% by us, completed a merger with GigOptix Inc. ("GigOptix"), a U.S. company traded "over-the-counter" in the United States, pursuant to which the shareholders of ChipX received 40% of the shares of the merged company, constituting about 26% of the total shares on a fully diluted basis, of which we own 8.71% on an issued and outstanding basis. As a result of the merger, we recognized a gain of approximately $1.5 million during the fourth quarter of 2009. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Delisting and Transition to IFRS.  On January 6, 2010, we voluntarily delisted from the Nasdaq Global Select Market. We further intend to terminate the registration of our ordinary shares under the Exchange Act as soon as possible under SEC rules, thereby terminating our obligation to file annual and other reports with the SEC. We do not expect such deregistration to take effect earlier than the first quarter of 2011. Our ordinary shares will continue to be listed and traded on the TASE, our principal trading market. We will continue to make public reports with the Israeli Securities Authority and TASE in accordance with the Israeli securities laws and regulations. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result of the delisting from Nasdaq and transition to reporting according to  Israeli securities laws and regulations , we have changed our financial reporting principles from U.S. GAAP to IFRS. As permitted under the Exchange Act and the regulations promulgated thereunder, our financial statements included herein are prepared in accordance with IFRS (without reconciliation to US GAAP). The financial statements included under "Item 18 – Financial Statements" are our first consolidated financial statements that were prepared in accordance with IFRS and reflect the application of IFRS 1, "First Time Adoption of International Financial Reporting Standards." |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Commencement of Negotiations for the sale of Teledata. We and other shareholders of Teledata have commenced negotiations for the sale, by way of merger, of all of the outstanding shares of Teledata to a non-Israeli publicly traded company. If completed, the aggregate consideration from this transaction is estimated, at this stage, at approximately $50 million, payable partly in cash, partly in bonds and partly in stock of the acquirer. Our share of the consideration from the transaction will be determined following discussions with other Teledata shareholders. The completion of the transaction is subject, inter alia, to due diligence regarding the acquirer to the sellers' satisfaction, the completion of negotiations, the execution of a definitive agreement and obtaining of the necessary regulatory and other approvals. Accordingly, there is no assurance that the negotiations will lead to the execution of a definitive agreement or that the transaction will be completed. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The following are the significant investments and divestitures that we and our group companies completed in 2007 and 2008, in chronological order: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | NetVision's Acquisition of Barak and GlobCall.  In January 2007, NetVision completed its acquisition of  Barak, then a subsidiary of CII and the acquisition of  GlobCall Communications Ltd., or GlobCall, then a subsidiary of DIC, in consideration of Netvision shares issued to the selling shareholders of Barak and Globcall.  As a result, our holding in NetVision was reduced to approximately 18% from approximately 36%, resulting in a gain for us of approximately $9.1 million (net of tax and according to US GAAP) recorded in the first quarter of 2007. As part of the  transaction, we entered into a shareholders agreement with DIC and CII and into a separate agreement with DIC concerning, among other things, the appointment of  NetVision directors. During 2007, NetVision raised in two private placements of its shares, an aggregate amount of approximately NIS 112.2 million (then approximately $28 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 concatenated 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. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | 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 accordance with U.S.GAAP) in the second quarter of 2007. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | 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 SCP Vitalife Partners II, L.P., or Vitalife. As a result of our aggregate investment, we held approximately 23% of Pocared's outstanding shares. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | During September 2009, the shareholders of Pocared, including us, granted Pocared a convertible bridge loan in the aggregate amount of $2.2 million (of which our share was approximately $1.1 million). During January 2010, the shareholders of Pocared, including us, granted Pocared a further convertible bridge loan in the aggregate amount of $3 million, of which our share was approximately $1.5 million. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Initial Public Offering of Starling on the TASE and Other Transactions. 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 (then approximately $14 million), approximately half of which consisted of convertible interest-bearing debentures, the proceeds of which  to be released to and used by Starling 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. As a result of 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 concatenated share of the holding of RDC. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During October 2008, we purchased 7,638,323 convertible debentures in private transactions and additional 10,139,455 convertible debentures as a part of partial tender offer for a total amount of approximately NIS 6.9 million and NIS 9.2 million respectively (then approximately $2.0 million and $2.4 million respectively). Subsequent to the abovementioned transactions, we beneficially owned approximately 62% of the outstanding convertible debentures. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In May 2009, we and RDC signed a loan agreement with Starling, or the First Loan Agreement, under which we and RDC extended to Starling loans  in the aggregate amount of $2.6 million of which our share was approximately $1.2 million. In July 2009, we and RDC signed a second loan agreement with Starling on substantially the same terms as in the First Loan Agreement, pursuant to which we and RDC provided Starling with an additional loan in five installments in the aggregate amount of $3.2 million of which our share was approximately $1.5 million. In December 2009, we and RDC signed an additional loan agreement, to provide Starling with an additional loan in the aggregate amount of $3.9 million, of which our and RDC's share was approximately $1.8 million and $2.1 million, respectively. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Agreement with Rafael and settlement of claim by Rafael against our subsidiaries, DEP and RDC. On December 30, 2007, we, DEP, RDC and Rafael signed an addendum agreement, or 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 court 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 that will be 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, we invested an additional $1.5 million in RDC. In December 2009, RDC signed a loan agreement with Rafael and us for loans in the aggregate amount of $15 million, of which our share is approximately $7.5 million to be advanced to RDC in installments subject to the terms specified in the definitive agreement, of which $7.5 million was granted in January 2010 (our share was $3.75 million). |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In January 2010, Medingo signed a convertible loan agreement for receiving convertible loans in the aggregate amount of $5.5 million, of which our share was approximately $0.5 million and RDC's share was approximately $4.6 million to be advanced in installments subject to the terms specified in the definitive agreement. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Investment in Wavion. In March and June 2008, we 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 we invested in each approximately $2 million. In addition, simultaneously with the second installment, we together with the other shareholder purchased all the shares then held by a former shareholder in Wavion, of which we 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. As a result of the above, we commenced consolidating Wavion as of March 31, 2008 |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2008, we, together with another shareholder of Wavion invested an additional $3 million, of which we invested $1.9 million. The above transactions did not affect our holding percentage in Wavion. In October 2009, we together with another shareholder of Wavion granted Wavion a convertible bridge loan in the aggregate amount of $1.5 million, of which our share was approximately $0.96 million. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, we, together with another shareholder of Wavion granted Wavion a convertible bridge loan in the aggregate amount of $1.6 million, of which our share was approximately $1.4 million. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | On July 7, 2009, Impliant completed the recapitalization and a conversion of the first $5 million of the above loans into the most senior preferred stock of Impliant. During the period of July to September 2009, we, together with other major shareholders of Impliant, entered into investment agreements with Impliant, according to which an aggregate amount of $8 million (of which our share was $2 million), was invested in Impliant as a prepayment toward the purchase of senior preferred shares of Impliant. Following the above transactions, we held approximately 39% of Impliant's share capital on a fully diluted and on an as-converted basis. The financing round led to our de-consolidation of Impliant. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | 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, our direct and indirect concatenated (through RDC) holding in Given Imaging increased to approximately 27.8% of Given Imaging's issued and outstanding shares (or a 32.4% beneficial ownership). DIC holds 16.1% of Given Imaging. Therefore, we together with DIC and RDC hold approximately 48.5% of the issued and outstanding shares of Given Imaging. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| Medical Devices | Information and Communication Technology | Clean Technology | Other Holdings |
|-----------------|------------------------------------------|------------------|----------------|
| Given Imaging   | Teledata                                 | Aqwise           | Jordan Valley  |
| Medingo         | Wavion                                   | BPT              |           |
| NuLens          | Starling                                 | Atlantium        |           |
| Brainsgate      | Safend                                   |             |           |
| Pocared         | PlyMedia                                 |             |           |
| Impliant        | Actysafe                                 |             |           |
| Galil Medical   | Xsights                                  |             |           |
| Notal           |                                     |             |           |
| SyncRx          |                                     |             |           |

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|   | ● | Given Imaging, in which we beneficially own approximately 48.3% 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 32.2%, representing our direct holding together with RDC's holding or 27.7% representing our direct holding and our concatenated share of 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 50% representing our direct holding and our concatenated share of 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  48% of the outstanding shares; |
|--------|---------|------------------------------------------------------------------------------------|

|   | ● | 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 concatenated share of the holding of RDC; |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Notal, in which we hold approximately 27% of the outstanding shares; and |
|--------|---------|--------------------------------------------------------------------------|

|   | ● | Sync-Rx, in which we beneficially own approximately 84% of the outstanding shares representing all shares owned by RDC, or 42% representing our concatenated share of the holding of RDC. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | 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 concatenated share of the holding of RDC; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | 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 in which we hold approximately 66% of the outstanding shares; |
|--------|---------|----------------------------------------------------------------------|

|   | ● | Safend, in which we hold approximately 27% of the outstanding shares; |
|--------|---------|-----------------------------------------------------------------------|

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|   | ● | XSights in which we beneficially own approximately 100% of the outstanding shares representing all shares owned by RDC, or approximately 50%, representing our concatenated share of 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 concatenated share of the holding of RDC. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Aqwise, in which we hold approximately 34% of the outstanding shares |
|--------|---------|----------------------------------------------------------------------|

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|   | ● | Atlantium, in which we hold approximately 23% of the outstanding shares; and |
|--------|---------|------------------------------------------------------------------------------|

|   | ● | BPT – Bio-Pure Technologies Ltd, or BPT, in which we hold approximately 17.5% of the outstanding shares. |
|--------|---------|----------------------------------------------------------------------------------------------------------------|

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| Item 4A. | Unresolved Staff Comments |
|----------|---------------------------|

| Item 5.    | Operating and Financial Review and Prospects |
|---------------------------|----------------------------------------------|

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|   | ● | Principles of accounting for holdings in group companies – Basis of consolidation, equity method of accounting and available for sale financial assets |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Business combinations and purchase price allocation |
|--------|---------|-----------------------------------------------------|

|   | ● | Other-than-temporary decline in value of investments in group companies |
|--------|---------|-------------------------------------------------------------------------|

|   | ● | Impairment of intangible assets |
|--------|---------|---------------------------------|

|   | ● | Accounting for income taxes |
|--------|---------|-----------------------------|

|   | ● | Exceptions chosen in accordance with IFRS 1 |
|--------|---------|--------------------------------------------------|

|   | ● | IFRS 3(R) currently prescribes that goodwill, as opposed to the acquiree's other identifiable assets and liabilities, will be measured as the  difference between the aggregate of the cost of the acquisition and any non-controlling interests in the acquiree over the acquirer's share in the fair value of the identifiable assets, net on the acquisition date. According to the Standards, non-controlling interests, including goodwill, can be measured either at fair value or at the proportionate share of the acquiree's fair value of net identifiable assets, this in respect of each business combination transaction measured separately. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Contingent consideration in a business combination is measured at fair value and changes in the fair value of the contingent consideration, which do not represent adjustments to the acquisition cost in the measurement period, are not simultaneously recognized as goodwill adjustments. If the contingent consideration is classified as a liability it will be measured at fair value through profit or loss. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | ● | A subsidiary's losses, even if resulting in a capital deficiency in a subsidiary, will be allocated between the parent company and non -controlling interests, even if the non -controlling interests has not guaranteed or has no contractual obligation for sustaining the subsidiary's operations or of investing further amounts. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | On the loss or achievement of control of a subsidiary, the remaining investment, if any, will be revalued to fair value against gain or loss from the sale and this fair value will represent the cost basis for the purpose of subsequent treatment. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | ● | Business combinations – IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates that occurred before 1 January 2007. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Translation differences from foreign activities – we did not recognize cumulative translation differences as of January 1, 2007 with respect to all our foreign operations. Therefore, the capital reserve from the adjustments deriving from the translation of financial statements of all the foreign operations was classified to retained earnings (accumulated deficit) as of January 1, 2007. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Share-based payments – IFRS 2, which discusses share-based payment transactions, was not implemented to equity instruments granted prior to November 7, 2002, or that were granted after this date and have vested prior to January 1, 2007. Regarding share-based payment transactions settled in cash, we elected not to apply IFRS 2 to liabilities paid prior to January 1, 2007. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | Compound financial instruments – we elected not to separate compound financial instruments into an equity component and a liability component, in cases were the liability did not exist as of January 1, 2007. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| Year ended December 31,                                  |
|----------------------------------------------------------|
| 2009                                                     |   | 2008 |
| RDCMedingoStarlingSync-Rx2XSIGHTS2Wavion3ActySafe2  |   | RDCSELA1MedingoStarlingSync-Rx2XSIGHTS2Wavion3Impliant4ActySafe2 |    |

| Year ended December 31,                            |
|----------------------------------------------------|
| 2009                                               |   | 2008 |
| Impliant1Teledata BrainsGate NuLensSafendAtlantium | EnurePocaredBPT2PLYmedia3Given ImagingNetVision4ChipX5 | AqwiseNotal VisionGalil Medical  |   | Impliant1Teledata BrainsGate NuLensSafend NeurosonixAtlantium | EnurePocaredBPT2PLYmedia3Given ImagingNetVision4ChipX5 | Wavion6AqwiseKyma7Ellara8Notal VisionGalil Medical3DV9RADLIVE |

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| Year ended December 31,      |
|------------------------------|
| 2009                         |   | 2008 |
| Jordan ValleyBPT1EVSGigOptix |   | Jordan ValleyEVSM-Wise2 |    |

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

| (i) | losses in the amount of $22.0 million, resulting from consolidated companies, mainly Medingo, Starling, Wavion and Impliant and losses (net of non-controlling interest) in the amount of $12.8 million, resulting from associates, mainly Pocared, Nulens and Atlantium; and |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | intangible asset amortization related to our investment in Given Imaging in the amount of $4.3 million. |
|------|---------------------------------------------------------------------------------------------------------|

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| (i) | losses in the amount of $22.8 million (net of non-controlling interest), resulting from consolidated companies, mainly Medingo, Starling, Wavion and Impliant, and losses (net of non-controlling interest) in the amount of $38.3 million (net of non-controlling interest), resulting from associates, mainly Pocared, Safend, Galil Medical and Atlantium; and |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | intangible asset amortization related to our investment in Given Imaging in the amount of $3.8 million, which is included in equity in losses of associates, net. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                              |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                              |   | 2009                    |   |   | 2008 |   |
|                                                                                              |   | (millions of $)         |   |
| Sale of goods                                                                                     |   |                    | 9.9    |   |   |   | 6.2 |   |
| Income (loss) from disposal of business and associates and changes in holdings in associates, net |   |                    | 31.8   |   |   |   |  0.8 |   |
|                                                                                              |   |                    |   |   |   |   |   |   |
| Financial income                                                                                  |   |                    | 1.4    |   |   |   | 6.3 |   |
|  Total income                                                                                |   |                    | 43.1   |   |   |   | 13.3 |   |
| Equity in losses of associates, net                                                               |   |                    | 10.5   |   |   |   | 40.1 |   |
| Cost of sales                                                                                     |   |                    | 4.8    |   |   |   | 3.2 |   |
| Operating expenses                                                                                |   |                    | 50.6   |   |   |   | 56.5 |   |
| Amortization of intangible  assets                                                      |   |                    | 1.4    |   |   |   | 1.1 |   |
| Other expenses                                                                                    |   |                    | 2.2    |   |   |   | 0.3 |   |
| Financial expenses                                                                                |   |                    | 5.4    |   |   |   | 4.8 |   |
| Total costs and expenses                                                                          |   |                    | 75.0   |   |   |   | 106.0 |   |
| Loss before taxes on income                                                                       |   |                    | (31.8  | ) |   |   | (92.7 | ) |
| (Taxes on income) tax benefit                                                                     |   |                    | 2.5    |   |   |   | - |   |
| Net loss                                                                                          |   |                    | (29.4  | ) |   |   | (92.7 | ) |
| Net loss attributable to non-controlling interest                                                 |   |                    | (15.1  | ) |   |   | (20.8 | ) |
| Net loss attributable to the Company's shareholders                                               |   |                    | (14.3  | ) |   |   | (71.8 | ) |

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

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|       |   | Year ended December 31, |   |
|------------|--------|-------------------------|--------|
|       |   | 2009                    |   |   | 2008 |   |
|       |   | (millions of $)         |   |
| Corporate  |   |                    | 6.9    |   |   |   | 9.5 |   |
| SELA1      |   |                    | 1.8    |   |   |   | 4.0 |   |
| Starling   |   |                    | 6.7    |   |   |   | 8.4 |   |
| Wavion 2   |   |                    | 7.8    |   |   |   | 5.4 |   |
| Medingo    |   |                    | 15.9   |   |   |   | 17.1 |   |
| Impliant 3 |   |                    | 4.9    |   |   |   | 4.7 |   |
| RDC        |   |                    | 2.6    |   |   |   | 2.5 |   |
| Other 4    |   |                    | 3.9    |   |   |   | 4.8 |   |
|       |   |                    | 50.5   |   |   |   | 56.5 |   |

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

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

|   | 3 Consolidated from March 31, 2008 through September 30, 2009. |
|--------|----------------------------------------------------------------|

|   | 4 Includes mainly Sync-Rx and XSIGHTS. |
|--------|----------------------------------------|

----

----

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

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

| Consolidated companies (*)             |   |   |   |
|----------------------------------------|--------|--------|--------|
| ($ in milllons)                        |   |   |   |
| RDC                                    |   |   | 3.3    |   |
| Medingo                                |   |   | 1.2    |   |
| Wavion                                 |   |   | 2.7    |   |
| Starling                               |   |   | 2.7    |   |
|  Associates and other investments |   |   |   |   |
| Impliant                               |   |   | 2.0    |   |
| Pocared                                |   |   | 5.0    |   |
| Brainsgate                             |   |   | 0.5    |   |
| Safend                                 |   |   | 0.2    |   |
| BPT                                    |   |   | 0.5    |   |
| Kyma                                   |   |   | 0.5    |   |
| Other                                  |   |   | 0.5    |   |
|                                   |   |   |   |   |
| Total corporate investments            |   |   | 18.9   |   |

----

----

| Consolidated companies           |   |   |   |
|----------------------------------|--------|--------|--------|
| RDC                              |   |   | 3.75   |   |
| Medingo                          |   |   | 0.2    |   |
| Wavion                           |   |   | 1.35   |   |
| Starling                         |   |   | 1.81   |   |
|                             |   |   |   |   |
| Associates and other investments |   |   |   |   |
| Nulens                           |   |   | 2.00   |   |
| Safend                           |   |   | 0.16   |   |
|                             |   |   |   |   |
| Total corporate investments      |   |   | 9.27   |   |

----

| Liabilities           |   | 2010                                |   |   | 2011         |   |   | 2012   |   |   | 2012   |   |   | 2013   |   |   | No specific repayment date |   |   | Total  |   |   | FairValue |   |
|-----------------------|--------|-------------------------------------|--------|--------|--------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|----------------------------|--------|--------|--------|--------|--------|-----------|--------|
|                  |   |   (US$ Equivalent in millions) |   |
| Long-term Debt        |   |                                |   |   |         |   |   |   |   |   |   |   |   |   |   |   |                       |   |   |   |   |   |      |   |
| Fixed Rate (NIS)      |   |                                | -      |   |         |   | 18,111 |   |   |   | -      |   |   |   | -      |   |                       |   | -      |   |   |   | -         |   |   |   | 18,111 |   |   |   | 18,229 |   |
| Average interest rate |   |                                |   |   |         |   | 4.66   | %      |   |   |   |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |   |   |   |   |
|                  |   |                                |   |   |         |   |   |   |   |   |   |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |   |   |   |   |
| Fixed Rate (US$)      |   |                                | 913    |   |         |   | -      |   |   |   | -      |   |   |   | -      |   |                       |   | -      |   |   |   | -         |   |   |   | 913 |   |   |   | 836 |   |
| Average interest rate |   |                                | 11     | %      |         |   |   |   |   |   |   |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |   |   |   |   |
|                  |   |                                |   |   |         |   |   |   |   |   |   |   |   |   |   |   |                       |   |   |   |   |   |      |   |   |   |   |   |   |   |   |   |
| Variable Rate (US$)   |   |                                | 11,760 |   |         |   | 37,356 |   |   |   | -      |   |   |   | -      |   |                       |   | -      |   |   |   | 8,685     |   |   |   | 57,802 |   |   |   | 55,286 |   |
| Average interest rate |   | LIBOR + 3.78                        | %      |   | LIBOR + 1.54 | %      |   |   |   |   |   |   |   |   |   |   |                       |   |   | LIBOR  |   |   |      |   |   |   |   |   |   |

