---

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------------------

OR

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

For the fiscal year ended _________

OR

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

For the transition period from _________ to ________

OR

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

Date of event requiring this shell company report: September 29, 2008

Commission File Number:
0-12332

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

Israel(Jurisdiction of incorporation or organization)

48 Ben Zion Street, Segula Industrial Area, Petach Tikva, 49277, Israel(Address of principal executive offices)

Shachar Rachim, Chief Financial Officer
Tel: (972)-3-9057730; Fax: (972)-3-9314422
48 Ben Zion Street, Segula Industrial Area, Petach Tikva, 49277, Israel(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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



---

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

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the annual report: As of September
29, 2008, the Registrant had outstanding:

# 43,579,388 Ordinary
Shares, NIS 0.12 nominal (par) value per share

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

o Yes     x No

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes     o No

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

x Yes     o No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

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

Indicate
by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:

U.S. GAAP x

o International Financing Reporting Standards as issued by the International Accounting Standards Board

o Other

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

o Yes     o No

2

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# TABLE OF CONTENTS

|                                                              | Page
|------------------------------------------------------------- | ----
|
|
|
|
|INTRODUCTION                                                  | 5   
|                                                             
|PART I                                                        | 6   
|Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 6   
|                                                             
|Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 7   
|                                                             
|Item 3. KEY INFORMATION                                       | 7   
|A. Selected Financial Data                                    | 7   
|B. Capitalization and Indebtedness                            | 10  
|C. Reasons for the Offer and Use of Proceeds                  | 11  
|D. Risk Factors                                               | 11  
|                                                             
|Item 4. INFORMATION ON THE COMPANY                            | 22  
|A. History and Development of the Company                     | 22  
|B. Business Overview                                          | 25  
|C. Organizational Structure                                   | 36  
|D. Property, Plants and Equipment                             | 36  
|                                                             
|Item 4A. UNRESOLVED STAFF COMMENTS                            | 36  
|                                                             
|Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 36  
|A. Operating Results                                          | 39  
|B. Liquidity and Capital Resources                            | 47  
|C. Research and Development, Patents and Licenses             | 50  
|D. Trend Information                                          | 50  
|E. Off-Balance Sheet Arrangements                             | 51  
|F. Tabular Disclosure of Contractual Obligations              | 51  
|                                                             
|Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 52  
|A. Directors and Senior Management                            | 52  
|B. Compensation                                               | 54  
|C. Board Practices                                            | 55  
|D. Employees                                                  | 61  
|E. Share Ownership                                            | 62  
|                                                             
|Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 64  
|A. Major Shareholders                                         | 64  
|B. Related Party Transactions                                 | 66  
|C. Interests of Expert and Counsel                            | 68  
|                                                             
|Item 8. FINANCIAL INFORMATION                                 | 69  
|A. Consolidated Statements and Other Financial Information    | 69  
|B. Significant Changes                                        | 69  
|                                                             
|Item 9. THE OFFER AND LISTING                                 | 70  
|A. Offer and Listing Details                                  | 70  
|B. Plan of Distribution                                       | 70  
|C. Markets                                                    | 71  
|D. Selling Shareholders                                       | 71  
|E. Dilution                                                   | 71  
|F. Expenses of the Issue                                      | 71  

3

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|Item 10. ADDITIONAL INFORMATION                                                       | 71 
|------------------------------------------------------------------------------------- | ---
|A. Share Capital                                                                      | 71 
|B. Memorandum and Articles of Association                                             | 71 
|C. Material Contracts                                                                 | 75 
|D. Exchange Controls                                                                  | 91 
|E. Taxation                                                                           | 91 
|F. Dividends and Paying Agents                                                        | 97 
|G. Statement by Experts                                                               | 97 
|H. Documents on Display                                                               | 98 
|I. Subsidiary Information                                                             | 98 
|                                                                                     
|Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 99 
|                                                                                     
|Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 99 
|                                                                                     
|PART II                                                                               | 99 
|                                                                                     
|Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 99 
|                                                                                     
|Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 99 
|                                                                                     
|Item 15. CONTROLS AND PROCEDURES                                                      | 99 
|                                                                                     
|Item 16A. Audit Committee Financial Expert                                            | 99 
|Item 16B. Code of Ethics                                                              | 99 
|Item 16C. Principal Accountant Fees and Services                                      | 99 
|Item 16D. Exemptions From the Listing Standards for Audit Committees                  | 99 
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 100
|                                                                                     
|PART III                                                                              | 100
|                                                                                     
|Item 17. FINANCIAL STATEMENTS                                                         | 100
|                                                                                     
|Item 18. FINANCIAL STATEMENTS                                                         | 100
|                                                                                     
|Item 19. EXHIBITS                                                                     | 101
|                                                                                     
|SIGNATURES                                                                            | 103

4

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# INTRODUCTION

Unless indicated otherwise by the
context, all references in this Shell Company Report (Report) to:

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

| |  | "Dollars"
or "$" are to United States dollars;
| | - | ----------------------------------------------

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

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

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

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

| |  | "Jemtex"
is to Jemtex InkJet Printing Ltd., of which we hold 15% of the equity interests;
| | - | -----------------------------------------------------------------------------------------

| |  | IPE is
to The Israel Petrochemicals Enterprise Ltd.;
| | - | ------------------------------------------------------

| |  | Israel
Corp. is to Israel Corporation Ltd.;
| | - | ---------------------------------------------

| |  | PCH is
to Petroleum Capital Holdings Ltd., a former subsidiary of ours through which we held
approximately 15.76% of the outstanding shares of ORL (as defined below), that was sold
to IPE, our former controlling shareholder;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | "ORL"
is to Oil Refineries Ltd., an oil refinery located in Haifa, Israel;
| | - | --------------------------------------------------------------------------

| |  | "Suny"
is to Suny Electronics Ltd., our controlling shareholder;
| | - | ----------------------------------------------------------------

| |  | Suny
Telecom is to the business operations of Suny Telecom (1994) Ltd. that we acquired
from Suny and that is engaged in the business of importing mobile cellular phones
and related parts and accessories into Israel and marketing and distribution
thereof;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Dynamic is
to the business operations of Din Dynamic Ltd. that we acquired from Suny and that
is engaged in the retail business of reselling mobile cellular phone and related parts
and services on behalf of Cellcom Israel Ltd., a major Israeli cellular network operator: and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | "Samsung"
is to Samsung Electronics Co. Ltd., a publicly traded Korean corporation and the
sole supplier of our Suny Telecom business for mobile cellular phones and
spare parts and accessories.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS

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

5

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---

| |  | the
loss of Samsung as the supplier of our Suny Telecom business;
| | - | -----------------------------------------------------------------

| |  | the
loss or a reduction in sales to the three major customers of the Suny Telecom
           business;
| | - | ------------------------------------------------------------------------------------------------------

| |  | our
absence of significant operations, other than our purchase of the business operations of
Suny Telecom and Dynamic from Suny, following the sale of the business of Scailex Digital
Printing and Scailex Vision, the reduction of our holdings in Jemtex to 15%, as well as
the sale of PCH to IPE;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to identify and evaluate suitable business opportunities;
| | - | ---------------------------------------------------------------------

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

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

| |  | our
classification as a passive foreign investment company ("PFIC"), which may subject our
           U.S. shareholders to adverse U.S. federal income tax consequences. See "Item
10.E Taxation            - Certain Material U.S. Federal Income Tax Considerations";
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
fact that we may be deemed an "investment company" under the Investment Company Act of
           1940 which may subject us to certain U.S. regulations and be subject to
limitations with            respect to the investment of our assets; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# USE OF TRADE NAMES

Scailex is our trademark. Jemtex is a
trademark of Jemtex.

# PART I

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

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

See Item 6. Directors, Senior
Management, and Employees.

|B. | ADVISERS
|-- | --------

Not
applicable.

|C. | AUDITORS
|-- | --------

For 2005 and 2006, our independent
auditors were Kesselman & Kesselman, a member of PricewaterhouseCoopers International
Ltd. (PwC). Their address is Trade Tower, 25 Hamered Street Tel-Aviv, 68125, Israel. For
2007 and 2008, our independent auditors have been Brightman Almagor Zohar & Co.,
Certified Public Accountants, a Member Firm of Deloitte Touche Tohmatsu. Their address is
One Azrieli Center, Round Building, Tel Aviv, 67021, Israel.

6

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

Not applicable.

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

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

The following selected consolidated
statements of operations data for the years ended December 31, 2005, 2006 and 2007 and the
selected consolidated balance sheet data as of December 31, 2006 and 2007 are derived
from our audited consolidated financial statements incorporated by reference into this
Report, which have been prepared in accordance with generally accepted accounting
principles in the United States (U.S. GAAP). The selected consolidated
statement of operations data for the years ended December 31, 2003 and 2004 and the
selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005 are
derived from audited consolidated financial statements not appearing in this Report, which
have been prepared in accordance with U.S. GAAP. Selected consolidated balance sheet data
for the period ended June 30, 2008, and our selected consolidated statements of operations
data for the periods ended June 30, 2007 and June 30, 2008 are derived from our unaudited
consolidated financial statements  included in this Report, which have been
prepared in accordance with U.S. GAAP.

In November 2005, Scailex Vision, our
majority owned subsidiary, sold its business to Hewlett-Packard Company, as described
below under Item 10.C Additional InformationMaterial Contracts. As a
result of the sale, since November 2005, the results of operations of Scailex Vision have
been reported as discontinued operations and the consolidated results from continuing
operations have no longer included the revenues and expenses attributable to Scailex
Vision. Similarly, assets and liabilities relating to Scailex Vision are presented on our
balance sheet separately as assets and liabilities of discontinued operations.

Our consolidated financial statements
for prior periods have been reclassified to reflect these changes. See Note 1b(2) to our
consolidated financial statements incorporated by reference into this Report.

In August 2006, we decreased our
holdings in Jemtex from approximately 75% to approximately 15% (on a fully diluted basis).
See Item 4A. History and Development of the Company, Item 4B. Business
Overview, and Item 10C. Material Contracts-Reorganization Contract between the
Company and Senior Management of Jemtex. As a result of the sale, since August 2006
the results of operations of Jemtex have been reported as discontinued operations and the
consolidated results from continuing operations have no longer included the revenues and
expenses attributable to Jemtex. Similarly, assets and liabilities relating to Jemtex are
presented on our balance sheet separately as assets and liabilities of discontinued
operations. Our consolidated financial statements for prior periods have been reclassified
to reflect these changes. See Note 1b(3) to our consolidated financial statements incorporated by reference into this this Report.

As of December 31, 2007, our
continuing operations were comprised of Scailex Corporation and PCH. Consequently, we did
not record any revenues from such continuing operations in the years 2003 through 2007.
Since we are exploring our strategic alternatives, including engaging in new areas of
operations, and we have recently acquired assets of the Suny Telecom and Dynamic
businesses, the data presented below are not indicative of our future operating results or
financial position.