----

|                    |   | Change inthe currencyexchange rate |   |   | December 312009 |   |
|-------------------------|--------|------------------------------------|--------|--------|-----------------|--------|
|                    |   | (%)                                |   |   | $ thousands     |   |
|                    |   |                               |   |   |            |   |
| Increase of the NIS by  |   |                               | 5      | %      |            |   | 290 |   |
| Increase of the NIS by  |   |                               | 10     | %      |            |   | 578 |   |
|                    |   |                               |   |   |            |   |   |   |
| Decreases of the NIS by |   |                               | (5     | )%     |            |   | (290 | ) |
| Decreases of the NIS by |   |                               | (10    | )%     |            |   | (578 | ) |

----

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

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

----

| Type of Obligation                |   | 2010   |   |   | 2011   |   |   | 2012   |   |   | 2013 |   |   | Total  |   |
|-----------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------|--------|--------|--------|--------|
| Loans from banks                  |   |   | 12.0   |   |   |   | 30.3   |   |   |   | -    |   |   |   | -      |   |   |   | 42.3 |   |
| Loans from others                 |   |   | 0.2    |   |   |   | 7.1    |   |   |   | -    |   |   |   | -      |   |   |   | 7.3 |   |
| Loan from Shareholders            |   |   | -      |   |   |   | 18.1   |   |   |   | -    |   |   |   | -      |   |   |   | 18.1 |   |
| Starling's Convertible Debentures |   |   | 1.4    |   |   |   | 1.4    |   |   |   | 1.4  |   |   |   | 1.3    |   |   |   | 5.5 |   |
| Leases                            |   |   | 0.8    |   |   |   | 0.5    |   |   |   | 0.1  |   |   |   | -      |   |   |   | 1.4 |   |

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

|  Name                               |   | Age    |   | Position                                      |
|------------------------------------------|--------|--------|--------|-----------------------------------------------|
|                                     |   |   |   |                                          |
| Arie Mientkavich(5) (4)                  |   | 67     |   | Chairman of the Board of Directors            |
| Avraham Asheri(1)(4)                     |   | 72     |   | Director                                      |
| Gad Arbel(1)(2)(4)                       |   | 61     |   | External Director                             |
| Prof. Gabi Barbash                       |   | 60     |   | Director                                      |
| Rona Dankner(5)(6)                       |   | 26     |   | Director                                      |
| Ami Erel(5) (4)                          |   | 62     |   | Director                                      |
| Avraham Fischer(5)                       |   | 53     |   | Director                                      |
| Yaacov Goldman (1)(2)(3) (4)             |   | 54     |   | External Director                             |
| Shay Livnat(5) (6)                       |   | 51     |   | Director                                      |
| Dori Manor(5) (6) (4)                    |   | 42     |   | Director                                      |
| Arie Ovadia(4)                           |   | 61     |   | Director                                      |
|                                     |   |   |   |                                          |
| Executive Officers   Name |   | Age    |   | Position                                      |
|                                     |   |   |   |                                          |
| Ari Bronshtein                           |   | 40     |   | Co- Chief Executive Officer                   |
| Dr. Zvi Slovin                           |   | 44     |   | Co- Chief Executive Officer                   |
| Yaron Elad                               |   | 32     |   | 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." |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

|                                               |   | Cash and Cash-Equivalent Forms of Compensation(in thousands of U.S. $) |   |
|----------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                               |   | Salaries, Fees, Directors'Fees, Commissions andBonuses                 |   |
| 2009(1)                                            |   |                                                                   |   |
| All Directors as a group, consisting of 11 persons |   |                                                                   | 1,111  |   |
| All Officers as a group, consisting of 7 persons   |   |                                                                   | 2,098  |   |

----

----

|   |   | ● | an employment relationship; |
|--------|--------|---------|-----------------------------|

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

|   |   | ● | control; and |
|--------|--------|---------|--------------|

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

----

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

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

----

----

| Period ended December 31,     |   | 2009   |   |   | 2008   |   |     | 2007   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|----------|--------|--------|
|                          |   |   |   |   |   |   |     |   |   |   |   |   |
| Management and Administration |   |   | 1      | *      |   |   |  27 |   |   |   | 25 |   |

----

| Director                                                         |   | Ordinary Shares |   |
|------------------------------------------------------------------|--------|-----------------|--------|
| Arie Mientkavich, Chairman(1)                                    |   | 60,000          |   |
| Ami Erel(1)                                                 |   | 0               |   |
| Gad Arbel                                                        |   | 0               |   |
| Avraham Asheri                                                   |   | 0               |   |
| Prof. Gabi Barbash                                               |   | 0               |   |
| Rona Dankner(1)                                                  |   | 0               |   |
| Avraham Fischer(1)                                          |   | 0               |   |
| Yaacov Goldman                                                   |   | 0               |   |
| Shay Livnat(1)                                                   |   | 0               |   |
| Dori Manor(1)                                               |   | 0               |   |
| Arie Ovadia                                                      |   | 0               |   |
|                                                             |   |            |   |
| All officers and directors as a group (consisting of 14 persons) |   |  70,000(2) |   |

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

| (2) | Options to purchase 70,000 of our ordinary shares currently exercisable or exercisable within 60 days of March 1, 2010. |
|-----|-------------------------------------------------------------------------------------------------------------------------|

----

| Date of Grant |   | Aggregate No. of Options |    |   | Aggregate No. of Options Granted to Officers (or former Officers) |   |    | Exercise Price |   | Expiry Date |
|---------------|--------|--------------------------|---------|--------|-------------------------------------------------------------------|--------|---------|----------------|--------|-------------|
| November 2005 |   |                     | 18,750  |   |                                                              |   | 18,750  |           |   | $           | 9.12 |   | December 2012 |
| March 2006    |   |                     | 5,000   |   |                                                              |   | -       |           |   | $           | 9.05 |   | March 2011 |
| May 2007      |   |                     | 120,000 |   |                                                              |   | 120,000 |           |   | $           | 15.53 |   | May  2012 |
| January 2008  |   |                     | 10,000  |   |                                                              |   | 10,000  |           |   | $           | 10.57 |   | January 2013 |

| (1) | Exercise price reduced as a result of a $3.00 dividend per share distributed in September 2005. |
|-----|-------------------------------------------------------------------------------------------------|

----

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

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

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

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

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

|  Name and Address                                    |   | Number ofOrdinary Shares |              |   | Percent ofOrdinary Shares |   |
|-----------------------------------------------------------|--------|--------------------------|-------------------|--------|---------------------------|--------|
| Discount Investment Corporation Ltd. (1) Tel Aviv, Israel |   |                     |   14,442,111 |   |                      |   | 48.71 | % |
| Taavura Special Projects Ltd. (2)                         |   |                     | 142               |   |                      |   | 0.0 | % |
| All Officers and Directors as a group (3)            |   |                     | 267,500           |   |                      |   | 0.9 | % |

| * | The above table does not include 388,086.75 shares, as of March 4, 2010 (approximately 1.3% of our outstanding shares),  held as of March 4, 2010, for members of the public through, among others, provident funds, mutual funds, pension funds, exchange traded funds and insurance policies, which are managed by subsidiaries of Clal Insurance Enterprises Holdings Ltd., or Clal Insurance, a subsidiary of IDBD. In connection with such holdings of our ordinary shares for members of the public, IDBD received on March 25, 2010 an approval of the General Director of the Israeli Anti-Trust Authority to hold in excess of 50% of our outstanding ordinary shares, which approval enables DIC as well to increase its holdings of our ordinary shares to more than 50% of our outstanding ordinary shares. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

----

----

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

----

----

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

|                                 |   | U.S.         |   |   | U.S.        |   |   | TASE      |   |   |          |   |
|--------------------------------------|--------|--------------|--------|--------|-------------|--------|--------|-----------|--------|--------|---------------|--------|
| Period                               |   | High(U.S. $) |   |   | Low(U.S. $) |   |   | High(NIS) |   |   | TASELow (NIS) |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |
| Annually                             |   |         |   |   |        |   |   |      |   |   |          |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |
| 2005                                 |   |         | 13.09  |   |        |   | 9.61   |      |   |   | 60.05         |   |   |   | 46.41 |   |
| 2006                                 |   |         | 12.80  |   |        |   | 8.75   |      |   |   | 55.79         |   |   |   | 40.81 |   |
| 2007                                 |   |         | 17.41  |   |        |   | 10.27  |      |   |   | 68.66         |   |   |   | 39.50 |   |
| 2008                                 |   |         | 12.37  |   |        |   | 1.07   |      |   |   | 45.50         |   |   |   | 4.45 |   |
| 2009                                 |   |         | 8.43   |   |        |   | 1.36   |      |   |   | 29.69         |   |   |   | 5.00 |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
| Quarterly                            |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
| First Quarter 2008                   |   |         | 12.37  |   |        |   | 8.21   |      |   |   | 45.50         |   |   |   | 27.41 |   |
| Second Quarter 2008                  |   |         | 9.87   |   |        |   | 8.08   |      |   |   | 34.00         |   |   |   | 26.95 |   |
| Third Quarter 2008                   |   |         | 8.28   |   |        |   | 4.30   |      |   |   | 27.56         |   |   |   | 17.3 |   |
| Fourth Quarter 2008                  |   |         | 4.59   |   |        |   | 1.07   |      |   |   | 15.17         |   |   |   | 4.45 |   |
| First Quarter 2009                   |   |         | 2.43   |   |        |   | 1.48   |      |   |   | 10.36         |   |   |   | 5.46 |   |
| Second Quarter 2009                  |   |         | 3.57   |   |        |   | 1.75   |      |   |   | 13.88         |   |   |   | 8.57 |   |
| Third Quarter 2009                   |   |         | 8.43   |   |        |   | 2.94   |      |   |   | 28.51         |   |   |   | 11.71 |   |
| Fourth Quarter 2009                  |   |         | 7.88   |   |        |   | 4.63   |      |   |   | 29.69         |   |   |   | 18.30 |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
| Most recent six months               |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
|                                 |   |         |   |   |        |   |   |      |   |   |          |   |   |   |   |   |
| October 2009                         |   |         | 7.19   |   |        |   | 4.63   |      |   |   | 27.90         |   |   |   | 18.30 |   |
| November 2009                        |   |         | 7.48   |   |        |   | 6.24   |      |   |   | 27.75         |   |   |   | 24.00 |   |
| December 2009                        |   |         | 7.88   |   |        |   | 6.66   |      |   |   | 29.69         |   |   |   | 25.50 |   |
| January 2010                         |   |         | 9.32   |   |        |   | 7.50   |      |   |   | 32.80         |   |   |   | 27.40 |   |
| February 2010                        |   |         | 7.99   |   |        |   | 6.95   |      |   |   | 30.46         |   |   |   | 26.90 |   |
| March 1, 2010 through March 20, 2010 |   |         | 8.50   |   |        |   | 7.55   |      |   |   | 32.40         |   |   |   | 28.52 |   |

----

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

|   | Not applicable. |
|--------|-----------------|

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

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

|   | Not applicable. |
|--------|-----------------|

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

|   | Not applicable. |
|--------|-----------------|

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

|   | Not applicable. |
|--------|-----------------|

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

----

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

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

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

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

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

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

----

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

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

----

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

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

----

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

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

|   | ● | a merger; or |
|--------|---------|--------------|

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

----

----

----

----

|   | (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 Credit Line Agreement, which shall be not less than three; |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | obligating to provide Discount 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 Discount Bank's rights will not be harmed; |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | obligating not to make, or agree to make, loans available to our shareholders and not to repay future loans from our shareholders without the prior consent of Discount 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 Discount Bank; and |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iv) | obligating not to pay dividends to our shareholders without the prior written consent of Discount Bank. |
|--------|------|---------------------------------------------------------------------------------------------------------|

----

----

----

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

----

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

----

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

----

----

----

----

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

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

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

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

----

----

----

----

----

----

----

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

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

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

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

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

----

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

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

----

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

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

|                             |   | 2009                     |   |   | 2008   |   |
|----------------------------------|--------|--------------------------|--------|--------|--------|--------|
|                             |   | (in thousands of U.S. $) |   |
|                             |   |                     |   |
| Audit Fees (1)                   |   |                     | 454    |   |   |   | 410 |   |
| Tax Fees (2)                     |   |                     | 32     |   |   |   | 37 |   |
| Audit-Related  Fees(3) |   |                     | 40     |   |   |   | 96 |   |
| All Other Fees (4)               |   |                     | 24     |   |   |   | 46 |   |
|    Total          |   |                     | 550    |   |   |   | 589 |   |

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

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

----

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

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

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

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

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

| Exhibit No.  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1               | Articles of Association (English translation), consolidated version including amendments approved by the Company's shareholders on December 28, 2006, incorporated by reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for the year ended December 31, 2006, filed with SEC on June 27, 2007.                                                                                                        |
| 1.2               | Memorandum of Association of Elron Electronic Industries Ltd., incorporated by reference to Exhibit 1.2 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000, filed with the SEC on June 8, 2001.                                                                                                                                                                                      |
| 4.1               | Services Agreement dated as of March 19, 2009 by and between the registrant and Discount Investment Corporation Ltd., incorporated by reference to Exhibit 99.2 to Form 6-K, filed with the SEC on March 24, 2009.                                                                                                                                                                                                       |
| 4.2               | Joint Venture Agreement, dated as of April 1993, among Discount Investment Corporation Ltd., PEC Israel Economic Corporation, Rafael Armament Development Authority Ltd. and Galram Technology Industries Limited (“Joint Venture Agreement”), incorporated by reference to Exhibit 10.4 to Amendment No. 5 to the Company’s Registration Statement on Form F-4, filed with the SEC on March 14, 2002. |
| 4.3               | Amendment to Joint Venture Agreement, dated December 30, 2007, incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 20F for the year ended December 31, 2007 filed with the SEC on June 30, 2008.                                                                                                                                                                                             |
| 4.4               | Credit Agreement dated May 15, 2008 with Israel Discount Bank Ltd., as amended (English summary) incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 20F/A for the year ended December 31, 2009 filed with the SEC on December 2, 2009.                                                                                                                                                      |
| 4.5               | Loan Agreement dated October 30, 2008 with Discount Investment Corporation Ltd. (Translation to English) ) incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 20F/A for the year ended December 31, 2009 filed with the SEC on December 2, 2009.                                                                                                                                            |

----

| 4.6  | Loan Agreement dated January 15, 2009 with Discount Investment Corporation Ltd (Translation to English). ) incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 20F/A for the year ended December 31, 2009 filed with the SEC on December 2, 2009 |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7  | Loan Agreement dated June 15, 2009 with Discount Investment Corporation Ltd (Translation to English). incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 20F/A for the year ended December 31, 2009 filed with the SEC on December 2, 2009.     |
| 4.8  | Share Purchase Agreement dated August  19, 2009 with Discount Investment Corporation Ltd and Clal Industries and Investments Ltd.                                                                                                                                  |
| 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 March 28, 2010.                                                                                                                               |
| 15.2 | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for NetVision Ltd., dated March 28, 2010.                                                                                                                                                 |
| 15.3 | Consent of Somekh Chaikin, a member firm of KPMG International, for Given Imaging Ltd., dated March 28, 2010.                                                                                                                                                                |
| 15.4 | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for Pocared Diagnostic Ltd., dated March 28, 2010.                                                                                                                                        |

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

 

----

|                                                | ELRON ELECTRONIC INDUSTRIES LTD. |                                   |
|-----------------------------------------------------|----------------------------------|----------------------------------------|
|                                                |                             |                                   |   |
|     Dated: March  28, 2010 | By:                              | /s/ Ari Bronshtein                |   |
|                                                |                             | Name: Ari Bronshtein                   |   |
|                                                |                             | Title: Co-Chief Executive Officer |   |

|   | By:    | /s/ Zvi Slovin               |   |
|--------|--------|-----------------------------------|--------|
|   |   | Name: Zvi Slovin                  |   |
|   |   | Title: Co-Chief Executive Officer |   |

|   | By:    | /s/ Yaron Elad                                      |   |
|--------|--------|----------------------------------------------------------|--------|
|   |   | Name: Yaron Elad                                         |   |
|   |   | Title: Vice President & Chief Financial Officer |   |
|   |   |                                                     |   |

----

----

----

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

----

|   | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelTel:  972 (3)6232525Fax: 972 (3)5622555www.ey.com/il |
|--------|-------------------------------------------------------------------------------------------------------------------------------|

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

----

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

----

Consolidated Balance Sheets as of 

----

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

----

----

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

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

----

Consolidated Statements of Loss 

----

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

----

Consolidated Statements of Comprehensive Loss 

----

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

----

Consolidated Statements of Changes in Equity 

----

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

----

----

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

----

Consolidated Statements of Cash Flows 

----

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

----

----

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

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

----

----

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

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

----

Notes to the Consolidated Financial Statements 

----

----

----

----

----

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

|   | When assessing the possible outcomes of legal claims that were filed against the Company and its group companies, the companies relied on the opinions of their legal counsel. The opinions of their legal counsel are based on the best of their professional judgment, and take into consideration the current stage of the proceedings and the legal experience accumulated with respect to the various matters. As the results of the claims will ultimately be determined by the courts, they may be different from such estimates. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Impairment of assets |
|--------|----|----------------------|

|   | The Company examines on every balance sheet date whether there have been any events or changes in circumstances which would indicate impairment of one or more assets. When indications of impairment exists, the Company examines whether the carrying amount of the assets can be recovered from the discounted cash flows anticipated to be derived from the asset, and if necessary, it records an impairment provision necessary to record the assets at the amount of the recoverable value. The estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The estimates regarding cash flows are based on past experience with respect to this asset or similar assets, and on the best possible assessments of the Company regarding the economic conditions that will exist during the remaining useful life of the asset. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | The Company is required to allocate the purchase price of group companies (other than in the acquisition of non-controlling interests that do not confer control) to the assets and liabilities of such group companies on the basis of their estimated fair value. In addition, the Company estimates the fair value of its investments in companies that are not consolidated or not accounted for in accordance with the equity method of accounting. The material intangible assets that were recognized as a result of business combination were commercial customer relations, technology, and research and development in progress. Critical estimates that were used to estimate the useful life of such intangible assets include, inter alia, the estimated life of the customer relations and of the other intangible assets as well as anticipated market developments. Management's estimates regarding the fair value and useful life are based on assumptions considered reasonable by management, but are uncertain, and therefore the actual results may be different than anticipated by management. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Employee benefits |
|--------|----|-------------------|

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

----

----

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

|   | Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Further details are provided in Note 25. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

----

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

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

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

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

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

|   | Associates are those entities in which the Company has significant influence or the ability to significantly influence the financial and operating policies, but control as stated above was not achieved. Associates are accounted for using the equity method of accounting (equity accounted investees). The Company's consolidated financial statements include the Company's share of the income and expenses of equity accounted investees, after adjustments required to align the accounting policies with those of the Company for uniform accounting policies, from the date that significant influence commences until the date that significant influence ceases. When the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Company has an obligation to support the investee or has made payments on behalf of the investee, or has granted it loans or guarantees. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In circumstances where the Company’s ownership in an associate is in the form of a preferred security or other senior security, the Company recognizes losses based on the ownership level of the particular associate's security or loan held by the Company to which the equity method is being applied. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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----

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

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

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

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

|   | The Company’s consolidated financial statements are presented in dollars. Transactions in foreign currencies are translated into the Company's functional currency at the exchange rates in effect on the dates of the transactions. Monetary assets and liabilities denominated in foreign currency existing as of the reporting date are translated into the functional currency at the exchange rate at that date. The exchange rate differences in respect of the monetary items are the difference between amortized cost in the functional currency at the beginning of the period, adjusted for the effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the Company's functional currency using the exchange rate on the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the exchange rate on the date that the fair value was determined. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

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

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

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

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

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

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

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

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

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

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----

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

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

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

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

|   | Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not traded on an active market. After the initial recognition, the loans and receivables are measured at amortized cost using the effective interest method while taking into consideration transaction costs and deducting any impairment losses which are recognized in the income statement in finance expenses. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | Other investments accounted for as available for sale and Available-for-sale financial assets |
|--------|-----------------------------------------------------------------------------------------------|

|   | Available-for-sale financial investments include equity and debt securities. Equity investments classified as available-for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealized gains or losses recognized as other comprehensive income in the available-for-sale reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other income (expenses), or determined to be impaired, at which time the cumulative loss is recognized in the income statement in other income (expenses), and removed from the available-for-sale reserve. For a financial asset reclassified out of the available-for-sale category, any previous gain or loss on that asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the effective interest rate ("EIR"). Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired then the amount recorded in equity is reclassified to the income statement. As for impairment of financial assets – see section G.1 below. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

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

|   | The fair value of foreign currency forward contracts is estimated on the basis of quotes of banks/brokers or on the basis of the discounted difference between the forward price specified in the contract and the present forward price in respect of the remaining period to maturity of the contract, while using a risk-free interest rate usually based on government debentures. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

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

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

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

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

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

|   | The cost includes expenditures that are directly attributable to acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to the place and condition required for them to function in the manner intended by management. The cost of purchased software that is integral to the functioning of the related equipment is capitalized to the cost of that equipment. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | An item of property, plant and equipment that was purchased in consideration for another non-monetary item in a transaction having a commercial substance is measured at fair value. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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----

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

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

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

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

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

|   | Depreciation is recognized in the statement of income on a straight-line basis over the estimated useful lives of each part of an item of the property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The estimated useful lives for the current and comparative periods are as follows: |
|--------|------------------------------------------------------------------------------------|

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

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

|   | The estimates regarding the depreciation method, useful life and residual value are reexamined at least at the end of each fiscal year. Depreciation of the assets is discontinued at the earlier of the date on which the asset is classified as held for sale or date on which the asset is eliminated. An asset is eliminated from the financial statements on the date of sale or when economic benefits are no longer expected from use of the asset. Gain or loss from disposition of the asset (calculated as the difference between the net proceeds from disposition and the depreciated cost in the financial statements) is included in the statement of income in the period the asset is disposed of. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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----

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

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

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

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

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

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

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

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

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

|   | Development activities are activities relating to a plan for the creation of new products or processes or the significant improvement of existing products or processes. Expenditures in respect of development activities are recognized as an intangible asset only if all the following exist: the development costs can be reliably measured; the product or process is technically and commercially feasible; future economic benefits from the product are probable; and the Company intends to and has sufficient resources to complete the development and to use or sell the asset. The costs recognized as an intangible asset include the cost of the materials, direct labor and overhead costs that can be directly attributed to preparation of the asset for its intended use. Other development expenditures are recognized in the statement of income as incurred. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | a. | Intangible assets are presented at cost and include direct costs required in order to place the assets into service. Intangible assets acquired in a business combination are included at the fair value at the acquisition date. After initial recognition, intangible assets are carried at their cost less any accumulated amortization (other than intangible assets having an indefinite useful life) and any accumulated impairment losses. Expenditures relating to internally generated intangible assets, excluding capitalized development costs, are recognized in the statement of income when incurred. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Subsequent expenditures are capitalized as an intangible asset only when they increase the future economic benefits embodied in the specific asset for which they were expended. All other expenditures, including expenditures relating to goodwill and intangibles developed independently, are recognized in the statement of income as incurred. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

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----

|   | Inventory is measured at the lower of cost or net realizable value. The cost of the inventory includes the expenses for acquisition of the inventory and bringing it to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and executing the sale. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Raw materials    | – | based on acquisition cost using the "first-in, first-out" method.                                          |
|------------------|---------|------------------------------------------------------------------------------------------------------------|
|             |    |                                                                                                       |
| Work in progress | – | On the basis of average cost including materials, labor and other direct and indirect production expenses. |
|             |    |                                                                                                       |
| Finished goods   | – | On the basis of average cost including materials, labor and other direct and indirect production expenses. |

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

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

|   | For financial assets carried at amortised cost the Company first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

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

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

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

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

|   | A non-current asset or disposal group is classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the assets must be available for immediate sale in their present condition, the Company must be committed to sell, there must be a plan to locate a buyer and it is highly probable that a sale will be completed within one year from the date of classification. These assets are not depreciated and are presented separately as current assets in the balance sheet, at the lower of their carrying amount and fair value less costs to sell. If the carrying amount is higher than the fair value less costs to sell, an impairment loss is recognized for the asset (or the group of assets) to the extent of the difference. Simultaneously, liabilities associated with these assets are presented separately in the balance sheet in a similar manner. Also, the related other comprehensive income (loss) is presented separately in the statement of changes in equity. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

|   | The Company has a number of post-employment benefit plans. The plans are usually financed by deposits with insurance companies or with funds managed by a trustee, and they are classified as defined contribution plans and defined benefit plans. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | Some of the subsidiaries have defined contribution plans, in accordance with Section 14 of the Severance Pay Law, whereby the subsidiaries make regular payments therein without it being legally or constructively liable to make additional payments even if sufficient amounts are not accumulated in the fund to pay all the benefits due to an employee relating to his service in the current and prior periods. Deposits in defined contribution plans in respect of severance pay or annuities, are recognized as an expense at the time the deposit is due to the plan concurrent with receipt of the services from the employee and no further provision is required in the consolidated financial statements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

----

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

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

|   | The fair value of employee options on the grant date is recognized as salary expense, with a corresponding increase in retained earnings, over the period that the employees become entitled to the options. The amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest. Share-based payments that were granted before November 7, 2002 or that vested before January 1, 2007 (the date of DIC’s transition to IFRS, see additional details in the beginning of Note 2 above), are not accounted for retroactively, in accordance with IFRS 2 and the relief adopted pursuant to IFRS 1. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

----

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

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

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

|   | Abovementioned discounts are fixed discounts that do not depend on the volume of purchases (this discount is calculated as a fixed percentage of the purchases made from the supplier or as an annual fixed amount that does not depend on the volume of purchases) and they are included in the consolidated financial statements upon the execution of the proportionate purchases that entitle the Company to the said discounts. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

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

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

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

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

|   | A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. The deferred tax assets are reviewed at every balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Simultaneously, temporary differences (such as carryforward losses) for which deferred tax assets have not been recognized are reassessed and deferred tax assets are recognized to the extent that their recoverability has become probable. Any resulting reduction or reversal is recognized in the item taxes on income. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | Government grants are recognized where there is reasonable assurance that the grant will be received and the Company will comply with the attached conditions. Up to December 31, 2008, government grants received from the Office of the Chief Scientist in Israel (“OCS”), in respect of support of research and development activities, which include a commitment for royalty payments to the State of Israel that are contingent on execution of future sales deriving from the development, were recognized as a liability and a loan received from the government bearing no interest or interest lower than market interest rate was accounted for upon the initial recognition thereof and in subsequent periods if it was expected that economic benefits stemming from the research and development activities will lead to sales entitling the State to royalties. Amounts paid as royalties were recorded as repayment of the liability. The difference between the amount of the loan received and the fair value is accounted for as a government grant in accordance with the provisions of IAS 20 (i.e., recognized as income in direct relation to expenses attributable to the approved grant) Where economic benefits, as stated, were not expected, the grant receipts were recognized as a reduction in the research and development expenses in the statement of income in accordance with the provisions of IAS 20 (i.e., recognized as income in direct relation to expenses attributable to the approved grant). In such a case, the liability to pay royalties was accounted for as a contingent liability pursuant to IAS 37 until such liability is recognized. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

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

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

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

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

----

----

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

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

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

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

----

----

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

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

|   | - | The definition of a business was broadened so that it contains also activities and assets that are not managed as a business as long as the seller is capable of operating them as a business. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | IFRS 3 currently prescribes that goodwill, as opposed to the acquiree's other identifiable assets and liabilities, will be measured as the excess of the cost of the acquisition over the acquirer's share in the fair value of the identifiable assets, net on the acquisition date. According to the Standards, non-controlling interests, including goodwill, can be measured either at fair value or at the proportionate share of the acquiree's fair value of net identifiable assets, this is measured separately in respect of each business combination transaction. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Contingent consideration in a business combination is measured at fair value and changes in the fair value of the contingent consideration, which do not represent adjustments to the acquisition cost in the measurement period, are not simultaneously recognized as goodwill adjustments. If the contingent consideration is classified as a financial liability it will be measured at fair value through profit or loss. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Direct acquisition costs attributed to a business combination transaction are recognized in the statement of income as incurred as opposed to the previous requirement of carrying them as part of the consideration of the cost of the business combination, which has been removed. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Subsequent measurement of a deferred tax asset for acquired temporary differences which did not meet the recognition criteria at acquisition date will be against profit or loss and not as adjustment to goodwill. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | - | A subsidiary's losses, even if resulting in a capital deficiency in a subsidiary, will be allocated between the parent company and non-controlling interests, even if the non-controlling interest has not guaranteed or has no contractual obligation for sustaining the subsidiary or of investing further amounts. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | - | On the loss or achievement of control of a subsidiary, the remaining investment, if any, will be revalued to fair value against gain or loss from the sale and this fair value will represent the cost basis for the purpose of subsequent treatment. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In November 2009, the IASB issued IFRS 9, "Financial Instruments", which represents the first phase of a project to replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | According to IFRS 9, upon initial recognition, all the financial assets (including hybrid contracts with financial asset hosts) will be measured at fair value. In subsequent periods, debt instruments can be measured at amortized cost if both of the following conditions are met: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------|

|   | - | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Subsequent measurement of all other debt instruments and financial assets will be at fair value. |
|--------|--------------------------------------------------------------------------------------------------|

|   | Financial assets that are equity instruments will be measured in subsequent periods at fair value and the changes will be recognized in the statement of income or in other comprehensive income (loss), in accordance with the election of the accounting policy on an instrument-by-instrument basis. Nevertheless, if the equity instruments are held for trading, they must be measured at fair value through profit or loss. This election is final and irrevocable. When an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. In all other circumstances, reclassification of financial instruments is not permitted. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The standard will be effective starting January 1, 2013. Earlier application is permitted. Early adoption will be made with a retrospective restatement of comparative figures, subject to the reliefs set out in the Standard. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

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

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

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

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

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

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

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

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

|   | According to the amendment to IFRS 5, when the parent decides to sell part of its interest in a subsidiary so that after the sale the parent retains a non-controlling interest, such as rights conferring to significant influence, all the assets and liabilities attributed to the subsidiary will be classified as held for sale if the relevant criteria of IFRS 5 are met, including the presentation as a discontinued operation. Further, an additional amendment specifies the disclosures required in respect of non-current assets (or disposal groups) that are classified as held for sale or discontinued operations. Pursuant to the amendment, only the disclosures required in IFRS 5 will be provided. Disclosures in other IFRSs apply to such assets only if they require specific disclosures in respect of non-current assets or disposal groups. The amendment will be prospectively adopted starting from the financial statements for periods beginning on January 1, 2010. Earlier application is permitted. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

----

----

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

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

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

|   |   | On June 13, 2007, Starling, then a 72.5% subsidiary of Elron, completed an initial public offering on the Tel Aviv Stock Exchange (TASE) in Israel of shares and convertible securities (convertible, bearing annual 6% interest  and NIS, ("New Israeli Shekels") Israeli CPI linked debentures ("Convertible Debentures")) and options to purchase the Convertible Debentures ("Convertible Debentures Options") in consideration for aggregate gross proceeds of approximately NIS 57,000 (approximately $14,000). An amount of approximately $12,100 (amount denominated in NIS) proceeds from the issuance of the Convertible Debentures and from the exercise of some of the Convertible Debentures Options ("Debentures Proceeds") were restricted and were to be released from the restrictions and used by Starling upon achieving certain milestones, no later than November 30, 2008. In December 2008 the Convertible Debentures Proceeds were released. Elron invested approximately $4,000 as part of the offering in consideration for 619,700 ordinary shares, 8,675,800 Convertible Debentures and 86,758 Convertible Debentures Options, which later expired. In addition, immediately prior to the offering, existing shareholders of Starling, including Elron and its subsidiary, RDC, converted shareholder loans in the amount of approximately $6,500 into 6,488,783 ordinary shares and 393,126 Convertible Debentures Options, which later expired. Immediately following the offering, Elron's consolidated holdings (directly and through RDC) in Starling's outstanding shares decreased from 72.5% to approximately 68%. Since Elron still has control over Starling, Elron continues to account for Starling as a consolidated subsidiary. During October 2008 Elron purchased 7,638,323 Convertible Debentures in private transactions and additional 10,139,455 as a part of partial tender offer for a total amount of approximately $2,000 and $2,400, respectively. Subsequent to the abovementioned transactions, Elron and RDC beneficially owns 26,453,578 out of a total of 42,364,000 outstanding Convertible Debentures which represent approximately 62% of the outstanding Convertible Debentures. In May 2009, Elron and RDC signed a loan agreement ("the First Loan Agreement") in the aggregate amount of $2,600 which was advanced to Starling in two installments. The first installment in the amount of $1,400 (of which Elron's share is approximately $650) was advanced during June 2009. The second installment in the amount of $1,200 (of which Elron's share is approximately $560) was advanced during July 2009. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

|   | In March, 2008, Elron extended an investment in the amount $6,000 to Impliant as part of an aggregate investmnet of $10,000 in two installments. The first installment in the amount of $5,000 was granted immediately and the second installment was granted in June 2008 following Impliant's achievement of a certain milestone as stipulated in the loan agreement. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

----

----

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

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

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

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

----

----

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

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

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

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

----

----

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

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

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

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

|   | Sela Semiconductor Engineering Laboratories Ltd. ("Sela") is an Israeli company engaged in the development and manufacture of equipment for increasing automated production for the semiconductor industry and optical components. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

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

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

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

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

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

|   | 3DV Systems Ltd. ("3DV") was an Israeli company that developed a unique video camera technology capable of capturing the depth dimension of objects in real time. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On June 2, 2009, 3DV completed the sale of substantially all of its assets to a third party and declared voluntary liquidation. In consideration for the sale and following the payment of certain expenses, proceeds to be distributed to Elron and RDC are expected to amount of approximately $3,600 and $4,400, respectively. During June-July 2009, 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds, in the aggregate amount of approximately $18,800, of which the shares of Elron and RDC were approximately $3,100 and $3,700, respectively. As a result of the sale of 3DV’s assets, the Company recorded a gain of $6,090 that was recorded as gain from disposal of associate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

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

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

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

|   | On March 10, 2009 and on August 12, 2009, NetVision declared a special cash dividend of approximately NIS 3.08 and NIS 0.86 per share, respectively (approximately $0.73 and $0.23, respectively), or NIS 90 million and NIS 26 million, respectively (approximately $21,200 and $7,000, respectively), in the aggregate, of which the Company’s share was approximately NIS 14.2 and NIS 4 million, respectively (approximately $3,300 and $1,048, respectively, as of date of payment). Payments of these dividends took place on April 7, 2009 and on September 9, 2009, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The selling price was determined by negotiations between the parties based on a valuation received from an independent appraiser jointly appointed by the parties, and further supported by a fairness opinion by an independent party, which was retained by Elron for such purpose, which concluded that the purchase price is fair and reasonable, from a financial point of view, to Elron's public shareholders. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

----

----

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

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

|   | a. | Discounted Future Earnings Method- This methodology was used in valuing the shares as of the balance sheet date because the investees were able to provide projections for their future cash flows. In addition, it was deemed not unreasonable that market participants or other investors would use this methodology to determine the value of these shares. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Company Security Transaction Method ("CSTM") – according to the CSTM method the value of each entity was estimated based upon recent transactions in the entity's securities. For these transactions to be relied upon to develop an estimate of fair value, they must be arms length transactions. Additional factors considered in this analysis include: size, amount and type of shares sold; the timing of the transaction relative to the estimation date; differences in the rights, preferences, marketability, control of the transaction securities and the subject securities; volatility with the investee's projections and the volatility of comparable firms. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

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

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

----

----

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

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

----

----

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

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

----

----

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

|   | 1. | In 2008, RDC signed an agreement with a commercial bank in Israel ("the Bank"), whereby the Bank will provide RDC a credit line in the total amount of up to $10,000 ("the Credit Line Agreement"), to be utilized no later than August 30, 2009. The interest on each loan pursuant to the Credit Line Agreement is Libor + 4%, and is payable quarterly. Repayment of the principal of each loan is after 24 months from the first withdrawal. With respect to every amount not utilized during the period of the Credit Line Agreement, RDC will pay a non-utilization fee at the annual rate of 0.5%. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The loans provided in accordance with the Credit Line Agreement ("the RDC Loans") are secured by a fixed, first priority lien on all the shares of Given held by RDC at the rate of 200% of the actual balance of the loans, as will be adjusted pursuant to the Credit Line Agreement. In addition, the RDC Loans are secured by a first priority floating charge on all its assets in favor of the Bank. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

----

----

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

----

----

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

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

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

----

----

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

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

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

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

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

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

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

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

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

----

----

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

|   | 1. | Company's options plans (Cont.) In May 2007, following approval of the Company's Audit Committee, Board of Directors and Shareholders the current chairman of the Board of Directors of the Company was granted options to purchase 120,000 ordinary shares of the Company under the 2003 option plan. The options vest over a period of four years from the date of grant, in four equal annual portions. The options are exercisable at a price per share of $15.53. As of the grant date, the weighted average fair value was $5.8 per share. The fair value was calculated using the Black & Scholes option pricing model. In March 2008, the Company's Board of Directors decided to extend the validity of certain options that were scheduled to expire in 2008 and 2009 based on their original terms (113,750 options that had not yet been paid as of that date), for a period of three additional years from the original expiration date. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

----

----

|   | A. | In September 1999, a shareholder of Elscint Ltd. ("Elscint"), a subsidiary of Elbit Medical Imaging Ltd. ("Elbit Imaging"), which was a group company of Elron up to May 1999, filed a claim with the District Court of Tel-Aviv Jaffa, along with a request for certification thereof as a class action on behalf of the public shareholders of Elscint, against various defendants, including Elscint, Elbit Imaging, Elron and former directors of Elscint. The claim alleges, primarily, that in the sale of Elscint's assets, which was finalized in 1998, Elscint's minority shareholders were prejudiced, and it requests that the Court order the defendants to pay monetary compensation based on the claim that the value of the Elscint share was $27. In October 1999, the plaintiff amended his claim and according to the amended claim the total amount of the class action (if certified) was estimated by the plaintiff to be about $158 million or alternatively about $123 million. On March 31, 2009, the court approved the defendants application to dismiss certain claims while others still remain. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | In November 1999, a number of institutional shareholders of Elscint filed a claim in the District Court of Haifa, together with a request for its certification in part as a class action on behalf of the public shareholders of Elscint and in part as a derivative action against various defendants, including Elscint, Elbit Imaging, Elron, companies to which Elron sold its holdings in Elbit Imaging in May 1999, and certain officers in the defendant companies. The claim alleges, mainly, that Elbit Imaging is duty bound to make a tender offer for the shares of Elscint held by the public and that it unlawfully refuses to do so and, in addition, it raises allegations of preference of the interests of the defendants over those of Elscint and its public shareholders with respect to a number of transactions involving Elscint that the plaintiffs allege discriminated against Elscint's public shareholders. The relief requested in the claim, is the ordering of Elbit Imaging to make a tender offer for the publicly held shares of Elscint at a price of $14 per share or, alternatively, to require the defendants to compensate Elscint's public shareholders or Elscint itself for the damage the plaintiffs allege were caused to them by the defendants' actions, without actually indicating any amount of damages in the said claim. In February 2001, the plaintiffs filed an amended statement of claim with the Court that is similar to the previous one but that is not a class action rather a personal claim of the plaintiffs and in part a derivative action. In June 2007 the plaintiffs submitted to the Haifa District Court a revised statement of claim and a revised request to certify the claim as a class action. The revised claim requests relief of monetary compensation in respect of damages caused by the failure to make the tender offer for Elscint's shares and other matters as alleged by the plaintiffs, but does not request relief of enforcing the tender offer for Elscint's shares that was included in the original claim. The revised claim does not specify the amount demanded but includes various arguments regarding the method of determining the damages caused to the plaintiffs, which depends, inter alia, on the specific circumstances of each individual shareholder of Elscint and the nature of the alleged damages. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

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

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

|  (2) |  As mentioned in Note 2 above, when the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any other long-term investments such as loans) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Company has an obligation to support the investee or has made payments on behalf of the investee, or has committed to grant it loans or guarantees. As of December 31, 2009, the aggregate equity in losses not recognized by the Company amounted to a total of $ 3,650 ($ 4,310 as of December 31, 2008 and none as of January 1, 2008). |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

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

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

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

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

----

----

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

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

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

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

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

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

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

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

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

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

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

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

----

----

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

----

----

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

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

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

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

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

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

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

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

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

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

----

----

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

|   | The Company’s principal financial liabilities, other than derivatives, comprise of loans and borrowings, trade and other payables, and financial guarantee contracts. The main purpose of these financial liabilities is to raise finances for the Company’s and group companies operations. The Company has loan and other receivables, trade and other receivables, and cash and short-term deposits that derive directly from its operations. The Company also holds available-for-sale investments, and occasionally enters into derivative transactions (mainly with respect to foregin currency hedge). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | 1. | Market risk – Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: interest rate risk, currency risk and other price risk, such as equity risk. Financial instruments affected by market risk include loans and borrowings, deposits, available-for-sale investments and derivative financial instruments. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In addition, the Company is exposed to the impact of exchange rates on the activities of group companies whose functional currency is the NIS. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company holds a significant portion of its cash balances in U.S. dollars, although in the future the amounts of these balances, the format of the holding thereof, and the allocation of their different currencies may change, from time to time, based on the business developments and according to the Company’s decision. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