As of December 31, 2007, the majority
of our consolidated assets were cash, available-for-sale financial assets (mainly
comprising of our shares in ORL) and securities held-to-maturity. On June 30, 2008 we sold
100% of the share capital of our then wholly owned subsidiary, PCH, to IPE, our then
controlling shareholder, for the total sum of approximately NIS 1.14 billion
(approximately $338 million). As a result of this transaction, we no longer had any
interest in ORL and as part of this transaction, IPE, our then controlling shareholder,
sold it shareholdings in Scailex to Suny Electronics (our current controlling
shareholder). See Item 10.C. Material Contracts  The PCH Sale Agreement, dated
April 10, 2008".

7

---

---

On September 29, 2008, we purchased
from Sunyassets of the Suny Telecom and Dynamic businesses for the total sum of
approximately NIS 255,809,000 (approximately $74.8 million), subject to certain
adjustments. Suny Telecom is engaged in the business of importing mobile cellular phones
and related parts and accessories into Israel and the marketing and distribution thereof,
and Dynamic is engaged in the business of retail business of reselling mobile cellular
phones and related parts and services on behalf of Cellcom Israel Ltd., a major Israeli
cellular network operator. As a result of this transaction, we ceased to be a shell
company.

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

BALANCE SHEET DATA

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

8

---

---

|                                                                            | As of June 30,
2008
|--------------------------------------------------------------------------- | -------------------
|
|
|
|
|Net working capital (continuing operations) **                              |                    
|Net working capital (discontinued operations) **                            |                    
|Cash, cash equivalents and short term Investments (continuing operations)   |                    
|Cash, cash equivalents and short term investments (discontinued operations) |                    
|Total assets                                                                |                    
|Long term liabilities (continuing operations)                               |                    
|Long term liabilities (discontinued operations) ****                        |                    
|Share capital                                                               |                    
|Shareholders' equity                                                        |                    

* Includes a restricted cash deposit
in a bank, the balance of which was $5,165,000, $18,000,000 and $18,262,000 as of
December 31, 2005, 2004 and 2003, respectively.

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

*** Including an investment in ORL
shares that is presented as available-for-sale assets.

**** Includes minority interest
related to discontinue operation.

---

1
          Includes $341,681 thousands of income receivable from a related party (IPE),
          mainly representing the proceeds from our sale of PCH to IPE, which was paid in
          cash on July 1, 2008. Concurrent with the sale of PCH to IPE, IPE sold all of
          its shares in the Company to Suny, and thereafter has not been a related party
          to the Company. See Item 4A. History and Development of the Company.

STATEMENT OF OPERATIONS
DATA

|                                                   | Year Ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|
|
|General and administrative expenses                |                        
|Financial income - net                             |                        
|Other income (loss) - net                          |                        
|                                                   |                        
|Income (loss) before taxes on income               |                        
|                                                   |                        
|Tax benefit (Taxes on income)                      |                        
|Share in results of associated companies           |                        
|                                                   |                        
|Minority interest in loss (income) of a subsidiary |                        
|                                                   |                        
|Net income (loss) from continuing operations       |                        
|                                                   |                        
|Net income from discontinued operations            |                        
|                                                   |                        
|Net income                                         |                        
|                                                   |                        
|Earnings (loss) per share - basic                  |                        
|Continuing operations                              |                        
|Discontinued operations                            |                        
|                                                   |                        
|                                                   |                        
|                                                   |                        
|Earnings (loss) per share - diluted                |                        
|Continuing operations                              |                        
|Discontinued operations                            |                        
|                                                   |                        
|                                                   |                        
|                                                   |                        
|Weighted average number of shares                  |                        
|outstanding(in thousands) - basic                  |                        
|- diluted                                          |                        
|                                                   |                        
|Dividends per share                                |                        
|                                                   |                        

9

---

---

|                                                   | Year Ended June 30,
|-------------------------------------------------- | -------------------
|
|
|
|
|General and administrative expenses                |                    
|Financial income - net                             |                    
|Other income (loss) - net                          |                    
|                                                   |                    
|Income (loss) before taxes on income               |                    
|                                                   |                    
|Tax benefit (Taxes on income)                      |                    
|Share in results of associated companies           |                    
|                                                   |                    
|Minority interest in loss (income) of a subsidiary |                    
|                                                   |                    
|Net income (loss) from continuing operations       |                    
|                                                   |                    
|Net income from discontinued operations            |                    
|                                                   |                    
|Net income                                         |                    
|                                                   |                    
|Earnings (loss) per share - basic                  |                    
|Continuing operations                              |                    
|Discontinued operations                            |                    
|                                                   |                    
|                                                   |                    
|                                                   |                    
|Earnings (loss) per share - diluted                |                    
|Continuing operations                              |                    
|Discontinued operations                            |                    
|                                                   |                    
|                                                   |                    
|                                                   |                    
|Weighted average number of shares                  |                    
|outstanding (in thousands) - basic                 |                    
|- diluted                                          |                    
|                                                   |                    
|Dividends per share                                |                    
|                                                   |                    

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

The table below sets forth the
unaudited historical capitalization and indebtedness, determined in accordance with U.S.
GAAP, as of June 30, 2008. The information in this table should be read in conjunction
with, and is qualified by reference to, the financial statements and notes thereto and
other financial information included elsewhere or incorporated by reference into this
Report.

|                                      | As of June 30, 2008
|------------------------------------- | -------------------
|
|
|
|
|Indebtedness                          |                    
|Share capital                         |                    
|Capital surplus                       |                    
|Accumulated other comprehensive loss  |                    
|Treasury shares                       |                    
|Retained earnings                     |                    
|Total shareholders' equity            |                    
|Total Capitalization and Indebtedness |                    
|                                      |                    

10

---

---

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

Not Applicable.

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

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

# Risks Related to Our
Business

| | Most
of our assets are held in financial instruments, and we may not be successful in  identifying
and evaluating suitable business opportunities.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | We
sold the business of Scitex Digital Printing Inc., or SDP, one of our two principal
operating subsidiaries, to Eastman Kodak Company, or Kodak, in January 2004. In November
2005, Scailex Vision, our remaining principal operating subsidiary, sold its business to
Hewlett-Packard Company, or Hewlett-Packard. In August, 2006, we decreased our holdings
in Jemtex from approximately 75% to approximately 15% (on a fully diluted basis).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 30, 2008, we sold 100% of the share capital of our then wholly owned subsidiary,
PCH, to IPE, our then controlling shareholder, following which we no longer had any
interest in ORL.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 29, 2008, we purchased from Suny assets of the Suny Telecom and Dynamic
businesses.
| | ------------------------------------------------------------------------------------------------

| | See
Item 4A. History and Development of the Company, Item 4B  Business
Overview, Item 10C  Material Contracts  The PCH Sale Agreement,
dated April 10, 2008 and Item 10C  Material Contracts Reorganization
Contract between the Company and Senior Management of Jemtex.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the date of this Report, we hold approximately 80% of our assets in financial
instruments. Our plan of operation is to explore and consider additional strategic
investments and business opportunities. While we are actively exploring such
opportunities, there can be no assurance that we will be successful in identifying and
evaluating suitable business opportunities. We may invest in entities having no
significant operating history or other negative characteristics, such as having limited
or no potential for immediate earnings that will not necessarily provide us with
significant financial benefits in the short term. In the event that we make new
investments, a significant factor in our success will be the performance of target
entities and their management, as well as numerous other factors beyond our control.
There is no assurance that we will be able to invest on terms favorable to us, or at all.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

| | We
hold approximately  80% of our assets in financial instruments which are
denominated in NIS. A decrease in interest rates in Israel could
materially reduce our financial income. In  addition, a significant
portion of our assets could be subject to loss in the event of the  failure
of the Israeli banks in which we have deposited our funds.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As of September 29, 2008, we held, on
a consolidated basis, approximately $284 million in cash and financial instruments, which
represented approximately 80% of our assets. The cash was primarily derived from our sale
on June 30, 2008 of all of our shares in our then wholly owned subsidiary, PCH, to IPE,
our then controlling shareholder, for the total sum of approximately NIS 1.14 billion
(approximately $340.8 million) This transaction occurred concurrently with the purchase by
Suny Electronics Ltd. from IPE of all of the Scailex shares held by IPE.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 29, 2008, we purchased from Suny assets of the Suny Telecom and Dynamic
businesses for the total sum of approximately NIS 255,809,000 (approximately $74.8
million), subject to certain adjustments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the change in our ownership resulting from the abovementioned agreement
between Suny and IPE, our operating currency changed from dollars to shekels.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to our significant investments in short term deposits in Israel, we are subject to the
risk of a reduction of interest rates in Israel. A decrease in interest rates could
materially reduce our financial income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, we are exposed to the potential instability of the Israeli banks in which we
have deposited our funds. In the event such banks fail due to the recent instability in
the financial markets or for any other reason, a significant portion of our assets could
be subject to loss.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
information on the types of our investments as of December 31, 2007, see Item 11 Quantitative
and Qualitative Disclosures About Market RiskPresentation of Exchange Rate and Interest Rate Risk."
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
a result of tax audits or assessments in Israel or abroad related to the Company or to
our subsidiaries which sold their operations, we may be required to pay additional taxes,
as a result of which our future results may be adversely affected. For more information
about these audits and other tax assessments, please see under Item 5B.  Liquidity
& Capital Resources  Tax Audits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | We
believe that we are not subject to regulation or registration under the Investment
Company Act of 1940, or the Investment Company Act, because we are incorporated outside
of the United States and are not publicly offering and do not propose to publicly offer
our securities in the United States. We also do not promote our securities in the United
States and our ordinary shares were delisted from Nasdaq. The Investment Company Act
limits our ability to raise capital in the United States.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
we fail to make strategic, controlling investments, the likelihood of being deemed to be
engaged in an investment company business would increase over time. If we were to
engage in a public offering of our securities in the United States or were deemed to
promote our securities in the United States and also to be engaged in an investment
company business, we may be required to seek exemptive or other relief from the SEC so as
not to be regulated under the Investment Company Act.  No assurance can be made
that we would obtain such exemptive or other relief from the SEC, if and when we seek the
same. As a result, we may be required to take certain actions with respect to the
investment of our assets or the distribution of cash to our shareholders in order to
avoid being deemed an investment company, which actions may not be as favorable to us as
if we were not potentially subject to regulation under the Investment Company Act.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
we were deemed to be an investment company and engaged in a public offering of our
securities or promoting our securities in the United States, we could be found to be in
violation of the Investment Company Act, and a violation of that act could subject
us to material adverse consequences.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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# Risks Related to the
Suny Telecom Business