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

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

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

|   | 2. | Credit risk – the Company does not have significant concentrations of credit risk. The Company holds cash and cash equivalents, short-term and long-term investments and other financial instruments in various financial institutions. The Company's policy is spreading out its cash investments among the various institutions. Pursuant to the Company's policy, assessments are made on an ongoing basis regarding the relative credit strength of the various financial institutions. As of December 31, 2009, the cash and cash equivalents amounted to $64,747. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Liquidity risk – the Company's policy for managing its liquidity is to assure, to the extent possible, that it will have sufficient liquidity to settle its liabilities on a timely manner and to ascertain the existence of the cash balances it requires to comply with its financial obligations. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009, Trade receivables are attributed to sales by a subsidiary. The subsidiary’s credit policy is aimed at ensuring that its products are sold to customers who maintain a satisfactory credit history. Sales are executed in cash or via letters of credit, with the client receiving credit only after having proved its ability to make payments over a period of time. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The subsidiary regularly assesses its customers' credit, while checking their general financial conditions. If necessary, the subsidiary recorded provisions for doubtful debts, based on factors which impact the credit risk of various customers, past experience and any other relevant information. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Market risks |
|--------|----|--------------|

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

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

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

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

----

----

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

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

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

|   | A change in the interest rates on the balance sheet date would increase (decrease) the equity and the anticipated annual income or loss by the theoretical amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect of December 31, 2008 and January 1, 2008 was prepared under the same assumptions. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

----

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

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

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

|   | A change in the exchange rate of the following currencies as of December 31, 2009 and a change in the CPI would increase (decrease) the Company's equity and income or loss in the amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect of December 31, 2008 and January 1, 2008 was prepared under the same assumptions. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

----

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

|                                   |   | December 31, 2009 |   |   | December 31, 2008 |   |
|----------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                   |   |              |   |   |              |   |   | Interest |   |   |   |   |   |   |   |   | Interest |   |
|                                   |   |              |   |   |              |   |   | rate |   |   |   |   |   |   |   |   | Rate |   |
|                                   |   |              |   |   |              |   |   | used to |   |   |   |   |   |   |   |   | used to |   |
|                                   |   |              |   |   |              |   |   | calculate |   |   |   |   |   |   |   |   | Calculate |   |
|                                   |   |              |   |   |              |   |   | the |   |   |   |   |   |   |   |   | The |   |
|                                   |   | Carrying          |   |   | Fair              |   |   | fair |   |   | Carrying |   |   | Fair |   |   | Fair |   |
|                                   |   | amount            |   |   | value             |   |   | value |   |   | amount |   |   | value |   |   | Value |   |
|                                   |   | $ thousands       |   |
|                                   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term loans from bank and others*  |   |              | 36,981 |   |              |   | 36,141 |   |   |   | 2.85% - 3.99 | % |   |   | 35,141 |   |   |   | 34,912 |   |   |   | 3.19 | % |
| Long-term loans from a shareholder*,** |   |              | 16,737 |   |              |   | 18,229 |   |   |   | 2.5 | % |   |   |   |   |   |   |   |   |   |   |   |   |
|                                   |   |              | 53,718 |   |              |   | 54,370 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

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

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

|   | During 2009, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|                                                                                                                                                                    |   | Available-for-sale financial assets |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                                                                    |   | $ thousands                         |   |
|                                                                                                                                                                    |   |                                |   |
|           Balance as of January 1, 2009                                                                               |   |                                | 6,703  |   |
|                                                                                                                                                                    |   |                                |   |   |
|           Total recognized gains (losses):                                                                            |   |                                |   |   |
|           In profit or loss                                                                                           |   |                                | (567   | ) |
|           In other comprehensive income                                                                               |   |                                | 4,906  |   |
|           Addition resulted from loss of significant influence in associate                                           |   |                                | 1,472  |   |
|                                                                                                                                                                    |   |                                |   |   |
|           Balance as of December 31, 2009                                                                             |   |                                | 12,514 |   |
|                                                                                                                                                                    |   |                                |   |   |
|           Total loss for the year included in profit or loss relating to assets held at the end of the reporting year |   |                                | (567   | ) |

|   | F. | Liquidity risk |
|--------|----|----------------|

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

|                                         |   | December 31, 2009 |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | Total             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   | projected         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                         |   | cash              |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                         |   | flows*            |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                         |   | $ thousands       |   |
|                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                               |   |              | 4,273  |   |   |   | 4,273 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other financial payables and credit balances |   |              | 8,367  |   |   |   | 8,125 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 242 |   |
| Convertible Debentures                       |   |              | 5,461  |   |   |   | 1,453 |   |   |   | 1,383 |   |   |   | 1,383 |   |   |   | 1,242 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Loans from banks and others                  |   |              | 49,598 |   |   |   | 12,242 |   |   |   | 37,356 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| A loan from Shareholder                      |   |              | 18,111 |   |   |   | - |   |   |   | 18,111 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |              | 9,116  |   |   |   | 431 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,685 |   |
|                                         |   |              | 94,926 |   |   |   | 26,524 |   |   |   | 56,580 |   |   |   | 1,383 |   |   |   | 1,242 |   |   |   | - |   |   |   | - |   |   |   | 8,927 |   |

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

----

----

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

|                                         |   | December 31, 2008 |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | Total             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   | projected         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                         |   | cash              |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                         |   | flows*            |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                         |   | $ thousands       |   |
|                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                               |   |              | 3,829  |   |   |   | 3,829 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other financial payables and credit balances |   |              | 11,904 |   |   |   | 11,754 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 150 |   |
| Convertible Debentures                       |   |              | 5,426  |   |   |   | 269 |   |   |   | 1,390 |   |   |   | 1,323 |   |   |   | 1,256 |   |   |   | 1,188 |   |   |   | - |   |   |   | - |   |
| Loans from banks and others                  |   |              | 36,274 |   |   |   | 2,482 |   |   |   | 1,425 |   |   |   | 32,367 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| A loan from Shareholder                      |   |              | 7,232  |   |   |   | - |   |   |   | - |   |   |   | 7,232 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |              | 9,097  |   |   |   | 283 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,814 |   |
|                                         |   |              | 73,762 |   |   |   | 18,617 |   |   |   | 2,815 |   |   |   | 40,922 |   |   |   | 1,256 |   |   |   | 1,188 |   |   |   | - |   |   |   | 8,964 |   |

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

|                                         |   | January 1, 2008 |   |
|----------------------------------------------|--------|-----------------|--------|
|                                         |   | Total           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |   | projected       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                         |   | cash            |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                         |   | flows*          |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                         |   | $ thousands     |   |
|                                         |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                               |   |            | 3,236  |   |   |   | 3,236 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other financial payables and credit balances |   |            | 8,907  |   |   |   | 8,907 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Convertible Debentures                       |   |            | 7,551  |   |   |   | 350 |   |   |   | 357 |   |   |   | 1,845 |   |   |   | 1,755 |   |   |   | 1,667 |   |   |   | 1,577 |   |   |   | - |   |
| Loans from banks and others                  |   |            | 5,717  |   |   |   | 3,431 |   |   |   | 224 |   |   |   | 48 |   |   |   | 2,014 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants            |   |            | 5,453  |   |   |   | 209 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 5,244 |   |
|                                         |   |            | 30,864 |   |   |   | 16,133 |   |   |   | 581 |   |   |   | 1,893 |   |   |   | 3,769 |   |   |   | 1,667 |   |   |   | 1,577 |   |   |   | 5,244 |   |

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

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

----

----

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

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

----

----

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

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

----

----

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

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

----

----

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

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

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

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

----

----

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

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

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

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

----

----

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

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

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

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

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

----

----

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

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

----

Elron 

----

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

----

----

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

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

----

----

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

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

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

----

| Given Imaging Ltd.and its Subsidiaries ConsolidatedFinancial Statements As of and for theYear Ended December 31, 2009 |
|---------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                |  Page      |
|-----------------------------------------------------------------------------------------------------|-----------------|
| Report of Independent Registered Public Accounting Firm                                        | G - 2      |
|                                                                                                |            |
| Consolidated Balance Sheets                                                                    | G - 3 |
|                                                                                                |            |
| Consolidated Statements of Operations                                                               | G - 5      |
|                                                                                                |            |
| Consolidated Statements of Changes in Shareholders’ Equity and Non-Controlling interests | G - 6           |
|                                                                                                |            |
| Consolidated Statements of Cash Flows                                                          | G - 7           |
|                                                                                                |            |
| Notes to the Consolidated Financial Statements                                                      | G - 8           |

----

Report of Independent Registered Public Accounting Firm

----

Consolidated Balance Sheets

|                                                |   |   |       |    | December 31, |   |
|-----------------------------------------------------|--------|--------|------------|---------|--------------|--------|
|                                                |   | Note   |       |    | 2009         |   |   | 2008 |   |
|                                                |   |   |       |    |         |   |   |   |   |
| Assets                                              |   |   |       |    |         |   |   |   |   |
|                                                |   |   |       |    |         |   |   |   |   |
| Current assets                                      |   |   |       |    |         |   |   |   |   |
| Cash and cash equivalents                           |   |   | 1D; 2      |    |         | $      | 46,458 |   |   | $ | 31,697 |   |
| Short-term investments                              |   |   | 1H; 5      |    |         |   | 31,736 |   |   |   | 28,509 |   |
| Accounts receivable:                                |   |   |       |    |         |   |   |   |   |   |   |   |
|  Trade, net                                    |   |   | 1E         |    |         |   | 24,742 |   |   |   | 21,673 |   |
|  Other                                         |   |   | 3          |    |         |   | 3,799 |   |   |   | 4,662 |   |
| Inventories                                         |   |   | 1F; 4      |    |         |   | 17,302 |   |   |   | 18,931 |   |
| Advances to suppliers                               |   |   |       |    |         |   | 534 |   |   |   | 3,540 |   |
| Deferred tax assets                                 |   |   | 1Q; 14D    |    |         |   | 2,207 |   |   |   | 1,178 |   |
| Prepaid expenses                                    |   |   |       |    |         |   | 1,036 |   |   |   | 1,631 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Total current assets                                |   |   |       |    |         |   | 127,814 |   |   |   | 111,821 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Deposits                                            |   |   |       |    |         |   | 1,062 |   |   |   | 1,094 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Assets held for employees’ severance payments |   |   | 1G; 10     |    |         |   | 4,968 |   |   |   | 3,686 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Marketable securities                               |   |   | 1H; 5      |    |         |   | 16,956 |   |   |   | 30,063 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Non-current inventory                               |   |   | 1F; 4      |    |         |   | 6,015 |   |   |   | - |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Fixed assets, less accumulated depreciation         |   |   | 1I; 6      |    |         |   | 13,843 |   |   |   | 15,115 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Deferred tax assets                                 |   |   | 1Q; 14D    |    |         |   | 192 |   |   |   | - |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Intangible assets less accumulated amortization     |   |   | 1J; 7; 16  |    |         |   | 11,284 |   |   |   | 12,067 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Goodwill                                            |   |   | 1K; 16; 17 |    |         |   | 3,586 |   |   |   | 4,069 |   |
|                                                |   |   |       |    |         |   |   |   |   |   |   |   |
| Total Assets                                        |   |   | $          | 185,720 |         |   | $ | 177,915 |   |

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

----

|                                                                                                                                                                                                         |   |   |   |   | December 31, |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------------|--------|
|                                                                                                                                                                                                         |   | Note   |   |   | 2009         |   |   | 2008 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |
| Liabilities and shareholders' equity                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |
| Current liabilities                                                                                                                                                                                          |   |   |   |   |         |   |   |   |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |
| Current installments of obligation under capital lease                                                                                                                                                       |   |   | 8B     |   |         | $      | 145 |   |   | $ | 114 |   |
| Accounts payable:                                                                                                                                                                                            |   |   |   |   |         |   |   |   |   |   |   |   |
|   Trade                                                                                                                                                                                            |   |   |   |   |         |   | 6,789 |   |   |   | 7,418 |   |
|   Other                                                                                                                                                                                            |   |   | 9      |   |         |   | 20,060 |   |   |   | 17,612 |   |
| Deferred income                                                                                                                                                                                              |   |   |   |   |         |   | 234 |   |   |   | 1,523 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Total current liabilities                                                                                                                                                                                    |   |   |   |   |         |   | 27,228 |   |   |   | 26,667 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Long-term liabilities                                                                                                                                                                                        |   |   |   |   |         |   |   |   |   |   |   |   |
| Obligation under capital lease                                                                                                                                                                               |   |   | 8B     |   |         |   | 356 |   |   |   | 485 |   |
| Liability in respect of employees’ severance payments                                                                                                                                                  |   |   | 10     |   |         |   | 5,530 |   |   |   | 4,599 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Total long-term liabilities                                                                                                                                                                                  |   |   |   |   |         |   | 5,886 |   |   |   | 5,084 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Total liabilities                                                                                                                                                                                            |   |   |   |   |         |   | 33,114 |   |   |   | 31,751 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Commitments and contingencies                                                                                                                                                                                |   |   | 8      |   |         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Equity                                                                                                                                                                                                       |   |   |   |   |         |   |   |   |   |   |   |   |
| Shareholders` equity:                                                                                                                                                                                        |   |   | 11     |   |         |   |   |   |   |   |   |   |
| Ordinary Shares, NIS 0.05 par value each(90,000,000 shares authorized as of December 31, 2008 and 2009,29,257,785 and 29,370,972 shares issued and fullypaid as of December 31, 2008 and 2009, respectively) |   |   |   |   |         |   | 345 |   |   |   | 343 |   |
| Additional paid-in capital                                                                                                                                                                                   |   |   |   |   |         |   | 182,203 |   |   |   | 173,983 |   |
| Capital reserve                                                                                                                                                                                              |   |   |   |   |         |   | 2,166 |   |   |   | 2,166 |   |
| Accumulated other comprehensive income (loss)                                                                                                                                                                |   |   |   |   |         |   | 399 |   |   |   | (600 | ) |
| Accumulated deficit                                                                                                                                                                                          |   |   |   |   |         |   | (33,185 | ) |   |   | (31,721 | ) |
| Shareholders` equity                                                                                                                                                                                         |   |   |   |   |         |   | 151,928 |   |   |   | 144,171 |   |
| Non-controlling interests                                                                                                                                                                                    |   |   |   |   |         |   | 678 |   |   |   | 1,993 |   |
| Total equity                                                                                                                                                                                                 |   |   |   |   |         |   | 152,606 |   |   |   | 146,164 |   |
|                                                                                                                                                                                                         |   |   |   |   |         |   |   |   |   |   |   |   |
| Total liabilities,  shareholders’ equity and non-controlling interests                                                                                                                       |   |   |   |   |         | $      | 185,720 |   |   | $ | 177,915 |   |

----

Consolidated Statements of Operations

|                                                                                           |   |   |     |   | Year ended December 31, |   |
|------------------------------------------------------------------------------------------------|--------|--------|----------|--------|-------------------------|--------|
|                                                                                           |   | Note   |     |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                       |   |   | 1O; 12   |   |                    | $      | 141,763 |   |   | $ | 125,108 |   |   | $ | 112,868 |   |
| Cost of revenues                                                                               |   |   |     |   |                    |   | (33,145 | ) |   |   | (33,001 | ) |   |   | (29,721 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Early repayment of royalty bearing government Grants                                      |   |   | 8A       |   |                    |   | - |   |   |   | - |   |   |   | (4,843 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                                   |   |   |     |   |                    |   | 108,618 |   |   |   | 92,107 |   |   |   | 78,304 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                                                             |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Research and development, gross                                                                |   |   | 1R       |   |                    |   | (17,842 | ) |   |   | (15,126 | ) |   |   | (12,847 | ) |
|  In-process research and development acquired in a business combination                   |   |   | 16       |   |                    |   | - |   |   |   | (4,700 | ) |   |   | - |   |
|                                                                                           |   |   |     |   |                    |   | (17,842 | ) |   |   | (19,826 | ) |   |   | (12,847 | ) |
| Government grants                                                                              |   |   | 1P; 8A   |   |                    |   | 1,109 |   |   |   | 1,530 |   |   |   | 1,242 |   |
| Research and development, net                                                                  |   |   |     |   |                    |   | (16,733 | ) |   |   | (18,296 | ) |   |   | (11,605 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                            |   |   |     |   |                    |   | (61,428 | ) |   |   | (60,902 | ) |   |   | (55,446 | ) |
| General and administrative                                                                     |   |   |     |   |                    |   | (18,919 | ) |   |   | (19,320 | ) |   |   | (20,981 | ) |
| Termination of marketing agreement                                                             |   |   | 8C       |   |                    |   | - |   |   |   | 5,443 |   |   |   | 22,860 |   |
| Other, net                                                                                     |   |   | 6; 7; 17 |   |                    |   | (1,220 | ) |   |   | (867 | ) |   |   | (422 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Total operating expenses                                                                       |   |   |     |   |                    |   | (98,300 | ) |   |   | (93,942 | ) |   |   | (65,594 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit (loss)                                                                        |   |   |     |   |                    |   | 10,318 |   |   |   | (1,835 | ) |   |   | 12,710 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Financial income, net                                                                          |   |   | 13       |   |                    |   | 1,584 |   |   |   | 4,004 |   |   |   | 5,520 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Profit before taxes on income                                                                  |   |   |     |   |                    |   | 11,902 |   |   |   | 2,169 |   |   |   | 18,230 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                                                                   |   |   | 1Q; 14C  |   |                    |   | 1,542 |   |   |   | (250 | ) |   |   | (4,548 | ) |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net Profit                                                                                     |   |   |     |   |                    |   | 13,444 |   |   |   | 1,919 |   |   |   | 13,682 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net loss attributable to non-controlling interest                                              |   |   |     |   |                    |   | 891 |   |   |   | 2,087 |   |   |   | 1,503 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net profit attributable to shareholders                                                        |   |   |     |   |                    | $      | 14,335 |   |   | $ | 4,006 |   |   | $ | 15,185 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share:                                                                            |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Basic Earnings per Ordinary Share                                                              |   |   | 1M       |   |                    | $      | 0.49 |   |   | $ | 0.14 |   |   | $ | 0.52 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Diluted Earnings per Ordinary Share                                                            |   |   | 1M       |   |                    | $      | 0.47 |   |   | $ | 0.13 |   |   | $ | 0.49 |   |
|                                                                                           |   |   |     |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares used to compute basic Earnings per Ordinary Share   |   |   | 1M       |   |                    |   | 29,281,897 |   |   |   | 29,254,035 |   |   |   | 28,961,968 |   |
| Weighted average number of Ordinary Shares used to compute diluted Earnings per Ordinary Share |   |   | 1M       |   |                    |   | 30,423,162 |   |   |   | 30,798,360 |   |   |   | 31,030,459 |   |

----

Shareholders’ Equity and non-controlling interests

|                                                              |   | Company’s shareholders |       |   |    |   |   |       |   |
|-------------------------------------------------------------------|--------|------------------------------|------------|--------|---------|--------|--------|------------|--------|
|                                                              |   |                         |       |   |    |   |   | Additional |   |   |   |   |   | AccumulatedOther |   |   |   |   |   |   |   |   |   |   |
|                                                              |   |                         |       |   |    |   |   | Paid-In    |   |   | Capital |   |   | Comprehensive |   |   | Accumulated |   |   | Non-controlling |   |   |   |   |
|                                                              |   | Ordinary shares              |       |   | Capital |   |   | Reserve    |   |   | Income (loss) |   |   | Deficit |   |   | interests |   |   | Total |   |
|                                                              |   | Shares                       |       |   | Amount  |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2007                                     |   |                         | 28,641,291 |   |    | $      | 335    |       |   | $ | 156,197 |   |   | $ | 2,166 |   |   | $ | - |   |   | $ | (50,912 | ) |   | $ | 3,499 |   |   | $ | 111,285 |   |
|                                                              |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2007:                                      |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                         |   |                         | 589,262    |   |    |   | 8      |       |   |   | 4,272 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,280 |   |
| Excess tax benefits related to stock based compensation           |   |                         | -          |   |    |   | -      |       |   |   | 693 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 693 |   |
| Exercise of warrants                                              |   |                         | 5,232      |   |    |   | *      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Restricted shares issued                                          |   |                         | 6,000      |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Stock based compensation                                          |   |                         | -          |   |    |   | -      |       |   |   | 5,651 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 5,651 |   |
| Net profit                                                        |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 15,185 |   |   |   | (1,503 | ) |   |   | 13,682 |   |
| Balance as of December 31, 2007                                   |   |                         | 29,241,785 |   |    |   | 343    |       |   |   | 166,813 |   |   |   | 2,166 |   |   |   | - |   |   |   | (35,727 | ) |   |   | 1,996 |   |   |   | 135,591 |   |
|                                                              |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Changes during the year 2008:                                     |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                         |   |                         | 16,000     |   |    |   | *      |       |   |   | 252 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 252 |   |
| Stock based compensation                                          |   |                         | -          |   |    |   | -      |       |   |   | 6,918 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,918 |   |
| Change in unrealized loss on available for sale securities        |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | (600 | ) |   |   | - |   |   |   | - |   |   |   | (600 | ) |
| Issuance of shares with respect to non-controlling interest       |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,084 |   |   |   | 2,084 |   |
| Net profit                                                        |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,006 |   |   |   | (2,087 | ) |   |   | 1,919 |   |
| Balance as of December 31, 2008                                   |   |                         | 29,257,785 |   |    |   | 343    |       |   |   | 173,983 |   |   |   | 2,166 |   |   |   | (600 | ) |   |   | (31,721 | ) |   |   | 1,993 |   |   |   | 146,164 |   |
| Change during the year 2009:                                      |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                         |   |                         | 113,187    |   |    |   | 2      |       |   |   | 952 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 954 |   |
| Stock based compensation                                          |   |                         | -          |   |    |   | -      |       |   |   | 7,268 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 7,268 |   |
|  Change in unrealized income on available for salesecurities |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | 999 |   |   |   | - |   |   |   | - |   |   |   | 999 |   |
| Dividend distribution                                             |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (15,799 | ) |   |   | - |   |   |   | (15,799 | ) |
| Change in noncontrolling interest                                 |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (424 | ) |   |   | (424 | ) |
| Net profit                                                        |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 14,335 |   |   |   | (891 | ) |   |   | 13,444 |   |
| Balance as of December 31, 2009                                   |   |                         | 29,370,972 |   |    | $      | 345    |       |   | $ | 182,203 |   |   | $ | 2,166 |   |   | $ | 399 |   |   | $ | (33,185 | ) |   | $ | 678 |   |   | $ | 152,606 |   |

----

Statements of Cash Flows

|                                                                                          |   | Year ended December 31, |    |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                          |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
|                                                                                          |   |                    |    |   |   |   |   |   |   |
| Cash flows from operating activities:                                                         |   |                    |    |   |   |   |   |   |   |
| Net profit                                                                                    |   | $                       | 13,444  |   |   | $ | 1,919 |   |   | $ | 13,682 |   |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Adjustments required to reconcile net profit to net cashprovided by operating activities:     |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                 |   |                    | 6,096   |   |   |   | 5,183 |   |   |   | 4,771 |   |
| In-process research and development                                                           |   |                    | -       |   |   |   | 4,700 |   |   |   | - |   |
| Goodwill impairment                                                                           |   |                    | 483     |   |   |   | 406 |   |   |   | - |   |
| Deferred tax assets                                                                           |   |                    | (1,221  | ) |   |   | 172 |   |   |   | 24 |   |
| Stock based  compensation                                                           |   |                    | 7,268   |   |   |   | 6,918 |   |   |   | 5,651 |   |
| Excess tax benefits related to stock based compensation                                       |   |                    | -       |   |   |   | - |   |   |   | (693 | ) |
| Other                                                                                         |   |                    | 570     |   |   |   | 621 |   |   |   | 380 |   |
| Decrease (increase) in accounts receivable – trade                                 |   |                    | (3,069  | ) |   |   | 1,642 |   |   |   | (4,428 | ) |
| Decrease (increase) in other accounts receivable                                              |   |                    | 863     |   |   |   | 5,723 |   |   |   | (8,922 | ) |
| Decrease (increase) in prepaid expenses                                                       |   |                    | 595     |   |   |   | (342 | ) |   |   | 51 |   |
| Decrease (increase) in advances to suppliers                                                  |   |                    | 3,006   |   |   |   | (3,350 | ) |   |   | (108 | ) |
| Decrease (increase) in inventories                                                            |   |                    | (4,386  | ) |   |   | (2,971 | ) |   |   | 2,208 |   |
| Increase (decrease) in accounts payable                                                       |   |                    | 1,819   |   |   |   | (3,287 | ) |   |   | 8,570 |   |
| Decrease in deferred income                                                                   |   |                    | (1,289  | ) |   |   | (7,856 | ) |   |   | (14,903 | ) |
| Net cash provided by operating activities                                                     |   |                    | 24,179  |   |   |   | 9,478 |   |   |   | 6,283 |   |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| Purchase of fixed assets and intangible assets                                                |   |                    | (4,794  | ) |   |   | (6,300 | ) |   |   | (5,772 | ) |
| Purchase of fixed assets, intangible assets, and goodwill in a business combination           |   |                    | -       |   |   |   | (16,660 | ) |   |   | - |   |
| Deposits                                                                                      |   |                    | 34      |   |   |   | (192 | ) |   |   | (355 | ) |
| Proceeds from sale of trading and marketable securities and  short term investments |   |                    | 38,085  |   |   |   | 67,743 |   |   |   | 23,845 |   |
| Proceeds from sales of fixed assets                                                           |   |                    | -       |   |   |   | 61 |   |   |   | - |   |
| Investments in trading and marketable securities                                              |   |                    | (27,410 | ) |   |   | (61,986 | ) |   |   | (36,584 | ) |
| Net cash provided by (used in) investing activities                                           |   |                    | 5,915   |   |   |   | (17,334 | ) |   |   | (18,866 | ) |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| Principal payments on capital lease obligation                                                |   |                    | (131    | ) |   |   | (120 | ) |   |   | (37 | ) |
| Proceeds from the issuance of Ordinary Shares                                                 |   |                    | 954     |   |   |   | 252 |   |   |   | 4,280 |   |
| Dividend distribution                                                                         |   |                    | (15,799 | ) |   |   | - |   |   |   | - |   |
| Excess tax benefits related to stock based compensation                                       |   |                    | -       |   |   |   | - |   |   |   | 693 |   |
| Purchase of shares from a noncontrolling shareholder in a subsidiary                          |   |                    | (382    | ) |   |   | - |   |   |   | - |   |
| Issuance of shares by a consolidated company                                                  |   |                    | -       |   |   |   | 2,288 |   |   |   | - |   |
| Net cash provided by (used in) financing activities                                           |   |                    | (15,358 | ) |   |   | 2,420 |   |   |   | 4,936 |   |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash                                                       |   |                    | 25      |   |   |   | 30 |   |   |   | 240 |   |
| Increase (decrease) in cash and cash equivalents                                              |   |                    | 14,761  |   |   |   | (5,406 | ) |   |   | (7,407 | ) |
| Cash and cash equivalents at beginning of year                                                |   |                    | 31,697  |   |   |   | 37,103 |   |   |   | 44,510 |   |
| Cash and cash equivalents at end of year                                                      |   | $                       | 46,458  |   |   | $ | 31,697 |   |   | $ | 37,103 |   |

|                                |   | Year ended December 31, |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Income taxes paid                   |   | $                       | 877    |   |   | $ | 259 |   |   | $ | 1,098 |   |
| Assets acquired under capital lease |   |                    | -      |   |   | $ | 109 |   |   | $ | 569 |   |

----

Financial Statements

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

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

----

----

|            |   | Year ended December 31, |   |
|-----------------|--------|-------------------------|--------|
|            |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Opening balance |   | $                       | 210    |   |   | $ | 329 |   |   | $ | 787 |   |
| Provision       |   |                    | 265    |   |   |   | 10 |   |   |   | (79 | ) |
| Write-offs      |   |                    | (223   | ) |   |   | (129 | ) |   |   | (379 | ) |
|            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Closing balance |   | $                       | 252    |   |   | $ | 210 |   |   | $ | 329 |   |

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

----

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

----

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

----

|                                                                                                         |   | Year ended December 31, |       |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                         |   | 2009                    |       |   | 2008 |   |   | 2007 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Net profit attributable to Ordinary Shares                                                                   |   | $                       | 14,335     |   |   | $ | 4,006 |   |   | $ | 15,185 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstandingused in basic earnings per Ordinary Sharecalculation   |   |                    | 29,281,897 |   |   |   | 29,254,035 |   |   |   | 28,961,968 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Add assumed exercise of outstanding dilutivepotential Ordinary Shares                                        |   |                    | 1,141,265  |   |   |   | 1,544,325 |   |   |   | 2,068,491 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstandingused in diluted earnings per Ordinary Sharecalculation |   |                    | 30,423,162 |   |   |   | 30,798,360 |   |   |   | 31,030,459 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Basic earnings per Ordinary Share                                                                            |   | $                       | 0.49       |   |   | $ | 0.14 |   |   | $ | 0.52 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Diluted earnings per Ordinary Share                                                                          |   | $                       | 0.47       |   |   | $ | 0.13 |   |   | $ | 0.49 |   |
|                                                                                                         |   |                    |       |   |   |   |   |   |   |   |   |   |
| Number of options excluded from the diluted earnings per share calculationbecause of anti-dilutive effect    |   |                    | 4,849,070  |   |   |   | 5,461,047 |   |   |   | 1,881,033 |   |

----

|   | Taxes collected from customers and remitted to governmental authorities are presented in the financial statements on a net basis. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | The Company routinely evaluates its products for inclusion of any embedded software that is more than incidental thereby requiring consideration of ASC 985-605, “Software Revenue Recognition”.  Based on such evaluation, the Company has concluded that none of its products have such embedded software. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

----

----

----

|                               |   | December 31, |   |
|------------------------------------|--------|--------------|--------|
|                               |   | 2009         |   |   | 2008 |   |
|                               |   |         |   |   |   |   |
| Denominated in U.S. dollars        |   | $            | 30,515 |   |   | $ | 18,401 |   |
| Denominated in New Israeli Shekels |   |         | 3,058  |   |   |   | 3,118 |   |
| Denominated in Euros               |   |         | 4,920  |   |   |   | 4,422 |   |
| Denominated in Australian dollars  |   |         | 1,439  |   |   |   | 277 |   |
| Denominated in Singapore dollars   |   |         | 331    |   |   |   | 216 |   |
| Denominated in Japanese Yen        |   |         | 6,195  |   |   |   | 5,263 |   |
|                               |   |         |   |   |   |   |   |   |
|                               |   | $            | 46,458 |   |   | $ | 31,697 |   |

|                    |   | December 31, |   |
|-------------------------|--------|--------------|--------|
|                    |   | 2009         |   |   | 2008 |   |
| Government institutions |   | $            | 2,397  |   |   | $ | 3,434 |   |
| Other                   |   |         | 1,402  |   |   |   | 1,228 |   |
|                    |   |         |   |   |   |   |   |   |
|                    |   | $            | 3,799  |   |   | $ | 4,662 |   |

----

|                         |   | December 31, |   |
|------------------------------|--------|--------------|--------|
|                         |   | 2009         |   |   | 2008 |   |
|                         |   |         |   |   |   |   |   |   |
| Raw materials and components |   | $            | 14,432 |   |   | $ | 9,651 |   |
| Work-in-progress             |   |         | 1,784  |   |   |   | 3,024 |   |
| Finished goods               |   |         | 7,101  |   |   |   | 6,256 |   |
|                         |   |         |   |   |   |   |   |   |
|                         |   | $            | 23,317 |   |   | $ | 18,931 |   |

|               |   | December 31, |   |
|--------------------|--------|--------------|--------|
|               |   | 2009         |   |   | 2008 |   |
|               |   |         |   |   |   |   |   |   |
| Current assets     |   | $            | 17,302 |   |   | $ | 18,931 |   |
| Non-current assets |   |         | 6,015  |   |   |   | - |   |
|               |   | $            | 23,317 |   |   | $ | 18,931 |   |

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

|                            |   | December 31, |   |
|---------------------------------|--------|--------------|--------|
|                            |   | 2009         |   |   | 2008 |   |
|                            |   |         |   |   |   |   |
| Available- for- sale securities |   | $            | 7,789  |   |   | $ | 14,254 |   |
| Trading securities              |   |         | 14,058 |   |   |   | - |   |
| Deposits                        |   |         | 9,889  |   |   |   | 14,255 |   |
| Total                           |   | $            | 31,736 |   |   | $ | 28,509 |   |

----

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

|                                  |   | Carrying |   |   | Gross unrealized |   |   | Gross unrealized |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|------------------|--------|--------|------------------|--------|--------|------------|--------|
|                                  |   | amount   |   |   | holding gains    |   |   | holding (losses) |   |   | Fair value |   |
|                                  |   |     |   |   |             |   |   |             |   |   |       |   |
| At December 31, 2008                  |   |     |   |   |             |   |   |             |   |   |       |   |
| Available- for- sale:                 |   |     |   |   |             |   |   |             |   |   |       |   |
| U.S government or government agencies |   | $        | 22,967 |   |             | $      | 407    |             |   | $      | -          |   |   | $ | 23,374 |   |
| Corporate debt securities             |   |     | 21,950 |   |             |   | 35     |             |   |   | (1,042     | )      |   |   | 20,943 |   |
| Total At December 31, 2008            |   | $        | 44,917 |   |             | $      | 442    |             |   | $      | (1,042     | )      |   | $ | 44,317 |   |

|                                  |   | Carrying |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|------------|--------|
|                                  |   | Amount   |   |   | Fair value |   |
|                                  |   |     |   |   |       |   |
| Available- for- sale:                 |   |     |   |   |       |   |
| Current maturities                    |   | $        | 7,641  |   |       | $      | 7,789 |   |
| Due after one year through five years |   |     | 16,705 |   |       |   | 16,956 |   |
|                                  |   | $        | 24,346 |   |       | $      | 24,745 |   |

----

|                      |   | Less than 12 months |   |   | Total      |   |
|---------------------------|--------|---------------------|--------|--------|------------|--------|
|                      |   | Unrealized          |   |   |       |   |   | Unrealized |   |   |   |   |
|                      |   | losses              |   |   | Fair value |   |   | losses |   |   | Fair value |   |
|                      |   |                |   |   |       |   |   |   |   |   |   |   |
| Available for sale:       |   |                |   |   |       |   |   |   |   |   |   |   |
| Corporate debt securities |   | $                   | 1      |   |       | $      | 1,998 |   |   | $ | 1 |   |   | $ | 1,998 |   |
|                      |   | $                   | 1      |   |       | $      | 1,998 |   |   | $ | 1 |   |   | $ | 1,998 |   |

|                                                |   |   | December 31, |   |
|-----------------------------------------------------|--------|--------|--------------|--------|
|                                                |   |   | 2009         |   |   |   | 2008 |   |
|                                                |   |   |         |   |   |   |   |   |
| Computers and software                              |   | $      | 9,630        |   |   | $ | 9,026 |   |
| Instruments and laboratory equipment                |   |   | 1,343        |   |   |   | 1,367 |   |
| Leasehold improvements                              |   |   | 4,932        |   |   |   | 4,743 |   |
| Motor vehicles                                      |   |   | 233          |   |   |   | 233 |   |
| Machinery and equipment                             |   |   | 16,558       |   |   |   | 16,120 |   |
| Communication equipment                             |   |   | 480          |   |   |   | 475 |   |
| Office furniture and equipment                      |   |   | 1,951        |   |   |   | 1,857 |   |
|                                                |   |   |         |   |   |   |   |   |
| Fixed assets, at cost                               |   |   | 35,127       |   |   |   | 33,821 |   |
|                                                |   |   |         |   |   |   |   |   |
| Accumulated depreciation                            |   |   | (21,284      | )      |   |   | (18,706 | ) |
|                                                |   |   |         |   |   |   |   |   |
| Fixed assets at cost, less accumulated depreciation |   | $      | 13,843       |   |   | $ | 15,115 |   |

----

|                                                                            |   |   | December 31, |   |
|---------------------------------------------------------------------------------|--------|--------|--------------|--------|
|                                                                            |   |   | 2009         |   |   |   | 2008 |   |
|                                                                            |   |   |         |   |   |   |   |   |
| Capitalized patents and trademarks                                              |   | $      | 7,212        |   |   | $ | 6,560 |   |
| Web site development                                                            |   |   | 1,396        |   |   |   | 1,214 |   |
| Software development                                                            |   |   | 647          |   |   |   | 647 |   |
| Patents, trademarks and trade names acquired in abusiness combination (note 16) |   |   | 6,400        |   |   |   | 6,400 |   |
| Customer relationships acquired in a business                                   |   |   |         |   |   |   |   |   |
| combination (note 16)                                                           |   |   | 1,800        |   |   |   | 1,800 |   |
|                                                                            |   |   |         |   |   |   |   |   |
| Intangible assets, at cost                                                      |   |   | 17,455       |   |   |   | 16,621 |   |
|                                                                            |   |   |         |   |   |   |   |   |
| Accumulated amortization                                                        |   |   | (6,171       | )      |   |   | (4,554 | ) |
|                                                                            |   |   |         |   |   |   |   |   |
| Intangible assets, less accumulated amortization                                |   | $      | 11,284       |   |   | $ | 12,067 |   |

|   | A. | Office of the Chief Scientist Grants |
|--------|----|--------------------------------------|

----

| Note 8 - Commitments and Contingencies (cont'd) |
|-------------------------------------------------|

|                |   | Capital leases |   |   | Operating leases |   |
|---------------------|--------|----------------|--------|--------|------------------|--------|
|                |   |           |   |   |             |   |   |   |
| 2010                |   | $              | 145    |   |             | $      | 3,787 |   |
| 2011                |   |           | 145    |   |             |   | 3,046 |   |
| 2012                |   |           | 145    |   |             |   | 2,699 |   |
| 2013                |   |           | 66     |   |             |   | 2,517 |   |
| 2014 and thereafter |   |           | -      |   |             |   | 4,230 |   |
|                |   | $              | 501    |   |             | $      | 16,279 |   |

----

| Note 8 - Commitments and Contingencies (cont'd) |
|-------------------------------------------------|

| Termination payments                      |   | $      | 7,620 |   |
|-------------------------------------------|--------|--------|-------|--------|
| Reimbursement for certain clinical trials |   |   | 1,200 |   |
|                                      |   | $      | 8,820 |   |

|   | (1) | The Company has agreements with a number of single source suppliers for some of the components necessary for the production of its products. For example, the Company has sole suppliers for the imaging sensor and transmitter of its PillCam capsules and the data recorder unit of the Bravo system. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The Company’s annual commitments under agreements with single source and other suppliers for the next 5 years are as follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------|

| 2010            |   | $      | 5,953  |   |
|-----------------|--------|--------|--------|--------|
| 2011            |   |   | 220    |   |
| 2012            |   |   | 860    |   |
| 2013            |   |   | 1,875  |   |
| 2014 and beyond |   |   | 8,515  |   |
|            |   | $      | 17,423 |   |

----

| Note 8 - Commitments and Contingencies (cont'd) |
|-------------------------------------------------|

----

|                              |   |   | December 31 |   |
|-----------------------------------|--------|--------|-------------|--------|
|                              |   |   | 2009        |   |   |   | 2008 |   |
|                              |   |   |        |   |   |   |   |   |
| Government institutions           |   | $      | 3,584       |   |   | $ | 4,596 |   |
| Liabilities relating to employees |   |   | 11,985      |   |   |   | 8,292 |   |
| Advances from customers           |   |   | 62          |   |   |   | 139 |   |
| Warranty                          |   |   | 57          |   |   |   | 98 |   |
| Commissions                       |   |   | 975         |   |   |   | 826 |   |
| Accrued expenses                  |   |   | 3,397       |   |   |   | 3,661 |   |
|                              |   |   |        |   |   |   |   |   |
|                              |   | $      | 20,060      |   |   | $ | 17,612 |   |

----

|   | B. | Employees’ and non employees’ stock options |
|--------|----|---------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|   | · | The 2009 Plan permits the grant of “Other Awards” defined as a right or other interest granted to a plan participant that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | If the employment of a particular holder of outstanding awards is terminated by the Company or by such holder in circumstances of “constructive termination” (as defined in the 2009 Plan), as of or during the 12-month period following an acquisition or merger, all unvested awards of such holder (as opposed to awards that are scheduled to vest within two years of such acquisition or merger) will be automatically accelerated and exercisable, subject to certain adjustments and exceptions; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | In the event the Company distributes a dividend in cash and the record date for such distribution is subsequent to the date of grant of a stock option but prior to the exercise or other termination of such stock option, the board or compensation committee administering the 2009 Plan may in its discretion determine that the exercise price of all or any portion of such outstanding stock option shall be reduced by the dividend amount, net of applicable tax. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Risk free average interest rate of 2.59% and 1.72% for the years ended December 31, 2008 and 2009, respectively, which represents the risk free rate of US$ zero - coupon U.S Government Bonds. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Weighted average expected life of 3.41 and 4.32 years for the years ended December 31, 2008 and 2009, respectively, which represents the period for which the options granted are expected to be outstanding. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Expected average volatility of 35.06% and 44.54% for the years ended December 31, 2008 and 2009 respectively, which represents a weighted average standard deviation rate for the price of the Company's Ordinary Shares in the NASDAQ National Market. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|            |   | Options outstanding as of |      |
|-----------------|--------|---------------------------|-----------|
|            |   | December 31, 2009         |      |
|            |   |                      |      |   | Weighted |   |
|            |   |                      |      |   | average |   |
|            |   |                      |      |   | remaining |   |
|            |   | Number                    |      |   | contractual life |   |
| Exercise prices |   | outstanding at            |      |   | (in years |   |
|            |   |                      |      |   |   |   |   |   |
| $1 - $10        |   |                      | 1,256,467 |   |   |   | 4.19 |   |
| $10.01-$20      |   |                      | 2,647,138 |   |   |   | 3.91 |   |
| $20.01-$30      |   |                      | 2,144,907 |   |   |   | 3.51 |   |
| $30.01-$40      |   |                      | 499,440   |   |   |   | 4.90 |   |
|            |   |                      | 6,547,952 |   |   |   |   |   |

|            |   | Options outstanding as of |      |
|-----------------|--------|---------------------------|-----------|
|            |   | December 31, 2008         |      |
|            |   |                      |      |   | Weighted |   |
|            |   |                      |      |   | average |   |
|            |   |                      |      |   | remaining |   |
|            |   | Number                    |      |   | contractual life |   |
| Exercise prices |   | outstanding at            |      |   | (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   |   |   |   | 5.90 |   |
|            |   |                      | 5,806,139 |   |   |   |   |   |