| | The
loss of Samsung as the sole supplier of mobile cellular phones and spare parts andaccessories,
or the loss of our exclusive relationship with Samsung, would have a materialadverse
effect on our Suny Telecom business.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Suny Telecom business is our primary area of operating activity. On a pro forma basis,
giving effect to the acquisition of the Suny Telecom business as of the beginning of
2008, our revenues from the sale of Samsungs mobile cellular phones, spare parts
and accessories would have accounted for approximately 74% of our total revenues during
the six month period ended June 30, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Samsung,
the number two manufacturer of mobile cellular phones in the world in 2007, is the sole
supplier of our Suny Telecom business for mobile cellular phones and spare parts and
accessories pursuant to distribution agreements with Samsung. One of the critical factors
in the success of our Suny Telecom business is the existence of a reliable source of
supply of quality and state-of-the-art mobile cellular phones. Samsungs mobile
cellular phones are viewed as innovative and reliable, with a high standard of design,
and at an advanced technological level. We rely on the technological edge, innovation and
strength of the Samsung brand, as well as Samsungs ability to manufacture a large
number of mobile cellular phone models using various technologies. In addition, we depend
on Samsung to supply us with adequate inventories of popular mobile cellular phones on a
timely basis and on favorable pricing and other terms. The loss of Samsung as our sole
supplier, a substantial price increase imposed by Samsung, a shortage or oversupply of
product available from Samsung or a tightening of credit terms granted by Samsung to us
could have a material adverse impact on our business. We cannot assure you that the loss
of Samsung as sole supplier, product shortages, product surpluses or a tightening of
trade credit terms will not occur in the future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Samsung
may terminate its agreements with us if we fail to meet various annual sales  targets
or upon the occurrence of other triggering events. Such a termination would have a  material
adverse effect on our Suny Telecom business.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are party to two distribution agreements with Samsung, one granting us exclusive rights
to market mobile cellular phones manufactured by Samsung using CDMA technology (the CDMA
Agreement) and the other granting us exclusive rights to market mobile cellular
phones manufactured by Samsung using GSM technology (the GSM Agreement). The
CDMA Agreement expires on December 31, 2009, and the GSM Agreement expires on August 12,
2009. These agreements also cover accessories and spare parts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of each of these agreements, we must meet certain annual sales targets provided
that Samsung fulfills certain conditions. Our annual sales targets include achieving
various commercial targets. Samsung may terminate or decide not to renew either or both
agreements on an annual basis should we fail to meet these annual targets under the
agreements, provided Samsung has fulfilled its obligations under the agreements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
Samsung terminates either or both of the CDMA and GSM Agreements and alternative sources
of supply are not readily available, or if any of these agreements expire and are not
renewed, or if we otherwise lose our exclusive relationship with Samsung, we expect that
there will be a significant decline in the scope of operations of our Suny Telecom
business and it will have a material adverse effect on our profitability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are dependent on three major customers, the major Israeli cellular network operators, to
 which we sell our products. The loss of any of these customers, or
reduction in orders from any  of these customers or a reduction in
prices that we are able to charge these customers, could  have a
material adverse effect on our Suny Telecom business.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
major customers of the Suny Telecom Business are the major operators of cellular networks
in Israel: Pelephone Communications Ltd. (Pelephone), Cellcom Israel Ltd. (Cellcom)
and Partner Communications Ltd. (Partner) (collectively, the Cellular
Operators). Sales to Pelephone accounted for approximately 55%  of the total sales of
the Suny Telecom business in 2007, 59% of total sales in 2006 and 43% of total sales in
2005. Sales to Partner accounted for approximately 27% of the total sales of the Suny
Telecom business in 2007, 24% of total sales in 2006 and 30% of total sales in 2005.
Sales to Cellcom accounted for approximately 18% of the total sales of the Suny Telecom
business in 2007, 17% of total sales in 2006 and 27% of total sales in 2005. We are
dependent on the Cellular Operators, and the termination of our contractual relationship
with any one or more of these Cellular Operators for any reason could have a material
adverse effect on the sales volume and results of operations of our Suny Telecom
business.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | Additionally,
our customers are not contractually obligated to purchase product from us. There can be
no assurance that any of the Cellular Operators will continue to purchase products or
services from us or that their purchases will be on the same terms or at the same or
greater levels than in prior periods. The loss of any of our major customers, a material
adverse change in the financial conditions of our major customers, a reduction in the
amount of product or services our major customers order from us or the inability to
maintain current terms, including price, with these or other customers could have an
adverse effect on our financial condition, results of operations and liquidity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
technical failure by Samsung in the manufacture of its mobile cellular phones and/orour
inability to adapt Samsung mobile cellular phones to the networks of cellular providerswould have a material adverse effect on our sales.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
sell mobile cellular phones that employ GSM technology to Partner and Cellcom and mobile
cellular phones that employ CDMA technology to Pelephone. Samsung typically launches new
mobile cellular phone models using the various technologies on an annual basis, primarily
due to accelerated technological development in the sector and market demand for advanced
technologies. The new mobile cellular phone models are characterized by increasingly
sophisticated functions, using advanced technologies optimizing usage and rendering it
more efficient and rapid, together with innovative design. The introduction of new
sophisticated mobile cellular phone models to the Israeli market requires adequate
engineering and marketing preparation to ensure that the Samsung mobile cellular phone
models that we market are compatible with the technological and marketing demands of the
Israeli cellular network operators and their end customers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
rely on Samsung to manufacture products that are satisfactory to our customers. If
Samsung experiences any technical failures in its manufacture of its mobile cellular
phones and or if we are unable or otherwise experience difficulties in adapting Samsungs
mobile cellular phones to the networks of the cellular providers in Israel to which we
sell Samsungs products, and no timely solution is found, our ability to provide
satisfactory products to our customers could be disrupted and our reputation could be
impaired. Defects in the mobile cellular phones that we market or in their
incompatibility with the Israeli cellular networks may be detected only after deployment.
Any resulting customer dissatisfaction is likely to result in a slowdown in sales volume,
adverse effect to the reliability of the brand and our company and loss of major
customers and/or market share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, we assist Samsung in the development of applications relating to the use of the
Hebrew language and correct operations in user manuals and incur significant costs in the
process. If these applications fail to meet our customers needs, are incompatible
with our customers cellular networks, are not widely accepted by our customers or
are not profitable, we may not be able to recover the entire investment in the
development of the applications.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
success depends in part on timely introduction by Samsung of new products andtechnologies.
Samsungs failure to meet timelines for introduction of new mobile cellularphone
models into the market could materially adversely affect our business.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
markets for mobile cellular phones and related products are characterized by rapidly
changing technologies, frequent new product introductions, short product life cycles and
evolving industry standards. Our success depends, in substantial part, on the timely and
successful introduction by Samsung of new products and upgrades of current products to
comply with emerging industry standards and Samsungs ability to address
technological and product developments carried out by competing mobile cellular phone
manufacturers. The many mobile cellular phone models on the market, the fierce
competition and the required technological innovation create a situation whereby any
deviation from the timelines set for launching new mobile cellular phones could result in
a decline in the sales volumes of such phones, loss of a market share and loss of the
funds invested in the development of those mobile cellular phones. The delay by Samsungs
in the development or introduction of new mobile cellular phone models, or the inability
of Samsung to address technological and product developments carried out by competitors,
could impair our revenue and operating results.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | The
inability to accurately predict which mobile cellular phone models and features will bein demand in the market could have a material adverse effect on our
Suny Telecom business.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
mobile cellular phone sector in Israel is characterized by innovation, frequent changes
in products and constant technological improvements, allowing end customers to benefit
from a variety of state-of-the-art features, such as color, camera, music, links to
computers, to the Internet and to TV broadcasts, high speed transmission of information
and/or video files, among others. The markets demand for innovation and advanced
mobile cellular phone features are among the factors that encourage end customers to
periodically replace and upgrade their mobile cellular phones.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
research and development of new, technologically-advanced mobile cellular phones is a
complex and uncertain process requiring high levels of innovation and investment, as well
as accurate anticipation of technological and market trends. In addition, the process of
selecting new Samsung mobile cellular phones to be marketed by us to the Cellular
Operators involves an assessment of market requirements and trends with respect to such
mobile cellular phones and their features. If we or Samsung is unable to accurately
predict technological and market trends or if the Samsung mobile cellular phones that we
market in Israel do not meet local market requirements, the revenues of our Suny Telecom
business could be materially adversely affected. In addition, we may focus our own
resources on technologies that are used and or developed by Samsung that do not become
widely accepted or are not commercially viable, which would increase our expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
transition of Pelephone, our major customer, from a cellular network employing CDMAtechnology
to a cellular network employing GSM technology could have a material adverse effecton
the Suny Telecom business.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Approximately
55% of the revenues of the Suny Telecom business sales in 2007 were to Pelephone, the
largest customer of the Suny Telecom business, which purchases from us mobile cellular
phones employing the CDMA technology used by the Pelephone network. Pelephone has
announced that it plans on converting from CDMA technology to GSM technology in the
beginning of 2009. We anticipate that upon the activation of the new cellular network,
competition vis-à-vis Pelephone due to the increased number of suppliers
whose imported mobile cellular phones will be compatible with operation on the new GSM
network. Such competition is likely to affect business results of our Suny Telecom
Business. We are currently unable to estimate how the transition of Pelephone to a GSM
cellular network will affect our results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are subject to legislative and standardization limitations and special constraintsapplicable
to the Suny Telecom business.
|- | -----------------------------------------------------------------------------------------------------------------------------

| | The
import of mobile cellular phones to Israel is subject to obtaining a trade license from
the Ministry of Communications, in accordance with the Wireless Telegraph (New Version)
Law, 5732  1972, and the regulations enacted thereunder. Furthermore, to import and
sell mobile cellular phones in Israel the importer is required to have a type approval
for each of the mobile cellular phone models that such importer seeks to import into
Israel. Receipt of a type approval is subject to approval from the cellular network
operator for the model the importer seeks to import or, in lieu ofsuch cellular
network operators approval, an international type approval recognized by the
Ministry of Communications.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Furthermore,
the import of mobile cellular phone chargers, which are included with the Samsung
handheld devices, is subject to the Israel Standards Institute approval.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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# Risks Related to the
Dynamic Cellular Business