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|                         |   |             |      |   | Weighted average |   |   | Weighted average           |   |
|------------------------------|--------|------------------|-----------|--------|------------------|--------|--------|----------------------------|--------|
|                         |   | Number of shares |      |   | exercise price   |   |   | grant date fair value |   |
|                         |   |             |      |   |             |   |   |                       |   |   |
| Balance at January 1, 2008   |   |             | 4,933,870 |   |             |   |   |                       |   |   |
| Granted                      |   |             | 990,350   |   |             | $      | 15.91  |                       |   | $ | 4.98 |   |
| Forfeited                    |   |             | (102,081  | )      |             |   | 20.79  |                       |   |   | 8.69 |   |
| Exercised                    |   |             | (16,000   | )      |             |   | 15.73  |                       |   |   | 7.91 |   |
| Balance at December 31, 2008 |   |             | 5,806,139 |   |             |   |   |                       |   |   |   |   |
| Granted                      |   |             | 1,096,350 |   |             | $      | 9.14   |                       |   | $ | 3.48 |   |
| Forfeited                    |   |             | (241,350  | )      |             |   | 18.61  |                       |   |   | 7.45 |   |
| Exercised                    |   |             | (113,187  | )      |             |   | 8.43   |                       |   |   | 4.98 |   |
| Balance at December 31, 2009 |   |             | 6,547,952 |   |             |   |   |                       |   |   |   |   |

|                                  |   |             |       |   | Weighted average      |
|---------------------------------------|--------|------------------|------------|--------|-----------------------|
| Non-vested options                    |   | Number of shares |       |   | grant date fair value |
|                                  |   |             |       |   |                  |   |   |   |
| Balance at January  1, 2009 |   |             | 2,520,376  |   |                  | $ | 8.20 |   |
| Granted                               |   |             | 1,096,350  |   |                  |   | 3.48 |   |
| Vested                                |   |             | (1,004,525 | )      |                  |   | 8.06 |   |
| Forfeited                             |   |             | (170,900   | )      |                  |   | 7.33 |   |
| Balance at December 31, 2009          |   |             | 2,441,301  |   |                  | $ | 6.20 |   |

|                                  |   |             |      |   | Weighted average      |
|---------------------------------------|--------|------------------|-----------|--------|-----------------------|
| Non-vested options                    |   | Number of shares |      |   | grant date fair value |
|                                  |   |             |      |   |                  |   |   |   |
| Balance at January  1, 2008 |   |             | 2,202,466 |   |                  | $ | 9.18 |   |
| Granted                               |   |             | 988,850   |   |                  |   | 4.96 |   |
| Vested                                |   |             | (577,545  | )      |                  |   | 8.71 |   |
| Forfeited                             |   |             | (93,395   | )      |                  |   | 8.58 |   |
| Balance at December 31, 2008          |   |             | 2,520,376 |   |                  | $ | 8.20 |   |

----

| Note 11 - Share Capital (cont’d) |
|----------------------------------------|

|   | B. | Employees’ and non employees’ stock options (cont’d) |
|--------|----|------------------------------------------------------------------------|

|                                |   | Year ended December 31, |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Research and development costs      |   | $                       | 257    |   |   | $ | 307 |   |   | $ | 406 |   |
| Selling and marketing expenses      |   |                    | 1,619  |   |   |   | 1,756 |   |   |   | 1,889 |   |
| General and administrative expenses |   |                    | 5,392  |   |   |   | 4,855 |   |   |   | 3,356 |   |
|                                |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                |   | $                       | 7,268  |   |   | $ | 6,918 |   |   | $ | 5,651 |   |

|   | A. | Revenues by activities |
|--------|----|------------------------|

|                          |   | Year ended December 31, |    |
|-------------------------------|--------|-------------------------|---------|
|                          |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
| Workstations and recorders    |   | $                       | 11,523  |   |   | $ | 14,523 |   |   | $ | 15,267 |   |
| PillCam SB capsule            |   |                    | 110,371 |   |   |   | 103,005 |   |   |   | 90,614 |   |
| PillCam ESO capsule           |   |                    | 702     |   |   |   | 1,213 |   |   |   | 1,012 |   |
| PillCam Colon capsule         |   |                    | 1,021   |   |   |   | 1,465 |   |   |   | 1,106 |   |
| Patency capsules and scanners |   |                    | 718     |   |   |   | 662 |   |   |   | 523 |   |
| Bravo pH monitoring products  |   |                    | 14,985  |   |   |   | 884 |   |   |   | - |   |
| Services                      |   |                    | 2,443   |   |   |   | 3,356 |   |   |   | 4,346 |   |
|                          |   |                    |    |   |   |   |   |   |   |   |   |   |
|                          |   | $                       | 141,763 |   |   | $ | 125,108 |   |   | $ | 112,868 |   |

|   | B. | Revenues by geographic areas |
|--------|----|------------------------------|

|                                           |   | Year ended December 31, |    |
|------------------------------------------------|--------|-------------------------|---------|
|                                           |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
| Americas                                       |   | $                       | 89,671  |   |   | $ | 75,609 |   |   | $ | 73,849 |   |
| Europe, Middle East and Africa (mainly Europe) |   |                    | 38,481  |   |   |   | 34,908 |   |   |   | 27,299 |   |
| Asia Pacific                                   |   |                    | 13,611  |   |   |   | 14,591 |   |   |   | 11,720 |   |
|                                           |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                           |   | $                       | 141,763 |   |   | $ | 125,108 |   |   | $ | 112,868 |   |

----

|                              |   | Year ended December 31, |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Currency gains, net               |   | $                       | 397    |   |   | $ | 1,504 |   |   | $ | 1,456 |   |
| Interest income                   |   |                    | 239    |   |   |   | 753 |   |   |   | 1,069 |   |
| Income from marketable securities |   |                    | 1,344  |   |   |   | 2,115 |   |   |   | 3,109 |   |
| Other                             |   |                    | (396   | ) |   |   | (368 | ) |   |   | (114 | ) |
|                              |   |                    |   |   |   |   |   |   |   |   |   |   |
|                              |   | $                       | 1,584  |   |   | $ | 4,004 |   |   | $ | 5,520 |   |

|   | (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. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 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, 2009, the Company has no tax loss carryforwards in Israel except for capital losses of approximately $10.2 million which are available to offset future taxable capital gains for an indefinite period. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (3) | As explained above, the Israeli Company is exempt from tax for a ten-year period.  Therefore, the Israeli Company has not recorded deferred tax assets and liabilities. Out of the Company’s accumulated deficit as of December 31, 2009, approximately $4.7 million are tax-exempt earnings attributable to its Approved Enterprise and approximately $4.5 million are tax-exempt earnings attributable to its Beneficiating Enterprise. The tax-exempt income attributable to the Approved and Beneficiating Enterprises cannot be distributed to shareholders without subjecting the Company to taxes. If these retained tax-exempt profits are distributed, the Company would be taxed at the reduced corporate tax rate applicable to such profits (currently- 25% pursuant to the implementation of the Investment Law). According to the Amendment, tax-exempt income generated under the Beneficiating Enterprise will be taxed upon dividend distribution or complete liquidation, whereas tax exempt income generated under the Approved Enterprise will be taxed only upon dividend distribution (but not upon complete liquidation, as the tax liability will be incurred by the shareholders). As of December 31, 2009, if the income attributed to the Approved Enterprise were distributed as dividend, the Company would incur a tax liability of approximately $1.2 million. If income attributed to the Beneficiating Enterprise were distributed as dividend, or upon liquidation, the Company would incur a tax liability in the amount of approximately $1.1 million. These amounts will be recorded as an income tax expense in the period in which the Company declares the dividend. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | On July 25, 2005 the Knesset passed the Law for the Amendment of the Income Tax Ordinance (No. 147) - 2005, which provides, inter-alia, for a gradual reduction in the company tax rate to 25% as from the 2010 tax year. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | In 2009, the Company signed a settlement agreement with the Israeli Tax Authorities (ITA) for fiscal years 2004 through 2007. (See also Note 14(F) below). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Foreign subsidiaries |
|--------|----|----------------------|

----

|   | C. | Profit (loss) before tax and income tax benefit (expense) included in the consolidated statements of operations |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|                                                               |   | Year ended December 31, |   |
|--------------------------------------------------------------------|--------|-------------------------|--------|
|                                                               |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                               |   |                    |   |   |   |   |   |   |   |
| Profit (loss) before taxes on income and non controlling interest: |   |                    |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | 12,096 |   |   | $ | 2,536 |   |   | $ | 13,438 |   |
| Foreign jurisdiction                                               |   |                    | (194   | ) |   |   | (367 | ) |   |   | 4,792 |   |
|                                                               |   | $                       | 11,902 |   |   | $ | 2,169 |   |   | $ | 18,230 |   |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Current taxes:                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | 500    |   |   | $ | (286 | ) |   | $ | (3,669 | ) |
| Foreign jurisdiction                                               |   |                    | (179   | ) |   |   | 208 |   |   |   | (855 | ) |
|                                                               |   | $                       | 321    |   |   | $ | (78 | ) |   | $ | (4,524 | ) |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Deferred taxes:                                                    |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                                                             |   | $                       | -      |   |   | $ | - |   |   | $ | - |   |
| Foreign jurisdiction                                               |   |                    | 1,221  |   |   |   | (172 | ) |   |   | (24 | ) |
|                                                               |   | $                       | 1,221  |   |   | $ | (172 | ) |   | $ | (24 | ) |
|                                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax expense                                                 |   | $                       | 1,542  |   |   | $ | (250 | ) |   | $ | (4,548 | ) |

----

|                                   |   | December 31, |    |
|----------------------------------------|--------|--------------|---------|
|                                   |   | 2009         |    |   | 2008 |   |
|                                   |   |         |    |   |   |   |
| Tax loss carryforwards of subsidiaries |   | $            | 14,138  |   |   | $ | 11,076 |   |
| Other timing differences               |   |         | 1,474   |   |   |   | 1,109 |   |
|                                   |   |         |    |   |   |   |   |   |
| Total gross deferred tax assets        |   |         | 15,612  |   |   |   | 12,185 |   |
| Valuation allowance                    |   |         | (13,213 | ) |   |   | (11,007 | ) |
|                                   |   |         |    |   |   |   |   |   |
| Net deferred tax asset                 |   | $            | 2,399   |   |   | $ | 1,178 |   |

|                                         |   | December 31, |   |
|----------------------------------------------|--------|--------------|--------|
|                                         |   | 2009         |   |   | 2008 |   |
|                                         |   |         |   |   |   |   |
| Current assets – Deferred tax assets   |   | $            | 2,207  |   |   | $ | 1,178 |   |
| Long-term assets – Deferred tax assets |   |         | 192    |   |   |   | - |   |
|                                         |   |         |   |   |   |   |   |   |
|                                         |   | $            | 2,399  |   |   | $ | 1,178 |   |

|   | E. | Reconciliation of the statutory tax benefit (expense) to actual income tax benefit (expense) |
|--------|----|----------------------------------------------------------------------------------------------|

|                                 |   | Year ended December 31, |   |
|--------------------------------------|--------|-------------------------|--------|
|                                 |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
| Profit before taxes on income        |   | $                       | 11,902 |   |   | $ | 2,169 |   |   | $ | 18,230 |   |
| Tax rate                             |   |                    | 0      | % |   |   | 0 | % |   |   | 0 | % |
| Computed expected tax                |   |                    | -      |   |   |   | - |   |   |   | - |   |
| Changes in unrecognized tax benefits |   |                    | 2,561  |   |   |   | (320 | ) |   |   | (2,901 | ) |
| Permanent difference and Other       |   |                    | 1,020  |   |   |   | 2,034 |   |   |   | 1,256  |   |
| Change in valuation allowance        |   |                    | (2,206 | ) |   |   | (2,324 | ) |   |   | (1,446 | ) |
| Foreign tax rate differential        |   |                    | 167    |   |   |   | 360 |   |   |   | (1,457 | ) |
|                                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)         |   | $                       | 1,542  |   |   | $ | (250 | ) |   | $ | (4,548 | ) |

----

|                                                         |   |   | 2009   |   |   |   | 2008    |   |   |   | 2007  |   |
|--------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|-------|--------|
| Balance at January 1                                         |   | $      | 7,091  |   |   | $      | 6,771   |   |   | $      | 3,870 |   |
| Additions based on tax positions related to the current year |   |   | 1,497  |   |   |   | 180     |   |   |   | 2,901 |   |
| Additions for tax positions of prior years                   |   |   | 507    |   |   |   | 140     |   |   |   | -     |   |
| Reductions for tax positions of prior years                  |   |   | (4,433 | )      |   |   | -       |   |   |   | -     |   |
| Settlements                                                  |   |   | (688   | )      |   |   | -  |   |   |   | -     |   |
| Balance at December 31                                       |   | $      | 3,974  |   |   | $      | 7,091   |   |   | $      | 6,771 |   |

----

|                       |   |         |   |   | In active markets for |   |   | Significant other |   |   | Significant      |   |
|----------------------------|--------|--------------|--------|--------|-----------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                       |   | December 31, |   |   | identical assets      |   |   | observable        |   |   | unobservable     |   |
|                       |   | 2009         |   |   | (Level 1)             |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                    |   |         |   |   |                  |   |   |              |   |   |             |   |
| Short-term investment      |   | $            | 21,847 |   |                  | $      | 21,847 |              |   | $      | -                |   |   | $ | - |   |
| Marketable securities      |   |         | 16,956 |   |                  |   | 16,956 |              |   |   | -                |   |   |   | - |   |
| Foreign exchange contracts |   |         | 824    |   |                  |   | -      |              |   |   | 824              |   |   |   | - |   |
| Total At December 31, 2009 |   | $            | 39,627 |   |                  | $      | 38,803 |              |   | $      | 824              |   |   | $ | - |   |

|                       |   |         |   |   |                  |   |   |              |   |   |             |   |
|----------------------------|--------|--------------|--------|--------|-----------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                       |   |         |   |   | In active markets for |   |   | Significant other |   |   | Significant      |   |
|                       |   | December 31, |   |   | identical assets      |   |   | observable        |   |   | unobservable     |   |
|                       |   | 2008         |   |   | (Level 1)             |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                    |   |         |   |   |                  |   |   |              |   |   |             |   |
| Short-term investment      |   | $            | 14,254 |   |                  | $      | 14,254 |              |   | $      | -                |   |   | $ | - |   |
| Marketable securities      |   |         | 30,063 |   |                  |   | 30,063 |              |   |   | -                |   |   |   | - |   |
| Foreign exchange contracts |   |         | 521    |   |                  |   | -      |              |   |   | 521              |   |   |   | - |   |
| Total At December 31, 2008 |   | $            | 44,838 |   |                  | $      | 44,317 |              |   | $      | 521              |   |   | $ | - |   |

----

| Property, plant and equipment                                  |   | $      | 250    |   |
|----------------------------------------------------------------|--------|--------|--------|--------|
| Identifiable intangible assets:                                |   |   |   |   |
| Patents of core technology                                     |   |   | 5,000  |   |
| Customer relationships                                         |   |   | 1,800  |   |
| Trademarks and trade name                                      |   |   | 1,400  |   |
| In-process research and development                            |   |   | 4,700  |   |
| Goodwill                                                       |   |   | 3,510  |   |
| Total assets acquired                                          |   |   | 16,660 |   |
|                                                           |   |   |   |   |
| Prepayments for inventory supply and future R&D services   |   |   | 3,841  |   |
|                                                           |   |   |   |   |
| Purchase price allocated (including transaction costs of $501) |   | $      | 20,501 |   |

----

----

|                              |   | December 31, |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | 2009         |   |   | 2008 |   |
|                              |   |         |   |   |   |   |
| Balance as of January 1           |   |         |   |   |   |   |
| Goodwill                          |   | $            | 4,475  |   |   | $ | - |   |
| Accumulated impairment losses     |   |         | (406   | ) |   |   | - |   |
|                              |   |         | 4,069  |   |   |   | - |   |
| Goodwill acquired during the year |   |         | -      |   |   |   | 4,475 |   |
| Impairment loss                   |   |         | (483   | ) |   |   | (406 | ) |
| Balance as of December 31         |   |         |   |   |   |   |   |   |
| Goodwill                          |   |         | 4,475  |   |   |   | 4,475 |   |
| Accumulated impairment losses     |   |         | (889   | ) |   |   | (406 | ) |
|                              |   |         |   |   |   |   |   |   |
|                              |   | $            | 3,586  |   |   | $ | 4,069 |   |

----

|                                                       | Page       |
|------------------------------------------------------------|------------|
|                                                       |       |
| Report of Independent Auditors                             | P-2        |
|                                                       |       |
| Consolidated Balance Sheets                                | P-3        |
|                                                       |       |
| Consolidated Statements of Operations                      | P-4        |
|                                                       |       |
| Statements of Changes in Shareholders' Equity (Deficiency) | P-5        |
|                                                       |       |
| Consolidated Statements of Cash Flows                      | P-6        |
|                                                       |       |
| Notes to Consolidated Financial Statements                 | P-7 - P-20 |

----

|   | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, IsraelTel:  972 (3)6232525Fax:  972 (3)5622555www.ey.com/il |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER     |
|------------------|--------------------------------------|
| March 9 , 2010   | A Member of Ernst & Young Global |

----

POCARED 

----

|                                                                                                                                                                                                                               |   | December 31, |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                                                                                                                                                               |   | 2009         |    |   | 2008 |   |
|                                                                                                                                                                                                                               |   |         |    |   | Unaudited |   |
| ASSETS                                                                                                                                                                                                                             |   |         |    |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                                                                    |   |         |    |   |   |   |
| Cash and cash equivalents (Note 3)                                                                                                                                                                                                 |   | $            | 3,340   |   |   | $ | 2,734 |   |
| Accounts receivable                                                                                                                                                                                                                |   |         | 6       |   |   |   | 9 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Total Current Assets                                                                                                                                                                                                               |   |         | 3,346   |   |   |   | 2,743 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| PROPERTY AND EQUIPMENT, NET (Note 4)                                                                                                                                                                                               |   |         | 40      |   |   |   | 53 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| LONG-TERM INVESTMENTS AND RECEIVABLES:                                                                                                                                                                                             |   |         |    |   |   |   |   |   |
| Long-term deposit                                                                                                                                                                                                                  |   |         | 8       |   |   |   | 8 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Total assets                                                                                                                                                                                                                       |   | $            | 3,394   |   |   | $ | 2,804 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)                                                                                                                                                                                  |   |         |    |   |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Accounts payables                                                                                                                                                                                                                  |   | $            | 776     |   |   | $ | 2,254 |   |
| Employees and payroll accruals                                                                                                                                                                                                     |   |         | 117     |   |   |   | 128 |   |
| Accrued expenses                                                                                                                                                                                                                   |   |         | 52      |   |   |   | 54 |   |
| Convertible loan )Note 5)                                                                                                                                                                                                          |   |         | 5,844   |   |   |   | 14,522 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Total Current Liabilities                                                                                                                                                                                                          |   |         | 6,789   |   |   |   | 16,958 |   |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| SHAREHOLDERS' DEFICIENCY (Note 6):                                                                                                                                                                                                 |   |         |    |   |   |   |   |   |
| Share capital -                                                                                                                                                                                                                    |   |         |    |   |   |   |   |   |
| Ordinary shares of NIS 0.01 par value - Authorized: 12,000,000 shares at December 31, 2009 and 2008 ; Issued and outstanding: 2,000,000 shares at December 31, 2009 and 2008                                                       |   |         | 4       |   |   |   | 4 |   |
| Preferred A shares of NIS 0.01 par value - Authorized: 1,500,000 shares at December 31, 2009 and 2008; Issued and outstanding: 1,333,333 shares at December 31, 2009 and 2008                                                      |   |         | 3       |   |   |   | 3 |   |
| Preferred B shares of NIS 0.01 par value - Authorized: 1,550,000 shares at December 31, 2009 and 2008; Issued and outstanding: 1,507,342 shares at December 31, 2009 and 2008                                                      |   |         | 3       |   |   |   | 3 |   |
| Preferred C shares of NIS 0.01 par value - Authorized: 1,000,000 shares at December 31, 2009 and 2008; Issued and outstanding: 760,501 shares at December 31, 2009 and 2008                                                        |   |         | 2       |   |   |   | 2 |   |
| Preferred D shares of NIS 0.01 par value - Authorized: 4,600,000 shares at December 31, 2009 and December 31, 2008; Issued and outstanding: 4,589,072 shares at December 31, 2009 and December 31, 2008                            |   |         | 11      |   |   |   | 11 |   |
| Preferred D-1 shares of NIS 0.01 par value - Authorized: 5,000,000 shares at December 31, 2009; Issued and outstanding: 4,924,722 at December 31, 2009                                                                             |   |         | 50      |   |   |   | (* |   |
| Preferred D-2 shares of NIS 0.01 par value - Authorized: 60,000 shares at  December 31, 2009; Issued and outstanding: 59,807 at December 31, 2009                                                                        |   |         | (*      |   |   |   | (* |   |
| Preferred E shares of NIS 0.01 par value - Authorized: 11,000,000 shares at December 31, 2009; Issued and outstanding: 10,413,052 at December 31, 2009Aggregate liquidation preference of $37,274 thousand as of December 31, 2009 |   |         | 25      |   |   |   | - |   |
| Additional paid-in capital                                                                                                                                                                                                         |   |         | 35,375  |   |   |   | 13,813 |   |
| Deficit accumulated during the development stage                                                                                                                                                                                   |   |         | (38,868 | ) |   |   | (27,990 | ) |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Total shareholders' deficiency                                                                                                                                                                                                     |   |         | (3,395  | ) |   |   | (14,154 | ) |
|                                                                                                                                                                                                                               |   |         |    |   |   |   |   |   |
| Total liabilities and shareholders' deficiency                                                                                                                                                                                     |   | $            | 3,394   |   |   | $ | 2,804 |   |

|  March 9, 2010                         |   |                                             |   |                                      |   |                               |
|---------------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------|
| Date of approval of thefinancial statements |   | Avi LudomirskiChairman of the Board of Directors |   | Jonathan GurfinkelChief Executive Officer |   | Yariv KerenChief Financial Officer |

----

POCARED 

----

|                                      |   | Year endedDecember 31, |   |   | Period fromJanuary 1, 2005 (inception date)throughDecember 31, |   |
|-------------------------------------------|--------|------------------------|--------|--------|---------------------------------------------------------------------|--------|
|                                      |   | 2009                   |   |   | 2008                                                                |   |   | 2007 |   |   | 2009 |   |
|                                      |   |                   |   |   | Unaudited                                                           |   |   | Unaudited |   |   | Unaudited |   |
| Operating expenses:                       |   |                   |   |   |                                                                |   |   |   |   |   |   |   |
|                                      |   |                   |   |   |                                                                |   |   |   |   |   |   |   |
| Research and development                  |   | $                      | 9,516  |   |                                                                | $      | 16,380 |   |   | $ | 7,167 |   |   | $ | 35,003 |   |
| General and administrative                |   |                   | 930    |   |                                                                |   | 1,330 |   |   |   | 508 |   |   |   | 3,423 |   |
|                                      |   |                   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                            |   |                   | 10,446 |   |                                                                |   | 17,710 |   |   |   | 7,675 |   |   |   | 38,426 |   |
|                                      |   |                   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Financial expenses (income), net (Note 8) |   |                   | 202    |   |                                                                |   | 350 |   |   |   | (117 | ) |   |   | 427 |   |
|                                      |   |                   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                  |   |                   | 10,648 |   |                                                                |   | 18,060 |   |   |   | 7,558 |   |   |   | 38,853 |   |
| Income taxes                              |   |                   | 5      |   |                                                                |   | 10 |   |   |   | - |   |   |   | 15 |   |
|                                      |   |                   |   |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                  |   | $                      | 10,653 |   |                                                                | $      | 18,070 |   |   | $ | 7,558 |   |   | $ | 38,868 |   |

----

POCARED 

----

|                                                                              |   |            |      |   |               |   |   |               |   |   |               |   |   | Preferred D, D-1 and |   |   |               |   |      | Additional |   |   | Deficit accumulated during the |   |   | Totalshareholders' |    |
|----------------------------------------------------------------------------------------|--------|-----------------|-----------|--------|--------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|----------------------|--------|--------|--------------------|--------|-----------|------------|--------|--------|--------------------------------|--------|--------|--------------------|---------|
|                                                                                   |   | Ordinary shares |      |   | Preferred A shares |   |   | Preferred B shares |   |   | Preferred C shares |   |   | D-2 shares           |   |   | Preferred E shares |   |      | paid-in    |   |   | development                    |   |   | equity             |    |
|                                                                                   |   | Number          |      |   | Amount             |   |   | Number             |   |   | Amount             |   |   | Number               |   |   | Amount             |   |      | Number     |   |   | Amount                         |   |   | Number             |    |   | Amount |   |   | Number |   |   | Amount |   |   | capital |   |   | stage |   |   | (deficiency) |   |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2005 (inception date)                                         |   |            | -         |   |               | $      | -      |               |   |   | -                  |   |   | $                    | -      |   |               |   | -         |       |   | $      | -                              |   |   |               | -       |   |   | $ | - |   |   |   | - |   |   | $ | - |   |   |   | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| Issuance of Ordinary shares, net in January 1, 2005                                    |   |            | 2,000,000 |   |               |   | 4      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4 |   |
| Issuance of Preferred A shares (at $0.22), net                                         |   |            | -         |   |               |   | -      |               |   |   | 1,333,333          |   |   |                 | 3      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 297 |   |   |   | - |   |   |   | 300 |   |
| Stock-based compensation related to options granted to service providers               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6 |   |   |   | - |   |   |   | 6 |   |
| Net loss                                                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (669 | ) |   |   | (669 | ) |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2005 (unaudited)                                            |   |            | 2,000,000 |   |               |   | 4      |               |   |   | 1,333,333          |   |   |                 | 3      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 303 |   |   |   | (669 | ) |   |   | (359 | ) |
| Issuance of Preferred B shares (at $1.08), net                                         |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | 1,507,341 |       |   |   | 3                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,631 |   |   |   | - |   |   |   | 1,634 |   |
| Issuance of preferred C shares (at $1.68)                                              |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | 760,501 |   |   |   | 2 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,278 |   |   |   | - |   |   |   | 1,280 |   |
| Stock based compensation related to options granted to service providers               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 45 |   |   |   | - |   |   |   | 45 |   |
| Net loss                                                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,918 | ) |   |   | (1,918 | ) |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2006 (unaudited)                                            |   |            | 2,000,000 |   |               |   | 4      |               |   |   | 1,333,333          |   |   |                 | 3      |   |               |   | 1,507,341 |       |   |   | 3                              |   |   |               | 760,501 |   |   |   | 2 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,257 |   |   |   | (2,587 | ) |   |   | 682 |   |
| Issuance of Preferred D shares(at $2.29)                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | 2,982,896 |   |   |   | 7 |   |   |   | - |   |   |   | - |   |   |   | 6,825 |   |   |   | - |   |   |   | 6,832 |   |
| Stock based compensation related to options granted to service providers and employees |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 107 |   |   |   | - |   |   |   | 107 |   |
| Net loss                                                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (7,558 | ) |   |   | (7,558 | ) |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2007 (unaudited)                                            |   |            | 2,000,000 |   |               |   | 4      |               |   |   | 1,333,333          |   |   |                 | 3      |   |               |   | 1,507,341 |       |   |   | 3                              |   |   |               | 760,501 |   |   |   | 2 |   |   |   | 2,982,896 |   |   |   | 7 |   |   |   | - |   |   |   | - |   |   |   | 10,189 |   |   |   | (10,145 | ) |   |   | 63 |   |
| Issuance of Preferred D shares(at $2.32),                                              |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | 1,606,176 |   |   |   | 4 |   |   |   | - |   |   |   | - |   |   |   | 3,731 |   |   |   | - |   |   |   | 3,735 |   |
| Stock based compensation related to options granted to service providers and employees |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 118 |   |   |   | - |   |   |   | 118 |   |
| Net loss                                                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (18,070 | ) |   |   | (18,070 | ) |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2008                                                        |   |            | 2,000,000 |   |               |   | 4      |               |   |   | 1,333,333          |   |   |                 | 3      |   |               |   | 1,507,341 |       |   |   | 3                              |   |   |               | 760,501 |   |   |   | 2 |   |   |   | 4,589,072 |   |   |   | 11 |   |   |   | - |   |   |   | - |   |   |   | 14,038 |   |   |   | (28,215 | ) |   |   | (14,154 | ) |
| Conversion of convertible loan to preferred D-1 shares                                 |   |            | -         |   |               |   | -      |               |   |   |               |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | 4,924,722 |   |   |   | 49 |   |   |   | - |   |   |   | - |   |   |   | 14,651 |   |   |   | - |   |   |   | 14,700 |   |
| Exercise of option granted to service provider                                         |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | 59,807 |   |   |   | 1 |   |   |   | - |   |   |   | - |   |   |   | 20 |   |   |   | - |   |   |   | 21 |   |
| Issuance of Preferred E shares(at $0.63),                                              |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 10,413,052 |   |   |   | 25 |   |   |   | 6,523 |   |   |   | - |   |   |   | 6,548 |   |
| Stock based compensation related to options granted to service providers and employees |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 143 |   |   |   | - |   |   |   | 143 |   |
| Net loss                                                                               |   |            | -         |   |               |   | -      |               |   |   | -                  |   |   |                 | -      |   |               |   | -         |       |   |   | -                              |   |   |               | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (10,653 | ) |   |   | (10,653 | ) |
|                                                                                   |   |            |      |   |               |   |   |               |   |   |               |   |   |                 |   |   |               |   |      |       |   |   |                           |   |   |               |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of  December 31, 2009                                             |   |            | 2,000,000 |   |               | $      | 4      |               |   |   | 1,333,333          |   |   | $                    | 3      |   |               |   | 1,507,341 |       |   | $      | 3                              |   |   |               | 760,501 |   |   | $ | 2 |   |   |   | 9,573,601 |   |   | $ | 61 |   |   |   | 10,413,052 |   |   | $ | 25 |   |   | $ | 35,375 |   |   | $ | (38,868 | ) |   | $ | (3,395 | ) |

----

POCARED 

----

|                                                                                 |   | Year endedDecember 31, |    |   | Period from January 1, 2005 (inception date)through December 31, |   |
|--------------------------------------------------------------------------------------|--------|------------------------|---------|--------|------------------------------------------------------------------|--------|
|                                                                                 |   | 2009                   |    |   | 2008                                                             |   |   | 2007 |   |   | 2009 |   |
| Cash flows from operating activities:                                                |   |                   |    |   | Unaudited                                                        |   |   | Unaudited |   |   | Unaudited |   |
| Net loss                                                                             |   | $                      | (10,653 | )      |                                                             | $      | (18,070 | ) |   | $ | (7,558 | ) |   | $ | (38,868 | ) |
| Adjustments required to reconcile net loss to net cash used in operating activities: |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                         |   |                   | 13      |   |                                                             |   | 12 |   |   |   | - |   |   |   | 25 |   |
| Interest on convertible loans                                                        |   |                   | 190     |   |                                                             |   | 522 |   |   |   | - |   |   |   | 712 |   |
| Stock-based compensation related to employees and service providers                  |   |                   | 143     |   |                                                             |   | 118 |   |   |   | 107 |   |   |   | 419 |   |
| Decrease (increase) in accounts receivable                                           |   |                   | 3       |   |                                                             |   | 54 |   |   |   | (41 | ) |   |   | (6 | ) |
| Decrease (increase) in prepaid expenses and long-term deposit                        |   |                   | -       |   |                                                             |   | (3 | ) |   |   | 45 |   |   |   | (8 | ) |
| Increase (decrease) in accounts payables                                             |   |                   | (1,478  | )      |                                                             |   | 672 |   |   |   | 1,393 |   |   |   | 776 |   |
| Increase (decrease) in accrued expenses                                              |   |                   | (2      | )      |                                                             |   | 30 |   |   |   | (53 | ) |   |   | 52 |   |
| Increase in employees and payroll accruals                                           |   |                   | (11     | )      |                                                             |   | 26 |   |   |   | - |   |   |   | 117 |   |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in operating activities                                                |   |                   | (11,795 | )      |                                                             |   | (16,639 | ) |   |   | (6,107 | ) |   |   | (36,781 | ) |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Purchase of property and equipment                                                   |   |                   | -       |   |                                                             |   | (61 | ) |   |   | (4 | ) |   |   | (65 | ) |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                                                |   |                   | -       |   |                                                             |   | (61 | ) |   |   | (4 | ) |   |   | (65 | ) |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from convertible loan                                                       |   |                   | 5,832   |   |                                                             |   | 14,000 |   |   |   | - |   |   |   | 19,832 |   |
| Proceeds from issuance of shares, net                                                |   |                   | 6,569   |   |                                                             |   | 3,735 |   |   |   | 6,832 |   |   |   | 20,354 |   |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by financing activities                                            |   |                   | 12,401  |   |                                                             |   | 17,735 |   |   |   | 6,832 |   |   |   | 40,186 |   |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Increase in cash and cash equivalents                                                |   |                   | 606     |   |                                                             |   | 1,035 |   |   |   | 721 |   |   |   | 3,340 |   |
| Cash and cash equivalents at beginning of period                                     |   |                   | 2,734   |   |                                                             |   | 1,699 |   |   |   | 978 |   |   |   | - |   |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of period                                           |   | $                      | 3,340   |   |                                                             | $      | 2,734 |   |   | $ | 1,699 |   |   | $ | 3,340 |   |
|                                                                                 |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Non-cash financing information:                                                      |   |                   |    |   |                                                             |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of Preferred shares upon conversion of a convertible loan                   |   | $                      | 14,700  |   |                                                             | $      | - |   |   | $ | - |   |   | $ | 14,700 |   |

----

POCARED 

----

|   | a. | Pocared Diagnostics Ltd. (the Company") was founded in 2004 and began its operation in January 2005.The Company has developed an innovative technological platform for fully automated, real-time diagnosis of contaminants suspended in liquids. The Company develops a real-time, fully automated laboratory based system for the in-vitro diagnostics (IVD) industry, and specifically for the microbiology market. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company's technology and System address the demands for greater throughput and test accuracy. The Company's testing platform can analyze different types of specimens, including urine, swabs, sputum, blood, CSF and feces. The first application to be released is for diagnosis of Urinary Tract Infection. The company's system is in development stage and it is not available at the US or any other place. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | On January 1, 2008, the Company's wholly-owned subsidiary, Pocared Diagnostics, Inc. ("the subsidiary"), commenced operations in the USA. Accordingly, Pocared Diagnostics, Inc. is consolidated from the date mentioned above in the Company's financial statements. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company and the subsidiary are parties to a service agreement under which all research and development expenditures incurred by the subsidiary are reimbursed by the Company on a cost-plus basis. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Since its inception, the Company has devoted substantially most of its efforts to business planning, research and development. In addition, the Company has not generated revenues. Accordingly, the Company is considered to be in the development stage, as defined in ASC 915 "Development Stage Entities" (formerly SFAS No. 7”). |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has incurred losses in the amount of $ 10,653 thousand during the year ended December 31, 2009, and has an accumulated deficit during the development stage of $ 38,868 thousand as of December 31, 2009. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company plans to continue to finance its operations, as it has in the past, through the sale of its securities. The Company cannot, however, give any assurance that it will in the future continue to be successful in obtaining such additional necessary financing. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company unable to continue as a going concern. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | a. | Use of estimates: |
|--------|----|-------------------|

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

----

----

|   | b. | Financial statements in U.S. dollars: |
|--------|----|---------------------------------------|

|   | The Company's financing activities including loans and equity transactions are incurred in U.S. dollars. The majority of the Company's expenses are currently paid in dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company's transactions and balances denominated in U.S. dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured to U.S. dollars in accordance with ASC 830 (formerly FAS 52). All transaction gains and losses from re measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of operations as financial income or expenses, as appropriate. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Principles of consolidation: |
|--------|----|------------------------------|

|   | The consolidated financial statements include the accounts of the Company and its subsidiaries. Inter-company balances and transactions including profits from inter-company sales not yet realized have been eliminated upon consolidation. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | Cash equivalents: |
|--------|----|-------------------|

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

|   | e. | Property and equipment: |
|--------|----|-------------------------|

|   | Property 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: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                         |   | %      |
|----------------------------------------------|--------|--------|
|                                         |   |   |
| Computers, peripheral equipment and software |   | 33     |
| Office furniture and equipment               |   | 7      |

|   | f. | Impairment for long-lived assets: |
|--------|----|-----------------------------------|

|   | The Company's long-lived assets are reviewed for impairment in accordance with ASC 360 (formerly FAS 144), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2009, no impairment losses have been identified. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | g. | Research and development costs: |
|--------|----|---------------------------------|

|   | Research and development costs are charged to expenses as incurred. |
|--------|---------------------------------------------------------------------|

|   | h. | Severance pay: |
|--------|----|----------------|

|   | The Company's liability for severance pay is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | i. | Fair value of financial instruments: |
|--------|----|--------------------------------------|

|   | The carrying values of cash and cash equivalents, account receivables and trade payables approximate fair values due to the short-term maturities of these instruments. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | j. | Accounting for share-based compensation: |
|--------|----|------------------------------------------|

|   | Effective January 1, 2006 ("the effective date"), the Company adopted ASC 718, "Compensation-Stock Compensation" ("ASC 718") (formerly SFAS No. 123(R), "Share-Based Payment") which required the measurement and recognition of compensation expenses based on estimated fair value for all share based payment awards made to employees and directors. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2007, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 110 ("SAB 110") regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with ASC 718. SAB 110 extends the use of the simplified method for "plain vanilla" awards in certain situations. The Company does not believe that its historical share option exercise data provides sufficient evidence to estimate expected term. Therefore, the Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company recognizes compensation expenses for the value of its awards based on the aggregate method over the requisite service period of each of the awards. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company applies ASC 505-50, "Equity-Based Payment to Non-Employees" (formerly EITF No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"), with respect to options issued to non-employees. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company's additional disclosures regarding stock-based compensation are provided in Note 6c. |
|--------|--------------------------------------------------------------------------------------------------|

----

----

|   | k. | Income taxes: |
|--------|----|---------------|

|   | The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740") (formerly SFAS 109, "Accounting for Income Taxes" or FAS Interpretation No 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109"). This Statement prescribes the use of the liability method whereby deferred Tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Beginning with the adoption of ASC 740 "Income Taxes" (formerly FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes") as of January 1, 2008, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | l. | Concentrations of credit risks: |
|--------|----|---------------------------------|

|   | Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivables. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Cash and cash equivalents are invested in major banks in Israel and the U.S.A. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | m. | Impact of recently issued accounting standards: |
|--------|----|-------------------------------------------------|

|   | In October 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue Arrangements." This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. This guidance also requires providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. This guidance is effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010 or on a retrospective basis. We are currently evaluating this new ASU. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                     |   | Interest |   |   | December 31, |   |
|--------------------------|--------|----------|--------|--------|--------------|--------|
|                     |   | rate *)  |   |   | 2009         |   |   | 2008 |   |
|                     |   |     |   |   |         |   |   |   |   |
| Cash                     |   |     | -      |   |         | $      | 225 |   |   | $ | 207 |   |
| Short-term bank deposits |   |     | 0.24   | %      |         |   | 3,115 |   |   |   | 2,527 |   |
|                     |   |     |   |   |         |   |   |   |   |   |   |   |
|                     |   |     |   |   |         | $      | 3,340 |   |   | $ | 2,734 |   |

|                                         |   | December 31, |   |
|----------------------------------------------|--------|--------------|--------|
|                                         |   | 2009         |   |   | 2008 |   |
| Cost:                                        |   |         |   |   |   |   |
| Computers, peripheral equipment and software |   | $            | 58     |   |   | $ | 48 |   |
| Office furniture and equipment               |   |         | -      |   |   |   | 18 |   |
|                                         |   |         |   |   |   |   |   |   |
|                                         |   |         | 58     |   |   |   | 66 |   |
|                                         |   |         |   |   |   |   |   |   |
| Accumulated depreciation                     |   |         | 18     |   |   |   | 13 |   |
|                                         |   |         |   |   |   |   |   |   |
| Depreciated cost                             |   | $            | 40     |   |   | $ | 53 |   |

|   | Depreciation expenses amounted to $13 and $12 for the years ended December 31, 2009 and 2008, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------|