| | Our
Dynamic Cellular Business is dependent on Cellcom. The loss of Cellcom as a customerof
the Dynamic Cellular business or a significant loss of business from Cellcom could have amaterial adverse effect on the results of operations of the Dynamic
Cellular business.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through our Dynamic Cellular
business, we are engaged in the sale of mobile cellular phones of various manufacturers,
as well as providing accessories and upgrade and maintenance services, in each case, to
end customers of Cellcom, a major cellular network operator in Israel, through a chain of
retail stores and booths in our ownership under the name Dynamica. Our Dynamic
Cellular business markets mobile cellular phones only in the Cellcom network, and revenues
from Cellcom and its end users constitute a significant share of the revenue of our
Dynamic Cellular business. Revenues from Cellcom accounted for approximately 59% of the
revenues in 2007, approximately 63% of the revenues in 2006 and approximately 58% of the
revenues in 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | One
of the critical factors in the success of the Dynamic Cellular business is the creation
of a long term engagement with a cellular operator for the purpose of sale and upgrade of
that operators mobile cellular phones, including providing the service of
connecting purchasers at the time of the purchase to the operators cellular
network. Our Dynamic Cellular business depends on the continued Cellcom business strategy
to outsource certain aspects of its business to us. Currently, we estimate that Cellcom
performs most of its mobile cellular phone sale and upgrading through its own chain of
stores and that we are the leading licensed marketer to which Cellcom outsources these
activities. In addition, Cellcom instituted a policy beginning in the first half of 2005
to aim to be a major supplier of mobile cellular phones to its licensed marketers, and as
a result we are also dependent on Cellcom as a supplier of mobile cellular phones not
manufactured by Samsung in sale and upgrade transactions to Cellcom customers. Our
agreement with Cellcom is non-exclusive and was recently extended until December 2011.
There is no assurance that Cellcom will continue to outsource its sale and upgrade
activities to licensed marketers or that it will continue to outsource such activities to
us. In addition, there is no assurance that Cellcom will be able to continue to provide
us with an adequate supply of mobile cellular phones other than Samsung mobile cellular
phones. The loss of our contractual relationship with Cellcom would materially adversely
affect the results of operations of our Dynamic Cellular business.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Dynamic Cellular Business is dependent on our Suny Telecom Business.
|- | ------------------------------------------------------------------------

| | A substantial portion of the mobile
cellular phones that are sold by our Dynamic Cellular business are purchased from the Suny
Telecom business. These phones accounted for 40% of the mobile cellular phones sold by the
Dynamic Cellular business in 2007, 50% of the mobile cellular phones sold in 2006, and 55%
of the mobile cellular phones sold by the Dynamic Cellular business in 2005. The
termination or expiration of the distribution agreement between us and Samsung would also
have a material adverse effect on the sales volume and results of operations of our
Dynamic Cellular business.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cellcom
may not be able to adequately respond to rapid technological changes in the mobilecellular
phone industry, which could cause us to lose customers.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
technology relating to mobile cellular phones changes rapidly resulting in product
obsolescence or short product life cycles. Competitors in the mobile cellular phone
market are required to anticipate future technological changes and to continually
identify, obtain and market new products in order to satisfy evolving industry and
customer requirements. Our future revenues in the Dynamic Cellular Business will depend
significantly on Cellcoms ability to retain existing subscribers and to attract
subscribers from the other cellular network operators. While Cellcom has historically
kept its products, and we aim to keep our own products, competitive in terms of
technological changes, there is no guarantee that Cellcom or we will continue to do so.
If we are not able to do so, the revenues from the Dynamic Cellular business could
suffer. If Cellcom is not able to do so, it may not be able to retain its subscribers
and/or attract subscribers from other operators. This could materially affect our Dynamic
Cellular business because it offers its products and services only to subscribers in the
Cellcom network
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| | We
provide upgrade, warranty and repair services to end customers of Cellcom through achain
of retail stores that we own. If we fail to provide high quality upgrade, warranty andrepair services to end customers, we would lose customers, which
would adversely affect therevenues that we generate from the
Dynamic Cellular business.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the majority of the models of mobile cellular phones that we sell through our Cellular
Dynamic business, we provide upgrade, warranty and repair services to end customers which
are beyond the manufacturers warranty provided for the products. The service to the
end customers is provided via 22 service stations throughout Israel, situated in the
branches of the Cellular Dynamic chain. In addition, we also operate a central laboratory
as a support hub for such service stations located in the chains stores.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
major competitor in the Dynamic Cellular business is Cellcom, which we estimate performs
most of the mobile cellular phone sale and upgrade transactions and warranty services in
the Cellcom network through its own chain of stores. In addition, there are other
licensed marketers of Cellcom who compete with us to sell and upgrade mobile cellular
phones in the Cellcom network and provide warranty and repair services to Cellcoms
end customers. If we fail to provide high quality upgrade, warranty and repair services
to Cellcoms end customers, we would lose customers, which would adversely affect
the revenues that we generate from the Dynamic Cellular business.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Risks Related to the
Suny Telecom Business and to the Dynamic Cellular Business

| | Actual
and alleged health risks relating to non-ionizing radiation generated from cellulartelecommunications
devices, including mobile cellular phones, could have a material adverseeffect
on the revenues and profitability of our Suny Telecom business and our Dynamic Cellularbusiness.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
number of studies have been conducted to examine the health effects of wireless phone use
and network sites, and some of these studies have been construed as indicating that
radiation from wireless phone use causes adverse health effects. Media reports have
suggested that radio frequency emissions from network sites, mobile cellular phones and
other mobile telecommunication devices may raise various health concerns and may
interfere with various electronic medical devices, including hearing aids and pacemakers.
While, to the best of our knowledge, the mobile cellular phones that we market comply
with the applicable legislation that relate to acceptable specific absorption rate, or
SAR, levels, we rely on the SAR levels published by the manufacturers of these mobile
cellular phones, and we do not perform independent inspections of the SAR levels of these
mobile cellular phones. As the manufacturers approvals refer to a prototype mobile
cellular phone, we have no information as to the actual level of SAR of the mobile
cellular phones throughout the lifecycle of the mobile cellular phones, including in the
case of mobile cellular phone repair.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Several
lawsuits have been filed outside of Israel against operators and other participants in
the wireless industry alleging adverse health effects and other claims relating to radio
frequency transmissions to and from mobile cellular phones and other mobile
telecommunications devices. We may be subject to potential future litigation relating to
these health concerns. Also, if health concerns over non-ionizing radiation increase,
adverse findings in new studies of non-ionizing radiation are published or if
non-ionizing radiation levels are found to be higher than the standardsset
for mobile cellular phones, consumers may be discouraged from using mobile cellular
phones and regulators may impose additional restrictions on usage of these phones.  As
a result, we may lose revenues due to decreasing usage of the mobile cellular phones, and
we may be subject to health-related claims for substantial sums.   We have not
obtained insurance for these potential claims.  An adverse outcome to, or
settlement of, any health-related litigation against us or any other provider of cellular
services could have a material adverse effect on our results of operations, financial
condition or prospects.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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| | Potential
technological and other changes in the telecommunications industry in Israelcould
have a material adverse effect on our Suny Telecom business and on our Dynamic Cellularbusiness.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
is substantial competition in all aspects of the cellular communications market in
Israel, and we expect this to continue in the future due to the highly penetrated state
of this market. Further, technologies such as satellite-based personal communications
services, wireless broadband access services such as worldwide interoperability for
microwave access (WiMAX), Wi-Fi and other technologies that have the capacity
to handle cellular calls may enter this market and compete with traditional cellular
providers, thus further intensifying competition in this market. In March 2008, a public
commission appointed by the Israeli Ministry of Communications recommended to publish a
WiMAX frequencies tender for mobile use. It also recommended, among other things, to
accelerate the procedures necessary to allow the entry of mobile virtual network
operators (MVNO) into the Israeli telecommunications market. Any of these
developments in the market may require us to reduce prices and/or cause a reduction in
the purchases made by our customers, either of which would adversely affect our results
of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
growth in our Suny Telecom business and in our Dynamic Cellular business is dependenton
growth in the mobile cellular phone industry.
|- | -----------------------------------------------------------------------------------------------------------------------------------------

| | The
demand for our products also depends in large part on the continued growth of the mobile
cellular phone industry. Although Israels mobile telephone market has experienced
substantial growth, the Israeli market for mobile telephone services is now highly
penetrated, and the growth of the overall Israeli market and of cellular providerssubscriber
base has been slower than in the past. A marked decline in growth of the mobile cellular
phone industry and/or demand for wireless products in the areas in which we operate could
have an adverse effect on our business. Our future revenues in the Suny Telecom business
and the Dynamic Cellular business will depend significantly on our customers ability
to retain existing subscribers and to attract new subscribers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | General
economic conditions, a decline in consumer discretionary spending or otherconditions
may materially adversely impact our sales in a disproportionate fashion.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
sell products and services that consumers tend to view as conveniences rather than
necessities. In addition, we enjoy a relative edge over other distributors and retailers
in the sale of higher cost mobile cellular phones with state-of-the art features. As a
result, our results of operations are more sensitive to changes in general economic
conditions that impact consumer spending, including discretionary spending. Future
economic conditions and other factors, including consumer confidence and the availability
of consumer credit, could reduce consumer spending or change consumer purchasing habits.
A general slowdown in the Israeli economy or in the global economy, or an uncertain
economic outlook, could materially adversely affect consumer spending habits and our
operating results.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Change
in the duties that are imposed on the mobile phones, accessories and spare partsthat
we import could affect the profitability of our Suny Telecom business and on our DynamicCellular business.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mobile
cellular phones, accessories and some of the spare parts imported by us are subject to
duties at different rates, affecting the prices of the products. Changes in the rates of
these duties are likely to affect product prices as well as our profitability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Risks Related to
Operations in Israel

| | Political,
economic and military instability in Israel or the Middle East may adversely affectour
results of operations.
|- | ------------------------------------------------------------------------------------------------------------------------

| | Our
corporate headquarters are located in Israel. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Since October 2000, there has been a high level of violence
between Israel and the Palestinians. Further, in 2006, Israel was engaged in an armed
conflict with Hezbollah, a Lebanese Islamist Shiite militia group, which involved
thousands of missile strikes and disrupted most day-to-day civilian activity in northern
Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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| | Any
armed conflicts or political instability in the region, including acts of terrorism or
any other hostilities involving or threatening Israel, would likely negatively affect
business conditions and harm our business. Furthermore, several countries restrict
business with Israel and Israeli companies and additional countries may restrict doing
business with Israel and Israeli companies as a result of hostilities between Israel and
the Palestinians.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
addition, some of our directors and officers are currently obligated to perform reserve
duty periodically. Also, all reservists are subject to being called to active duty at any
time under emergency circumstances. We cannot assess the full impact of these
requirements on our workforce and business if conditions should change, and we cannot
predict the effect on us of any expansion or reduction of these obligations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

| | The
Israeli Companies Law generally requires that a merger be approved by the board of
directors and a majority of the shares voting on the proposed merger. For purposes of the
shareholder vote, unless a court rules otherwise, the merger will not be deemed approved
if shares representing a majority of the voting power present at the shareholders
meeting, and which are not held by the other party to the merger (or by any person who
holds 25% or more of the shares or the right to appoint 25% or more of the directors of
the other party or its general manager), have voted against the merger. Upon the request
of any creditor of a party to the proposed merger, a court may delay or prevent the
merger if it concludes that there is a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy the obligations of the surviving
company. Finally, a merger may generally not be completed unless at least (1) 50 days
have passed since the filing of a merger proposal signed by both parties with the Israeli
Registrar of Companies and (2) 30 days have passed since the merger was approved by the
shareholders of each of the parties to the merger. Also, in certain circumstances an
acquisition of shares in a public company must be made by means of a tender offer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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| | Lastly,
Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an
Israeli company and a foreign company, less favorably than U.S. tax laws. These
provisions of Israeli corporate and tax law may have the effect of delaying, preventing
or make more difficult an acquisition of or merger with us, which may adversely affect
our ability to engage in a business combination and could depress our share price.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Risks Related to the
Market for Our Ordinary Shares