----

----

|   | a. | On March 23, 2008, the Company entered into a convertible loan agreement with shareholders and with a third party for a total amount of $ 14,000. The loan bears interest of LIBOR plus 2.8% per annum which shall not apply in the event that the loan is converted. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In the event of an issuance of shares by the Company for an amount greater than $ 5,000, before March 22, 2009 ("Qualified Financing"), the loan shall automatically be converted into shares of the same class issued at the Qualified Financing at a price per share reflecting a 15% discount on the price offered in the issuance. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In the event that a Qualifying Event does not occur, then on March 22, 2009, the notes shall automatically be converted into a new class of preferred shares of the Company, at a price per share of $2.84. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Until its conversion, the convertible loan shall be payable in certain conditions as stipulated in the convertible loan agreement. |
|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | In March 2009, the convertible loan of $ 14,000 was converted into 4,924,722 Preferred D-1 shares, each convertible into one Ordinary share. According to the terms of the loan, upon its conversion, no interest should apply. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | During the period between August and November 2009, the Company entered into several convertible loan agreements, according to which certain lenders provided the Company with convertible loans in an aggregate amount of $ 5,832,138. The loans bear an annual interest at the rate of 3%. The loans shall be converted or repaid as follows: a) in the event of an equity investment of at least $2 million in the company by an unaffiliated third party, the loans shall be automatically converted without the accrued interest into shares at a lowest price per share paid in such qualifying round less a discount of 5% per month until the closing of such round subject to a maximum discount of 30%; b) in the event of an equity investment which is less than $2 million in the Company, the loans may be converted at the option of the lenders, including any accrued interest, into shares at the lowest price per share paid in such round; c) in the event of an M&A Transaction (as defined in the Loan Agreement), the loans shall be automatically converted, including the accrued interest, into the most senior class of preferred shares of the Company existing at the time of such M&A Transaction. The number of shares to be issued upon conversion of the aggregate loan shall be adjusted as stipulated in the agreement. The lenders may, upon an M&A Transaction, elect to receive repayment of the loans instead of conversion into shares of the company; d) in the event that within 18 months from the date of the loan Agreement, the loans were not converted pursuant to any other conversion option above, the loans shall be automatically converted without the accrued interest, into Series E Preferred Shares of the Company at a price per share of $ 0.63382. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | The Company accounted for above convertibles loans according to ASC 470-20 "Debt with Conversion". No beneficial conversion feature was recorded as the effective conversion price of the convertibles loans were less to the fair market value of the share on the date of issuance. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | a. | Share capital: |
|--------|----|----------------|

|   | 1. | In January 2005, the Company issued to the founders 1,000 Ordinary shares of NIS 0.01 par value each, in return for their par value. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | In March 2005, the Company entered into an investment agreement according to which, the Company issued 667 Preferred A shares of NIS 0.01 par value each in consideration of $ 300 thousands. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | In April 2005, the company issued, at no consideration, to ordinary and preferred shareholders, bonus shares at a ratio of 1,999 Ordinary shares for each issued and outstanding Ordinary share and 1,998 preferred A shares for each issued and outstanding Preferred A share. Accordingly, 1999,000 Ordinary shares and 1,332,666 preferred shares of 0.01 par values each were issued. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | In March 2006, the Company entered into an investment agreement according to which, the Company issued 1,333,333 Preferred B shares of NIS 0.01 par value each in consideration of $ 1,533 thousands. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | In March and in July 2006, the Company issued 174,008 Preferred B shares of NIS 0.01 par value each in consideration of $ 200 thousands. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | In July 2006, the Company entered into an investment agreement according to which, the Company issued 760,501 Preferred C shares of NIS 0.01 par value each in return for $ 1,300. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | In June 2007, the Company signed a Preferred D shares purchase agreement for the total consideration of $ 10,670. In June 2007, the Company issued 2,982,896 Preferred D shares in consideration of $ 6,935 invested at the closing and an additional 1,606,176 Preferred D shares were issued to the investors in consideration of an additional $ 3,735 in January 2008. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | In March 2009, the convertible loan of $ 14,000 granted on March 2008 was converted into 4,924,722 Preferred D-1 shares, each convertible into one Ordinary share. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 9. | In March 2009, a service provider exercised an option to purchase 59,807 Preferred D-2 shares par value NIS 0.01 each in consideration for $21. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10. | On April 1, 2009, the Company signed a Preferred E shares purchase agreement for the issuance of 10,413,052 Preferred E shares for the total consideration of $ 6,600. Pursuant to the issuance of the Preferred E shares, the anti dilution mechanism was activated with respect of Preferred B shares, Preferred C shares, Preferred D shares and Preferred D-1 shares were adjusted. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | b. | Share rights: |
|--------|----|---------------|

|   | 1. | Ordinary shares: |
|--------|----|------------------|

|   | The holders of Ordinary shares have the right to receive notices to attend and vote in general meetings, the right to share in dividends and a residual right upon liquidation after all preferred shareholders have received their preference allocation. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2009, the company has not sufficient Ordinary shares authorized available, after considering the right of Preferred shares to convert to Ordinary shares. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Preferred shares: |
|--------|----|-------------------|

|   | The Preferred shareholders (A,B,C,D,E) are entitled to the same rights conferred by the Ordinary shares in addition to the following rights: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | Anti dilution protection-Standard anti dilution and down round protection as stipulated in the agreements. |
|--------|------------------------------------------------------------------------------------------------------------|

|   | Liquidation Preference - After the Preferred E & D Liquidation Preference, the Preferred A & B & C shall receive together: Original Issue Price plus interest at the rate of 5% per annum, compounded annually, from the date of the Original Issue Date to the date of the Liquidation Event, plus an amount equal to declared but unpaid dividends, but less any dividends previously received on such shares. Notwithstanding, preference shall be cancelled if the amount of the Distributable Proceeds, equals to or exceeds USD 330,000. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Dividend Preference - Subject to a net cash balance of the Company of at least USD15,000 after such declaration and distribution of such dividend, and after the Preferred E & D Dividend Preference, the Preferred A & B& C shall receive together: Original Issue Price plus interest at a rate of 5% per annum, compounded annually, from the Original Issue Date until such declaration of dividend plus any declared but unpaid dividends but less any dividends previously received. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Conversion – Each Preferred shareholder has the right to convert its Preferred Shares into Ordinary Shares of the Company according to the then in effect Conversion Price at a conversion ratio of 1:1. Automatic Conversion upon Qualified IPO (Automatic Conversion upon the closing of an underwritten public offering of the Company’s ordinary shares netting to the Company proceeds of at least US$20,000 at a price per share which is at least five (5) times the original issue price per each Preferred D Share) or an IPO that is not qualified, with the consent in writing of the holders of at least 51% of all of the outstanding Ordinary Shares of the Company, on an as converted basis, including Elron Electronics Industries Ltd and SCP Vitalife II, LP which holds approximately 63% of the company's shares as of December 31, 2009. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The preferred D and E shares have also Protective Provisions rights - Until Qualified IPO: As long as Preferred D Shareholders hold at least 12.5% of the voting power of the Company, on an as-converted basis, in case of Non-Qualified Financing in which the majority of the funds is provided by investors other than the lenders, and provided further, that the amount payable to the lenders according to the liquidation preference set forth in the Company's Articles of Association with respect to the shares to be issued to them upon such conversion, is lower than the aggregate loan (without interest), then each lender may elect, in lieu of such conversion and participation, to have its portion of the loans repaid in full at the time of the M&A Transaction; require the affirmative vote of the directors appointed by D & E or by 55% of the D & E shareholders. Also, it has the right to appoint Board Members appointed by D & E together. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | c. | Options granted to service providers: |
|--------|----|---------------------------------------|

|   | 1. | In April 2005, the Company entered into a consulting agreement according to which the consultant was granted an option to purchase 9,877 Ordinary shares at an exercise price of $ 0.181 per share. The options vested over a period of 24 months. In July 2005, the Company entered into a similar agreement with an additional consultant. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | In December 2005, the Company entered into a consulting agreement according to which the consultant was granted an option to purchase 8,438 Ordinary shares at an exercise price of $ 0.6595 per share. The options vested over 8 quarters. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | In May 2006, the Company entered into a consulting agreement according to which the consultant was granted options to purchase 19,936 Ordinary shares at an exercise price of $ 1.1494 per share. 25% of the options were made available for immediate exercise and the remainder, subject to six vesting dates until May 10, 2009. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | In May 2006, the Company entered into a consulting agreement according to which the consultant was granted an option to purchase 59,807 preferred shares. Under the terms of the option, the option was exercisable until December 31, 2008. On December 28, 2008, the consultant gave the Company notice of its choice to exercise the option and to purchase 59,807 Preferred D shares, at a price per share of $ 0.3495. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | In November 2007, the Company entered into an agreement to receive consulting services according to which the consultant was granted an option to purchase 21,460 Ordinary shares at an exercise price of $ 2.2311 per share. The vesting period of the options is two years. 12.5% of the options shall vest 6 months from the grant date and the remaining options shall vest in an equal manner over six quarters and shall be valid until November 2014. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | On August, 2009, the Company granted several consultants options to purchase 23,666 Ordinary shares of NIS 0.01 par value each, at an exercise price of $ 0.63382 per share. 25% of the options shall vest at the end of the first year and the remainder shall vest over the following 3 years in 12 equal quarterly installments. The option shall expire 7 years after the date of grant. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | Summary of options issued to service providers: The Company's outstanding options that were granted to service providers as of December 31, 2009 are as follows: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Issuance date |   | Number of options |   |   | Exerciseprice |   |    | Options exercisable |   | Exercisablethrough |
|---------------|--------|-------------------|--------|--------|---------------|--------|---------|---------------------|--------|--------------------|
|          |   |              |   |   |          |   |    |                |   |               |
| April 2005    |   |              | 9,877  |   |          | $      | 0.1810  |                |   |               | 9,877 |   | April 2015 |
| July 2005     |   |              | 9,877  |   |          | $      | 0.1810  |                |   |               | 9,877 |   | July 2015 |
| December 2005 |   |              | 8,438  |   |          | $      | 0.6595  |                |   |               | 8,438 |   | December 2015 |
| May 2006      |   |              | 19,936 |   |          | $      | 1.1494  |                |   |               | 19,936 |   | December 2018 |
| November 2007 |   |              | 21,460 |   |          | $      | 2.2311  |                |   |               | 12,071 |   | November 2014 |
| August 2009   |   |              | 23,666 |   |          | $      | 0.63382 |                |   |               | - |   | August 2016 |
|          |   |              |   |   |          |   |    |                |   |               |   |   |   |
|          |   |              | 93,254 |   |          |   |    |                |   |               | 60,199 |   |   |

----

----

|   | The fair value of the options granted to service providers was estimated on the date of grant or at each balance sheet date (as applicable), using a Black-Scholes option pricing model, with the following weighted-average assumptions for 2009 and 2008: weighted average volatility of 80% and 94%, risk-free interest rates of 3% and 3.34%-3.81%, respectively, dividend yields of 0% and a weighted average expected life of the options of 5.5 years and six years for 2009 and 2008, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | Options granted to employees: |
|--------|----|-------------------------------|

|   | 1. | Share option plan: Under the Company's 2007 Share Option Plan ("the Plan"), options may be granted to officers, directors, employees and consultants of the Company. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pursuant to the Plan, the Company reserved for issuance 1,146,981 Ordinary shares. As of December 31, 2009, an aggregate of 2,966 stock options of the Company are still available for future grant. Each option granted under those Plans is exercisable until the earlier of seven years from the date of the grant of the option or the expiration dates of the respective option plans. The options vest primarily over four years (unless the Board of Directors approves otherwise in accordance with the provisions of the plans). Any options canceled or forfeited before expiration, become available for future grants. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company estimates the fair value of stock options granted using the Black and Scholes- option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility and the expected option term (the amount of time from the grant date until the options are exercised or expire). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company determined the expected life of the options according to the simplified method, average of vesting and the contractual term of the Company’s stock options. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Expected volatilities are based on historical volatilities from traded stock of similar companies. |
|--------|----------------------------------------------------------------------------------------------------|

----

----

|   | The weighted-average estimated fair value of employee stock options granted during the 12 months ended December 31, 2009, 2008 was $0.43 and $2.71, respectively per share using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages): |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                          |   | Year ended December 31, |   |
|-------------------------------|--------|-------------------------|--------|
| Employee stock options        |   | 2009                    |   |   | 2008 |   |
|                          |   |                    |   |   |   |   |
| Expected volatility           |   |                    | 80     | % |   |   | 90 | % |
| Average risk-free interest    |   |                    | 3      | % |   |   | 3.5 | % |
| Dividend yield                |   |                    | 0      | % |   |   | 0 | % |
| Average expected life (years) |   |                    | 5.5    |   |   |   | 6.11 |   |

|   | 2. | On December 25, 2007, the Company's board of directors approved the grant of 55,797 options to employees to purchase Ordinary shares at an exercise price of $ 2.2311 per share. 25% of the options shall vest at the end of the first year and the remainder shall vest over the following 3 years in 12 equal quarterly installments, provided that the employee remains employed by the Company during that quarter. The option shall expire 7 years after the day of grant. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | On February 17, 2008 and on June 18, 2008, the Company's board of directors approved the grant of 46,324 and 14,868 options, respectively, to employees to purchase Ordinary shares at an exercise price of $ 2.2311 per share. 25% of the options shall vest at the end of the first year and the remainder shall vest over the following 3 years in 12 equal quarterly installments, provided that the employee remains employed by the Company during that quarter. The options shall expire 7 years after the day of grant. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On June and August, 2009, the Company's Board of Directors approved, the grant of 1,031,657 options convertible to 1,031,657 Ordinary shares of NIS 0.01 par value each, to its employees at an exercise price of $ 0.634 per share. 25% of the options shall vest at the end of the first year and the remainder shall vest over the following 3 years in 12 equal quarterly installments. The option shall expire 7 years after the day of grant. The following table sets forth the total stock-based compensation expense resulting from stock options granted to employees and directors included in the Company's consolidated statement of operations: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                   |   | Year ended December 31 |   |
|----------------------------------------|--------|------------------------|--------|
|                                   |   | 2009                   |   |   | 2008 |   |
|                                   |   |                   |   |   |   |   |
| Research and development cost          |   |                   | 41     |   |   |   | 37 |   |
| General and administrative expenses    |   |                   | 95     |   |   |   | 49 |   |
|                                   |   |                   |   |   |   |   |   |   |
| Total stock-based compensation expense |   |                   | 136    |   |   |   | 86 |   |

|   | 5. | As of December 31, 2009, there was $ 350 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and service providers under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 2 years. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 6. | A summary of the Company's option activity related to options granted to employees, and related information for the year ended December 31, 2008 and 2009 are as follows: |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                  |   | Number of options |    |   | Weighted-average exercise price |   |   | Weighted- average remaining contractual term (in years) |   |
|---------------------------------------|--------|-------------------|---------|--------|---------------------------------|--------|--------|---------------------------------------------------------|--------|
|                                  |   |              |    |   |                            |   |   |                                                    |   |
| Outstanding at January 1, 2008        |   |              | 55,797  |   |                            | $      | 2.23   |                                                    |   |   | 5.2 |   |
| Granted                               |   |              | 61,192  |   |                            | $      | 2.23   |                                                    |   |   | 5.5 |   |
| Forfeited                             |   |              | (12,018 | )      |                            | $      | 2.23   |                                                    |   |   | - |   |
|                                  |   |              |    |   |                            |   |   |                                                    |   |   |   |   |
| Outstanding at December 31, 2008 |   |              | 104,971 |   |                            | $      | 2.23   |                                                    |   |   | 5 |   |
|                                  |   |              |    |   |                            |   |   |                                                    |   |   |   |   |
| Exercisable at December 31, 2008 |   |              | 14,486  |   |                            | $      | 2.23   |                                                    |   |   | 5 |   |

|                                  |   | Number of options |      |   | Weighted-average exercise price |   |   | Weighted- average remaining contractual term (in years) |   |
|---------------------------------------|--------|-------------------|-----------|--------|--------------------------------------|--------|--------|---------------------------------------------------------|--------|
|                                  |   |              |      |   |                                 |   |   |                                                    |   |
| Outstanding at January 1, 2009        |   |              | 104,971   |   |                                 | $      | 2.23   |                                                    |   |   | 5 |   |
| Granted                               |   |              | 1,031,657 |   |                                 | $      | 0.63   |                                                    |   |   | 5.5 |   |
| Forfeited                             |   |              | (37,739   | )      |                                 | $      | 2.23   |                                                    |   |   | - |   |
|                                  |   |              |      |   |                                 |   |   |                                                    |   |   |   |   |
| Outstanding at December 31, 2009 |   |              | 1,098,889 |   |                                 | $      | 0.73   |                                                    |   |   | 5.5 |   |
|                                  |   |              |      |   |                                 |   |   |                                                    |   |   |   |   |
| Exercisable at December 31, 2009 |   |              | 21,345    |   |                                 | $      | 0.23   |                                                    |   |   | 4.5 |   |

----

----

|   | a. | Tax laws applicable to the Company: |
|--------|----|-------------------------------------|

|   | According to the law, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI. |
|--------|------------------------------------------------------------------------------------------------------------------|

|   | In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. Adjustments relating to capital gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Tax rates applicable to the income of the Company: |
|--------|----|----------------------------------------------------|

|   | In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed by the "Knesset" (Israeli parliament) and on July 25, 2005, another law was passed, the amendment to the Income Tax Ordinance (No. 147) 2005, according to which the corporate tax rate is to be progressively reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In July 2009, the "Knesset" (Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among others, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The amendment is not expected to have a material effect on the Company's financial position and results of operations. |
|--------|------------------------------------------------------------------------------------------------------------------------|

|   | c. | Non-Israeli subsidiary: Non-Israeli subsidiary is taxed based on tax laws in its country of residence. |
|--------|----|-------------------------------------------------------------------------------------------------------------|

|   | d. | Deferred income taxes: |
|--------|----|------------------------|

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

|                                              |   | Year ended December 31, |   |
|---------------------------------------------------|--------|-------------------------|--------|
|                                              |   | 2009                    |   |   | 2008 |   |
|                                              |   |                    |   |   |   |   |
| Operating loss and deductions carry forwards      |   | $                       | 8,531  |   |   | $ | 7,038 |   |
| Reserves and allowances                           |   |                    | -      |   |   |   | 16 |   |
|                                              |   |                    |   |   |   |   |   |   |
| Net deferred tax asset before valuation allowance |   |                    | 8,531  |   |   |   | 7,054 |   |
| Valuation allowance                               |   |                    | (8,531 | ) |   |   | (7,054 | ) |
|                                              |   |                    |   |   |   |   |   |   |
| Net deferred tax asset                            |   | $                       | -      |   |   | $ | - |   |

----

----

|   | As of December 31, 2009, the Company has provided valuation allowances of approximately $ 34,125 thousand in respect of deferred tax assets resulting from tax loss carry forwards and other temporary differences. Management currently believes that since the Company and its subsidiaries have a history of losses it is more likely than not that the deferred tax regarding the loss carry forward and other temporary differences will not be realized in the foreseeable future. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | f. | Loss before taxes on income consists of the following: |
|--------|----|--------------------------------------------------------|

|     |   | Year ended December 31, |    |
|----------|--------|-------------------------|---------|
|     |   | 2009                    |    |   | 2008 |   |   | 2007 |   |
|     |   |                    |    |   |   |   |   |   |   |
| Domestic |   |                    | (10,630 | ) |   |   | (18,093 | ) |   |   | (7,333 | ) |
| Foreign  |   |                    | 18      |   |   |   | 33 |   |   |   | - |   |
|     |   |                    |    |   |   |   |   |   |   |   |   |   |
|     |   |                    | (10,648 | ) |   |   | (18,060 | ) |   |   | (7,333 | ) |

|   | The provision for income tax derives from reimbursement of the U.S. subsidiary's expenses by the parent company, which is taxable in the U.S.. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | g. | Net operating losses carry forward: |
|--------|----|-------------------------------------|

|   | The Company has accumulated losses and deductions for tax purposes as of December 31, 2009, in the amount of approximately $ 34,000 thousand, which may be carried forward and offset against taxable income in the future for an indefinite period. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | h. | Final tax assessments: |
|--------|----|------------------------|

|   | The Company's tax assessments through the 2005 tax year are considered final. |
|--------|-------------------------------------------------------------------------------|

|   | i. | No liability for unrecognized tax benefits was recorded as a result of implementation of ASC 740 (formerly FIN 48). |
|--------|----|---------------------------------------------------------------------------------------------------------------------|

|                                        |   | Year ended December 31, |   |
|---------------------------------------------|--------|-------------------------|--------|
|                                        |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                        |   |                    |   |   |   |   |   |   |   |
| Financial income:                           |   |                    |   |   |   |   |   |   |   |
|    Interest on bank deposits |   |                    |   |   |   |   |   |   |   |
|                                        |   |                    | (2     | ) |   |   | (177 | ) |   |   | (122 | ) |
|                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
| Financial expenses:                         |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest and bank charges                   |   |                    | 3      |   |   |   | 3 |   |   |   | 3 |   |
| Foreign currency translation differences    |   |                    | 11     |   |   |   | 2 |   |   |   | 2 |   |
| Interest related to Convertible loan        |   |                    | 190    |   |   |   | 522 |   |   |   | - |   |
|                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                        |   |                    | 204    |   |   |   | 527 |   |   |   | 5 |   |
|                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                        |   | $                       | 202    |   |   | $ | 350 |   |   | $ | (177 | ) |

----

----