| | If
there is no active trading market for our ordinary shares, our investors may be unable tosell their shares.
|- | --------------------------------------------------------------------------------------------------------------

| | In
October 2006, the Companys shares were de-listed from NASDAQs Global Market
because the Company was determined by Nasdaq to be a public shell lacking any business
operations, pursuant to Marketplace Rule 4300. As of the date of this Report, the Companys
shares are traded on the Tel Aviv Stock Exchange and are quoted on the OTC Bulletin Board
(OTCBB) in the United States. We cannot guarantee there will be an active
trading market for our ordinary shares in the United States. We also cannot provide our
investors with any assurance that our ordinary shares will continue to be quoted on the
OTC Bulletin Board or, if quoted, that there will be an active public market for our
shares. Further, the OTCBB is not a listing service or exchange, but is instead a dealer
quotation service for subscribing members. If our ordinary shares are not quoted on the
OTCBB or if there is no public market for our ordinary shares, investors may not be able
to resell the shares of our ordinary shares that they have purchased and may lose all of
their investment, or they may be required to sell their shares on TASE, where liquidity
of the shares also cannot be guaranteed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
expect to qualify as a passive foreign investment company, or PFIC, in 2007, as it was in
2006. Unless U.S. holders of our shares make certain elections under U.S. federal
income tax rules and regulations, they may be subject to certain adverse U.S.
federal income tax consequences.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the PFIC rules, a U.S. holder who disposes of, or is deemed to dispose of, our shares at
a gain, or who receives, or is deemed to receive, certain distributions with respect to
our shares, generally will be required to treat such gain or distributions as ordinary
income earned ratably over the holders holding period and will be subject to a
special tax and interest charge on amounts treated as earned during periods during which
we are classified as a PFIC. Certain elections may be used to reduce or eliminate the
adverse impact of the PFIC rules for holders of our shares (QEF elections and
mark-to-market elections), but these elections may accelerate the recognition
of taxable income and may result in the recognition of ordinary income in excess of
amounts actually distributed to the holder. In addition, because we are a PFIC, our
distributions will not qualify for the reduced rate of U.S. federal income tax that
applies to qualified dividends paid to non-corporate U.S. taxpayers. The PFIC rules are
extremely complex; prospective U.S. investors are urged to consult independent tax
advisers regarding the potential consequences to them of our classification as a PFIC.
See Item 10.E Taxation  Certain Material U.S. Federal Income Tax
Considerations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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

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

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

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

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

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

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

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

| | A
single shareholder may be able to control us.
|- | -----------------------------------------------

| | As of September 29, 2008, Suny was
our largest shareholder, holding approximately 64.22% of our outstanding ordinary shares,
and Tao Tsuot Ltd. (Tao) held approximately 24.71% of our shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 29, 2008, Ben Dov Holdings Ltd., a company wholly-owned by Mr. Ilan Ben Dov,
owned 68.59% of the shares of Suny, and Mr. Ben Dov, directly and through Harmony (Ben
Dov) Ltd., a company wholly-owned by Mr. Ben Dov, beneficially owned 83.24% of the shares
of Tao. Therefore, as of September 29, 2008, Mr. Ben Dov may be deemed to have
beneficially owned all of the shares held directly by Suny and Tao.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the foregoing holdings, the corporate actions of the Company may be
significantly influenced by Suny and by Mr. Ilan Ben Dov, the indirect controlling
shareholder of Suny. In addition, Suny may have sufficient voting power, subject to
special approvals required by Israeli law for transactions involving controlling
shareholders, to:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | approve
or reject any merger, consolidation or other sale or liquidation event that requires
approval of our shareholders.
| | - | --------------------------------------------------------------------------------------------------------------------------

| | This
concentration of ownership of our ordinary shares could delay or prevent proxy contests,
mergers, tender offers, open-market purchase programs or other purchases of our ordinary
shares that might otherwise give our shareholders the opportunity to realize a premium
over the then-prevailing market price for our ordinary shares. This concentration of
ownership may also adversely affect our share price.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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

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

CORPORATE HISTORY &
DETAILS

Our legal and commercial name is
Scailex Corporation Ltd. and our legal form is a company limited by shares. We were
incorporated under the laws of the State of Israel on November 2, 1971, succeeding a
predecessor corporation, Scientific Technology Ltd. that was founded on September 5, 1968.
On December 29, 2005, we changed our name from Scitex Corporation Ltd. to
Scailex Corporation Ltd. Our corporate headquarters and principal executive
offices are located at 48 Ben Zion Street, Segula Industrial Area, Petach Tikva, 49277,
Israel . Our telephone number in Israel is (972) 3 - 9057730. Our website
address is www.scailex.com. Information contained on our website does not
constitute a part of this Report.

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

In November 2005, we sold the
operations of Scailex Vision, which was involved in the wide format segment to
Hewlett-Packard, and in August 2006, we reduced our holdings from 75% to 15% in Jemtex,
which was involved in the industrial inkjet digital printing market.

Between February and October 2007,
the Company, through its then 80.1% subsidiary, PCH, purchased approximately 15.76% of
ORLs share capital. On March 26, 2008, the Company completed the purchase of the
19.9% minority interest of Linura Holding AG (Linura) in PCH, and PCH became a
wholly owned subsidiary of the Company.

On June 30, 2008, we sold 100% of the
share capital of our then wholly owned subsidiary, PCH, to IPE, our then controlling
shareholder, for the total sum of approximately NIS 1.14 billion (approximately $338
million). This transaction occurred concurrently with the purchase by Suny Electronics
Ltd. from IPE of all of the Scailex shares held by IPE, described below, following which
we no longer had any interest in ORL.

Concurrent with our sale of our
interest in PCH to IPE, IPE sold all of its shares in Scailex to Suny Electronics Ltd. for
an aggregate purchase of approximately $219.4 million. Immediately following such
transaction, Suny Electronics Ltd. became our largest shareholder and currently holds
approximately 64.22% of our outstanding share capital.

Most of our assets are in cash and
cash equivalents, and we are looking for additional investment opportunities.

RECENT DEVELOPMENTS

On September 29, 2008, we purchased
from Suny assets of the Suny Telecom and Dynamic businesses for the total sum of
approximately NIS 255,809,000 (approximately $74.8 million), subject to certain
adjustments. Suny Telecom is engaged in the business of importing mobile cellular phones
and related parts and accessories into Israel and the marketing and distribution thereof,
and Dynamic is engaged in the retail business of reselling mobile cellular phones and
related parts and services on behalf of Cellcom Israel Ltd., a major Israeli cellular
network operator. As a result of this transaction, we ceased to be a shell company.

Pursuant to the purchase agreement
entered into between Scailex and Suny, Scailex acquired all assets and rights (tangible
and intangible) of Suny Telecom and of Dynamic in the cellular end equipment and retail
market segment (excluding the shares of Suny Electronics in the possession of Suny
Telecom, cash, cash equivalents and other financial assets), and all the liabilities of
Suny Telecom and Dynamic in such area, including liabilities arising from the agreements
assigned to Scailex as part of the transferred assets or relating to these agreements, and
excluding the debt of the subsidiaries to Bank Leumi le-Israeli B.M.; short term credit,
short term loans (on call) and long term loans; valued added tax balances payable and
provisions for Income Tax (including Employees Income Tax and National Insurance)
for the period up to the execution date of this agreement.

22

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MAJOR BUSINESS
DEVELOPMENTS

Below are important events in our
business over the last few years:

| |  | July
2006: our two major shareholders, Clal and Discount sold their entire holdings in the
Company, representing approximately 49.4% of our outstanding share capital, to IPE.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | August
2006: the Company entered into an agreement for the reorganization of Jemtex whereby the
Companys equity holdings in the Company were reduced from approximately 75% to
approximately 15% (on a fully diluted basis). Following the reduction of the Companys
holdings in Jemtex, the Company ceased to consolidate the financial results of Jemtex in
its financial statements and classified the operations of Jemtex as discontinued
operations. See also Item 10C. Material Contracts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | November
2006: XMPie, a minority held company, was sold to Xerox Corporation for approximately $48
million, of which the Company received approximately $1.3 million (in May 2008, the
Company received an additional amount of approximately $0.1 million; an additional
approximately $0.1 million remains in escrow.).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | December
2006: PCH was created, held 80.1% by Scailex and 19.9% by Linura Holding AG, a Swiss
company indirectly held by one of the largest global natural resource companies. PCH was
established for the purpose of acquiring shares of ORL, an oil refinery located in Haifa,
Israel. See Item 10C. Material Contracts.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | February
2007: we entered into a Memorandum of Understanding (the MOU) with Israel
Corp. for the joint acquisition of ORLs shares and control thereof. Pursuant to the
MOU, we initially purchased through PCH, our then 80.1% subsidiary, 12.62% of the
outstanding shares of ORL, and Israel Corp. acquired 40.98% of the outstanding shares.
The MOU provided for, among other things, the joint acquisition of ORL shares by PCH and
Israel Corp. and an option for PCH to acquire additional shares in ORL from Israel Corp.
The ORL transaction required two approvals: (i) approval from the Commissioner of the
Israeli Antitrust Authority for the acquisition of 25% or more of ORLs share
capital, and (ii) a control permit from the Minister of Finance and the Prime Minister.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2007, because we were experiencing delays in receiving the control permit, we and
Israel Corp. revoked the MOU and entered into a Deed of Undertaking pursuant to which the
parties agreed, inter alia, to apply separately for the control permit, and in the
event PCH would succeed in receiving mandatory regulatory approvals, including the
control permit and any additional approvals required by the Antitrust Commission, by May
12, 2009, the Company, PCH and Israel Corp. would enter into a control agreement for the
joint control of ORL (the Control Agreement). Following termination of the
MOU until October 2007, PCH acquired, independent of Israel Corp., additional shares of
ORL for $49.8 million, increasing PCHs holdings in the outstanding share capital of
ORL to approximately 15.76%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
a complete description see "Item 4B. Business Overview" and "Item 10C.  Material
           Contracts."
| | -----------------------------------------------------------------------------------------------------------

| |  | On
March 26, 2008 we completed the purchase of Linuras entire shareholding in PCH, and
received the capital note that PCH had issued to Linura. The total consideration for the
purchase was a total of $57.2 million. With the purchase of Linuras share in PCH,
PCH became our wholly owned subsidiary.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
June 30, 2008, we sold 100% of the share capital of our then wholly owned subsidiary,
PCH, to IPE, our then controlling shareholder, for the total sum of approximately NIS
1.14 billion (approximately $340.8 million). This transaction occurred concurrently with
the purchase by Suny Electronics Ltd. from IPE of all of the Scailex shares held by IPE.
Following which we no longer had any interest in ORL.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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| |  | On
September 29, 2008, we purchased from Suny assets of the Suny Telecom and Dynamic
businesses for the total sum of approximately NIS 255,809,000 (approximately $74.8
million), subject to certain adjustments. See   Recent Developmentsabove.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of the date of this Report, we
held approximately 80% of our assets in cash and financial assets. Our current plan
of operation is to continue to explore and consider strategic investments and business
opportunities.

PRINCIPAL CAPITAL
EXPENDITURE & DIVESTITURES

Since January 1, 2005, except for the
cash distribution described below, most of our principal capital expenditures and
divestitures have been for the acquisition or sale of interests in other companies, as
follows:

| |  | In
November 2005, we sold the business of Scailex Vision. This transaction is described
under Item 10C. Material Contracts below.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | In
June 2005, we sold all of our 22.9% holdings in Objet Geometries Ltd. to several
shareholders of Objet for $3.0 million in cash.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | In
July 2005, IDX Systems Corporation, or IDX, acquired the assets of RealTimeImage Ltd., or
RTI, in which we held a 14.9% stake, for an estimated purchase price of $15.5 million.
The book value of our investment in RTI was recorded at $1.2 million on our balance sheet
as of December 31, 2005, and such investment is accounted for under the cost method. In
February 2006, we received a dividend of approximately $2.6 million from RTI, and in
August 2007 we received an additional $0.4 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Since
January 1, 2004, we invested an aggregate of approximately $7.1 million in Jemtex in
consideration for the issuance to us of convertible debentures and preferred shares of
Jemtex. Until August 2006, we held an approximate 74.9% interest (85.4% assuming
conversions of the debentures, but not giving effect to the pending financing described
in the next sentence) in Jemtex. In 2006, we invested an additional $2 million in Jemtex
in respect of a pending round of financing by Jemtex. In August 2006, we entered into a
reorganization agreement with senior management of Jemtex, pursuant to which our holdings
in Jemtex were reduced to 15%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the reorganization agreement, we converted a sum of approximately $6.7
million, out of an aggregate amount of approximately $9.7 million provided by the Company
to Jemtex by way of loans, into shares of Jemtex while the remaining amount of
approximately $3.0 million was to be paid to the Company over a period of five to seven
years, unless Jemtex paid the Company a sum of $1.0 million by January 4, 2007, whereupon
the debt would be deemed to have been repaid in full. On January 4, 2007, the Company was
paid $1.0 million (plus interest), and in accordance with the terms of the reorganization
agreement, the Company forgave the $3.0 million in outstanding loans and those loans to
be paid in full. See also Item 10C. Material Contracts below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
February 2007, we entered into an MOU with Israel Corp. through our then 80.1% owned
subsidiary, PCH, pursuant to which we jointly acquired shares of ORL in February and
March 2007. As a result of the joint purchase, Israel Corp. and Scailex (through PCH)
held 40.98% and 12.62%, respectively, of the outstanding shares of ORL. Total
consideration paid by PCH for the purchase of the ORL shares was $192.9 million. In May
2007 we acquired, through PCH, independent of Israel Corp., additional shares of ORL for
$12.9 million, which increased our holdings in ORL, through PCH, to approximately 13.4%.
In July  October 2007, we made an additional purchase, through PCH, of
approximately 47.4 million shares of ORL for $36.9 million, thereby increasing our
holding to 15.76% of ORLs outstanding share capital.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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| |  | On
March 26, 2008, we completed the purchase of the minority 19.9% interest of Linura in
PCH, and received, by way of assignment, the capital note that PCH had issued to Linura,
increasing our holdings in PCH to 100% of PCHs outstanding shares. The total
consideration for the purchase was $57.2 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
June 30, 2008, we sold all of the issued share capital of PCH to IPE, the then
controlling shareholder of Scailex, for the total consideration of approximately NIS 1.14
billion (approximately $338 million). Following this transaction, we no longer had any
vested interest in ORL.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
September 29, 2008, we purchased from Suny the assets of the Suny Telecom and Dynamic for
the total sum of approximately NIS 255,809,000 (approximately $74.8 million), subject to
certain adjustments.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As previously reported, we were
involved in several disputes with C.D.I. Technologies (1999) Ltd. (CDI) a minority
shareholder of Scailex Vision, including claims against us, Scailex Vision and several
other parties. In May 2005, we and our former two largest shareholders, Clal and Discount,
purchased all of CDIs interest in Scailex Vision, constituting 1.89% of Scailex
Visions issued share capital (1.35% on a fully diluted basis), for $1.6 million,
plus additional contingent consideration to be paid if Scailex Vision had an exit
event in the subsequent two years at a higher valuation than implied in the
agreement. As a result of the sale of the business of Scailex Vision to Hewlett Packard,
we have already paid to CDI an additional $0.3 million in February 2006, $0.2 million in
February 2007 and $0.3 million in June 2008 in respect of such contingent consideration,
and we expect to pay an additional amount in the future (as a result of Scailex
Visions future distributions). In connection with the purchase agreement, CDI agreed
to dismiss all of the claims asserted by it against us and the other parties.

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

On September 29, 2008, we purchased
from Suny assets of the Suny Telecom and Dynamic businesses. For more information, see
Item 4.A. Information on the Company  History and Development of the Company
 Recent Developments above.

Following our purchase from Suny of
assets in Suny Telecom and Dynamic, approximately 80% of our assets remain in cash
and cash equivalents.

SUNY TELECOM BUSINESS

We acquired the Suny Telecom
business ("Suny Telecom") on September 29, 2008 from Suny Electronics Ltd., a public
company listed for trading on TASE.

Suny Telecom acts as the exclusive
distributor in Israel for Samsung for the sale of Samsungs mobile cellular phones,
accessories, and spare parts, as well as for the provision of warranty and repair services
for mobile cellular phones manufactured by Samsung. Suny Telecoms principal
customers are Pelephone, Partner, and Cellcom, Israels three major cellular network
operators. Samsung is a leading global manufacturer of mobile cellular phones and other
electronic devices.

The Suny Telecom business has been in
operation since 1994, and has acted as Samsungs exclusive distributor in Israel
since 1997. The sales of the Suny Telecom business amounted to approximately US $106.6
million in 2007 (of which $6.1 million was to Dynamic). The Suny Telecom business had
approximately 125 employees as of August 31, 2008 in Israel.

Information presented in this Report
regarding the Suny Telecom business was compiled based on and it is qualified by,
Sunys public filings in Israel. Sunys reports are made in Hebrew and posted on
the web site of the Israeli Securities Authority at www.magna.gov.il.

25

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Industry Background

Four cellular network operators are
active in the mobile cellular phone market in Israel, three of which, whose market share
we estimate at approximately 95%, are customers of Suny Telecom in this sector.

The mobile cellular phone sector in
Israel is characterized by innovation, frequent changes in products and constant
technological improvements, allowing end customers, when operating the mobile cellular
phone, to benefit from a variety of state-of-the-art features, such as color, camera,
music, links to computers, to the Internet and to TV broadcasts, high speed transmission
of information and/or video files, among others. The markets demand for innovation
and advanced cellular phone features are among the factors that encourage end customers to
periodically replace and upgrade their cellular phones.

The extent of usage of cellular
phones in Israel, according to public sources, is characterized by a high rate of
penetration compared with other countries around the world.

Strategy

Suny Telecom strives to increase the
number of mobile cellular phones it sells and to increase its market share, inter
alia, by enhancing the variety of mobile cellular phones offered by it to the Israeli
market. In doing so, Suny Telecoms goal is to continue being one of Israels
leading players in the sale of mobile cellular phones to cellular network operators in
Israel and to become the leader in this sector in upcoming years.

Suny Telecom relies on the
technological edge, innovation and strength of the Samsung brand, as well as
Samsungs ability to manufacture a large number of cellular phone models using
various technologies. Suny Telecom estimates that the transition to the use of advanced
mobile cellular phones around the world is likely to assist it in improving its position
in the market place.

In order to reinforce users
loyalty to the Samsung brand in the cellular market, Suny Telecom intends to continue
promoting the brand through a range of advertising media and sales promotions with the
cellular network operators. Suny Telecom strives to increase its market share by offering
high quality and technologically advanced mobile cellular phones and accessories, as well
as through a stronger relationship with the ultimate consumers through the network
cellular operators and through the Dynamic cellular business at the point of sale.

Products and Services

In addition to its principal activity
of selling mobile cellular phones manufactured by Samsung to Israeli cellular network
operators, Suny Telecom also sells accessories such as batteries, speakerphones, Bluetooth
products, and rechargers, as well as spare parts for the mobile cellular phones it sells.
Suny Telecom also offers to cellular network operators repair and other laboratory
services for Samsung mobile cellular phones.

The mobile cellular phones sold by
Suny Telecom to Partner and Cellcom, both local Israel cellular network operators, employ
GSM technology , while the mobile cellular phones sold by Suny Telecom to Pelephone,
another major Israeli cellular network operator, employ CDMA technology. Pelephone has
announced that it plans on converting from CDMA technology to GSM technology in the
beginning of 2009.

Samsung typically launches new phone
models using the various technologies on an annual basis, primarily due to accelerated
technological development in the sector and market demand for advanced technologies. The
new cellular phone models are characterized by increasingly sophisticated functions, such
as camera functions, Internet connectivity, and MP3, using advanced technologies
optimizing usage and rendering it more efficient and rapid, together with innovative
designs.

The introduction of new models by
Suny Telecom to the Israeli market requires adequate engineering and marketing preparation
from Suny Telecom, primarily enabling Hebrew on the mobile cellular phones, so as to
ensure that the phone models sold by it are compatible with the technological and
marketing demands of the cellular network operators and the end customers.

26

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Furthermore, Suny Telecom assists
Samsung with the development of applications relating to the use of the Hebrew language
and correct operations in user manuals. Suny Telecom provides level C and D services,
which are complex repair services relating to the electronic components of the mobile
cellular phones, as well as technical support and repair services to the cellular network
operators for mobile cellular phones manufactured by Samsung, which are sold by it; such
services are provided at Sunys central laboratory located in Petach Tikva, Israel.

Distribution, Sales and
Marketing

Suny Telecoms marketing and
distribution activity in the cellular network operators area is carried out via the
Suny Telecoms internal marketing department, which employed 22 employees as of
December 31, 2007. The marketing department is responsible for contact with the cellular
network operators in order to promote the Samsung brand and launching advertising
campaigns through a range of advertising media in collaboration with the cellular network
operators in order to promote sales of Samsung mobile cellular phones.

Seasonality

Suny Telecoms revenues and the
results of its operations are not subject to seasonal influences; however, fluctuations in
Suny Telecoms revenues are possible between the various quarters, resulting
primarily from the timing of launching new mobile cellular phones as well as the cellular
network operators activity.

Customers

Suny Telecoms major customers
are three Israeli cellular network operators: Pelephone, Partner and Cellcom. Below is a
breakdown of Suny Telecoms revenues from its major customers among the cellular
network operators (in NIS millions) for the last three years:

|          | 2007 | 2006 | 2005
|--------- | ---- | ---- | ----
|
|
|
|
|Pelephone |      |      |     
|Partner   |      |      |     
|Cellcom*  |      |      |     
|Total     |      |      |     

*
Not including sales to Dynamic and to external marketers.

Selling prices to the cellular
network operators, as well as the purchase prices of the phones from Samsung, are quoted
in USD.

Suny Telecom is dependent on the
cellular network operators and the termination of the contractual relationship with one or
more of such networks could have a material adverse effect on Suny Telecoms sales
volume and results of operations.

27

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Competition

The cellular market is intensely
competitive, most notably between importers of cellular phones who sell their products to
cellular operators.

Suny Telecom sells Samsung cellular
phones to Cellcom and Partner, which use GSM technology, and Pelephone, which uses CDMA
technology.

Suny Telecoms major competitor
is Eurocom Cellular Communication Ltd., marketer of Nokia, which sells most of the Nokia
mobile cellular phones with GSM technology to Cellcom and Partner and was Israels
leading company in the sale of mobile cellular phones in 2007. In addition, there are
other competitors that sell products of other manufacturers, such as Motorola,
Sony-Ericsson, LG and other smaller manufacturers. Some of these competitors sell mobile
cellular phones using both GSM and CDMA technologies, while others sell mobile cellular
phones compatible with only one of those technologies.

When selling accessories and spare
parts, Suny Telecom encounters intense competition from various importers (including small
importers who do not import mobile cellular phones, but only accessories and spare parts)
that import substitute and/or non-original accessories and parts, which leads to constant
pressure on the prices of accessories and parts sold by Suny Telecom in these categories.
While Suny Telecom is the exclusive distributor for Samsung spare parts and accessories,
Suny Telecoms main competitors for non-brand accessories and spare parts
are Motorola with respect Bluetooth devices, and Nokia and Sony-Ericsson for other
accessories and spare parts.

Suny Telecoms estimate, which
is not based on official data, is that the market share of Samsung in the sale of mobile
cellular phones in Israel in 2007 was approximately 26%, significantly higher than the
worldwide market share of Samsung in the cellular area (approximately 16% according to ABI
Research, an independent U.S. company engaged in technological market analysis).

Suny Telecom estimates that one of
the positive factors affecting or likely to affect its competitive status is its marketing
of mobile cellular phones manufactured by Samsung, which in 2007 became the no. 2
manufacturer of mobile cellular phones in the world. Samsungs mobile cellular phones
are viewed as innovative and reliable, with a high standard of design, and at an advanced
technological level.

As part of its efforts to prove
itself as a leading competitor, Suny Telecom invests marketing and advertising efforts in
the promotion and maintenance of the brand and works to maintain a high professional level
of engineering and development in making the mobile cellular phones that it markets
compatible with Israeli technological and marketing demands, and provides quality repair
and maintenance services to its customers. The Suny Telecom business has an extensive and
an experienced organizational foundation with at least 10 years of experience in
supporting all its interfaces vis-à-vis the cellular network operators and
supporting those operators in the sales promotion of Samsung mobile cellular phones.

The negative factors affecting or
likely to affect Suny Telecoms competitive status include (i) possible delays in the
launch and delay in delivery time of new mobile cellular phones and devices, (ii) a
possibility that a variety of Samsung mobile cellular phones will not meet cellular
network operators requirements in terms of required features and/or competitive
prices, (iii) strengthening of non-brand cellular phone manufacturers offering products at
lower prices, (iv) changes in the competition map of the relevant market, such as the
entry of additional manufacturers, and (v) Pelephones scheduled transition at the
beginning of 2009 to GSM in lieu ofCDMA technology, which would increase the
number of suppliers whose imported mobile cellular phones will be compatible with the
operations of the new network.

28

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Employees

Below is a breakdown of the list of
Suny Telecoms employees as of August 31, 2008:

|                             | As of
August 31, 2008
|---------------------------- | ---------------------
|
|
|
|
|Management and Headquarters  |                      
|Marketing And Sales          |                      
|Engineering  and development |                      
|Laboratory                   |                      
|Logistics                    |                      
|                             |                      
|Total employees              |                      

Supplier

Samsung is the only supplier
providing mobile cellular phones to Suny Telecom, as well as spare parts and accessories.
Suny Telecom is dependent on Samsung as a major supplier. Suny Telecom is party to two
distribution agreements with Samsung, one granting us rights to market mobile cellular
phones manufactured by Samsung using CDMA Technology (CDMA Agreement) and the
other granting us rights to market mobile cellular phones manufactured by Samsung using
GSM technology (GSM Agreement). The CDMA Agreement expires on December 31,
2009, and the GSM Agreement expires on August 12, 2009. Under both agreements, Suny
Telecom must meet several targets each year, including targeted market share and purchase
quotas of mobile cellular phones. For more information, see Item 10. Material
Contracts  Distribution Agreement for Cellular Phone Devices  CDMA and
Item 10. Material Contracts  Distribution Agreement for Cellular Phone Devices
 GSM.

DYNAMIC CELLULAR

We acquired the Dynamic Cellular
business (Dynamic) on September 29, 2008 from Suny Electronics Ltd. Dynamic is
engaged in the sale of mobile cellular phones of various manufacturers, including Samsung,
Nokia, Sony-Ericsson, Motorola, and others, as well as the provision of accessories and
maintenance services, in each case, to end customers of Cellcom Israel Ltd., a major
cellular network operator in Israel, through a chain of retail stores and booths in its
ownership, under the name Dynamica. Dynamic has been in operation since 1994,
and has acted as Cellcoms Licensed Marketer in Israel since 1994. The sales of
Dynamic amounted to approximately US $35.9 million in 2007. Dynamic had approximately 328
employees as of August 31, 2008 in Israel.

Information presented in this Report
regarding Dynamic Cellular was compiled based on and it is qualified by, Sunys
public filings in Israel.

Industry

In general, the activities of
cellular network operators in the sale of mobile cellular phones and in the provision of
warranty and repair services to their end customers are carried out via a chain of stores
and service centers owned by each cellular network operator, as well as through licensed
external marketers (Licensed Marketers) acting as the cellular network
operators representatives. It is estimated that the majority of sales of mobile
cellular phones to end customers, both private and business, are carried out via store
chains and distribution systems owned by the cellular network operators, while a small
segment is carried out via the Licensed Marketers.

The Licensed Marketers act as
franchisees of the cellular network operators for mobile cellular phone sales and
upgrades, and, in addition, they act to execute contractual agreements for the provision
of maintenance services for mobile cellular phones to end customers by the cellular
network operators. The Licensed Marketers also act as the cellular network operators
agents for the purpose of connecting the mobile cellular phones sold by them to the
cellular network operators network. Some of the Licensed Marketers operate via a
network of points of sale, similar to that of Dynamic, while others operate at single
points of sale.

29

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There are several entities in Israel
that provide maintenance services to end customers, not through the cellular network
operators, within the framework of a direct transaction between them and the end
customers.

Dynamic acts as a Cellcom Licensed
Marketer, by which it sells mobile cellular phones to end customers in the Cellcom network
and provides upgrade services as well as warranty and repair services for mobile cellular
phones to Cellcoms end customers, as part of periodic service agreements entered
into directly by and between Dynamic and the end customers.

Strategy

We have set a target to continue to
be a leading Licensed Marketer for the Cellcom network, relying on Dynamics chain of
stores.

We strive to continue focusing on
increasing numbers of customers who receive repair and warranty services by means of
improving service while focusing on quick response time, professionalism and
profitability, adapting service packages to customers needs, and initiating
approaches to potential markets.

We believe that the increased use of
advanced mobile cellular phones, at prices and maintenance costs higher than those of
mobile cellular phones of previous generations, has the potential to lead to an increase
in the number of customers purchasing repair and warranty services from Dynamic.

Products and Services

Dynamic acts as Cellcoms
non-exclusive distributor and is engaged, inter alia, in the sale/upgrade of mobile
cellular phones operating on Cellcoms network. In addition, various products
relating to the cellular area are sold at Dynamics stores, such as accessories,
speakerphones, dialing cards, Bluetooth headsets, rechargers, and other products.

The sale/upgrade of a cellular phone
to the end customer within the Cellcom network by Dynamic includes a number of principal
types of transactions, as follows:

Sale/Upgrade of Mobile
Cellular Phones:

In these transactions, a contractual
relationship is formed between Cellcom and the end customer, pursuant to which the end
customer is charged by Cellcom with the cost of the mobile cellular phone, connection time
and other payments in accordance with the contract entered into between the end customer
and Cellcom at the Dynamic point of sale. Dynamic, on behalf of Cellcom, signs end
customers to such contracts.

In consideration of the performance
of the sale/upgrade transaction of a cellular phone, Cellcom pays Dynamic the proceeds
from sales of the cellular phone sold /upgraded as part of such transaction plus various
charges/fees, the amounts of which are determined on the basis of agreed parameters, such
as the type of mobile cellular phone, type of customer (private or business), and nature
of the transaction (sale or upgrade). The sale/upgrade transaction with end customers
occurs at Dynamics stores, which are connected in real time to Cellcoms
computer system, for the purpose of obtaining relevant information and updating the
details of each transaction performed.

Sale of Mobile Cellular Phones
Activated by means of Dialing Cards:

In these transactions, the end
customer pays Dynamic the consideration for the cellular phone, and no contractual
arrangement is entered into between the end customer and Cellcom. In order to effect a
sale transaction of a cellular phone activated via dialing cards, Cellcom pays Dynamic
various agreed upon fees.

The phones being sold or upgraded by
Dynamic within the framework of the dialing cards originate from various manufacturers,
including Samsung, Nokia, Motorola, Sony-Ericsson and others.

30

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Sale of Warranty and
Repair Services:

For the majority of the models of
mobile cellular phones that it sells, Dynamic sells repair warranty services to end
customers which are beyond the manufacturers warranty provided for the products.
Payment for such service is effected by means of a periodic payment collected by Dynamic
from the end customer via a standing order or credit card. The service to the end
customers is provided via 22 service stations throughout Israel, situated in the branches
of the Dynamic chain. The service stations are manned by teams of trained technicians. In
addition, Dynamic also operates a central laboratory as a support hub for such service
stations located in the chains stores.

Distribution, Sales and
Marketing

As of the date of this Report,
Dynamic operates 42 points of sale throughout Israel, and we estimate that Dynamic is the
largest Licensed Marketer for the Cellcom network.

Dynamics marketing and
distribution activity is carried out via its internal marketing department. The marketing
department is responsible for nurturing the Dynamic brand, as well as creating
collaborations with Cellcom and third parties.

For products and services purchased
from Dynamic, the end customers pay before or at the time of receipt of the product or the
service by means of cash and/or credit card and/or standing order, and Dynamic is
therefore exposed to minimal credit risk due to the provision of credit to customers.

Seasonality

Dynamics revenues and the
results of its operations are not subject to seasonal influences; however, fluctuations in
Dynamics revenues are possible between the various quarters resulting primarily from
the timing of launching new mobile cellular phones as well as the cellular network
operators activity.

Customers

Dynamics end customers in this
area are cellular phone users on the Cellcom network. In addition, the activity of service
and warranty for mobile cellular phones comprises tens of thousands of customers for
Dynamic, including users not on the Cellcom network.

In its capacity as a Cellcom Licensed
Marketer, Dynamic issues invoices to Cellcom on a monthly basis, for the amounts owing to
it in connection with the transactions effected by Dynamic.

Revenues from Cellcom represented
approximately 59% of the revenues of Dynamic in 2007, as compared with approximately 63%
and approximately 58% in 2006 and 2005, respectively.

Competition

Dynamics major competitor is
Cellcom, which we estimate performs most of the cellular phone sale/upgrade transactions
in the Cellcom network through its own chain of stores. Furthermore, there are other
licensed marketers of Cellcom who compete with Dynamic to sell and upgrade mobile cellular
phones in the Cellcom network and provide warranty and repair services to Cellcoms
end customers. However we estimate that Dynamic is Cellcoms leading Licensed
Marketer.

Property, Plant and
Equipment

Dynamic operates through a chain of
42 points of sale, consisting of 22 stores and 20 stands. The majority of the stores
operated by Dynamic are situated in central malls throughout Israel. All stores are leased
to Dynamic for periods of several years, while some have an option to extend the lease
term. In general, the size of the stores is between 40 and 60 square meters per store. As
part of the stores, Dynamic operates 22 repair laboratories engaged in the provision of
repair warranty services for mobile cellular phones sold by Dynamic.

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The stands operated by Dynamic are
situated in malls, their average size being approximately 12 square meters per stand.

Employees

Below is a breakdown of the number of
Dynamics employees as at August 31, 2008:

|                                 | As at
August 31, 2008
|-------------------------------- | ---------------------
|
|
|
|
|Sales attendants in stores       |                      
|Telemarketing & Customer service |                      
|Logistics                        |                      
|Management and Operations        |                      
|                                 |                      
|Total                            |                      

Suppliers

Suny Telecom and Cellcom are the
major suppliers of Dynamic in terms of purchases of mobile cellular phones. The scope of
purchases of mobile cellular phones from both companies in 2007 totaled approximately 85%
of total phones purchased by Dynamic Cellular, as compared with approximately 90% and
approximately 93% in 2006 and 2005, respectively.

Cellcoms policy, which
commenced in the first half of 2005, is to be a major supplier of mobile cellular phones
to its Licensed Marketers. This has created a dependency by Dynamic on Cellcom as a
supplier of mobile cellular phones which are not manufactured by Samsung, in connection
with Dynamics sale and upgrade transactions.

Licensed Marketer
Agreement with Cellcom

We are a party to an agreement with
Cellcom, pursuant to which we are a Cellcom Licensed Marketer for referring customers to
Cellcom in connection with communication services of mobile cellular phones (the
Marketing Agreement). Pursuant to the Marketing Agreement, we must carry out
marketing activities only in stores approved by Cellcom, and the manner of the marketing
activities must be in accordance with procedures similar to those in practice at
Cellcoms stores, to the extent possible. The products that we offer for sale must
comply with the terms of standards and type approval, as prescribed in the agreement, and
must be compatible with the Cellcom network. The Marketing Agreement expires in April
2009.

DOR VENTURES

Dor Venture Capital Fund
(Dor), headquartered in Brussels, Belgium, is a specialized venture capital
fund investing in technology companies worldwide. As of December 31, 2006, we had invested
an aggregate of approximately $3.6 million in one of the funds managed by Dor, and we are
generally committed to invest up to an additional $1.4 million in the future upon
Dors request. To date, we received approximately $1.3 million as distributions from
the fund. We currently hold approximately 13.2% of Dor. The Company has decided to
discontinue its investment in Dor and not to realize its commitment to invest an
additional $1.4 million. As a result of this decision, the Company will be subject to
penalties and the Companys holdings in Dor may be diluted by 50%.

REALTIMEIMAGE LTD.

RTI was formed in 1996. It was
headquartered in San Bruno, California, with research and development operations in
Or-Yehuda, Israel, and employed about 42 employees (it had no employees as of December 31,
2006) before IDX Information Corporation Systems acquired the companys business in
July of 2005. We held an approximately 14.9% interest in RTI until that time. After the
sale we received a dividend of $3.14 million. Since RTI sold its healthcare business to
IDX, it has not conducted any operations.

RTI is presented in our financial
reports on a cost method. After receiving a total dividend of $3.1 million, we recognized
a capital gain of $1.9 million.

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XMPIE INC.

XMPie,which was formed in
2000, developed and marketed software solutions for dynamic publishing in print and
electronic media. The XMPie software platform was designed to allow organizations and
marketing service providers, such as digital commercial printers and direct marketing
agencies, to efficiently create  plan, design and produce  highly customized
and personalized documents for direct marketing communication and other highly targeted
messaging disciplines. XMPie is headquartered in New York, New York and, as of December
31, 2005, employed approximately 50 people. In November 2006, the Xerox Corporation
acquired XMPie for approximately $48 million, including our approximately 2.3% interest in
XMPie. We received $1.3 million for the sale, and we received approximately $0.1 million
on May 26, 2008, which was held in escrow. An additional $0.1 million still remains in
escrow.

DISCONTINUED OPERATIONS

Scailex Vision

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

General.
          Scailex Vision Ltd. (formerly, Scitex Vision Ltd.), or Scailex Vision, is our
          majority owned subsidiary (approximately 77.1% interest on an issued and
          outstanding basis;  on a fully diluted basis, taking into account the
          contemplated distributions to employees of Scailex Vision and outstanding
          options, our ownership in Scailex Vision is approximately 71.8%.). It was a
          developer, manufacturer and distributor of wide-format and super-wide format,
          color inkjet digital printing systems used for point-of-purchase displays,
          banners and indoor and outdoor advertising posters. It was also engaged in the
          design, development, manufacturing and marketing of advanced digital printing
          presses and specialized water-based inks for the packaging and textile markets
          based on its patented drop-on-demand inkjet technology. As of November 1, 2005,
          Scailex Vision employed approximately 570 employees (including employees of its
          sales, marketing and support subsidiaries and part-time and temporary
          employees).

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

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

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As previously reported, we were
involved in several disputes with C.D.I. Technologies (1999) Ltd. (CDI) a minority
shareholder of Scailex Vision, including claims against us, Scailex Vision and several
other parties. In May 2005, we and our former two largest shareholders, Clal and Discount,
purchased all of CDIs interest in Scailex Vision, constituting 1.89% of Scailex
Visions issued share capital (1.35% on a fully diluted basis), for $1.6 million,
plus additional contingent consideration to be paid if Scailex Vision had an exit
event in the subsequent two years at a higher valuation than implied in the
agreement. As a result of the sale of the business of Scailex Vision to Hewlett Packard,
we have already paid to CDI an additional $0.3 million in February 2006, $0.2 million in
February 2007 and $0.3 million in June 2008 in respect of such contingent consideration.
In connection with the purchase agreement, CDI agreed to dismiss all of the claims
asserted by it against us and the other parties.

Jemtex Ink Jet Printing
Ltd.

In August 2006, a reorganization
agreement was signed with the senior management of Jemtex, whereby our holdings in the
Company were reduced from 74.9% to 15% (on a fully diluted basis). See Item 4A.
History and Development of the Company and Item 10C. Material Contracts.

As a result of the aforementioned
reorganization transaction, the results of operations of Jemtex are reported as
discontinued operations and the consolidated results from continuing operations no longer
include revenues and expenses attributable to Jemtex. Nevertheless, since the operations
of Jemtex comprised one of our principal activities in the past years, the following is a
brief description of Jemtexs business prior to August 2006. Accordingly, the
following description of Jemtex business, to the extent it uses the current tense, does
not purport to describe the current operations of Jemtex. For additional details see Note
1b(3) to the Companys financial statements. For details of the asset and liabilities
of Jemtex and the results of the measures taken with respect to the discontinued
operations of Jemtex, see Note 1b(3) of the Companys financial statements.

Jemtex, located in Lod, Israel, was
established in 1995. Jemtex is a developer of inkjet based digital systems, printheads and
engines for the heavy-duty industrial printing markets for the ceramic tiles, carpet and
corrugated packaging markets.

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

CUSTOMERS & SALES

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

GOVERNMENT REGULATIONS

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

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

We believe that we are not subject to
regulation or registration under the Investment Company Act because we are incorporated
outside of the United States and are not publicly offering and do not propose to publicly
offer our securities in the United States. We also do not promote our securities in the
United States and recently delisted our common stock from Nasdaq. The Investment Company
Act limits our ability to raise capital in the United States.

If we fail to make strategic,
controlling investments, the likelihood of being deemed to be engaged in an investment
company business would increase over time. If we were to engage in a public offering
of our securities in the United States or were deemed to promote our securities in the
United States and also to be engaged in an investment company business, we may be required
to seek exemptive or other relief from the SEC so as not to be regulated under the
Investment Company Act.  No
assurance can be made that we would obtain such exemptive or other relief from the SEC, if
and when we seek the same. As a result, we may be required to take certain actions with
respect to the investment of our assets or the distribution of cash to our shareholders in
order to avoid being deemed an investment company, which actions may not be as favorable
to us as if we were not potentially subject to regulation under the Investment Company
Act. If we were deemed to be an investment company and engaged in a public offering of our
securities or promoting our securities in the United States, we could be found to be in
violation of the Investment Company Act, and a violation of that act could subject us
to material adverse consequences.

Legislative and Standardization
Limitations and Special Constraints Applicable to the Area of Cellular Import
Activity. The import of mobile cellular phones to Israel is subject to obtaining a
trade license from the Ministry of Communications, in accordance with the Wireless
Telegraph (New Version) Law, 5732  1972, and the regulations enacted thereunder.
Furthermore, in order to import and sell mobile cellular phones in Israel, the importer is
required to have a type approval for each of the cellular phone models that such importer
seeks to import into Israel. Receipt of a type approval is subject to approval from the
cellular network operator for the model the importer seeks to import, or, in lieuofsuch cellular network operators approval, an international type approval
recognized by the Ministry of Communications.

Furthermore, the import of cellular
phone chargers, which are included with the Samsung handheld devices, is subject to the
Israel Standards Institute approval.

Communications.
          Changes in regulatory requirements in Israel in the area of cellular
          communication and interfacing areas are likely to affect Dynamics results
          of operations.

As of December 2, 2007 the Ministry
of Communications implemented a plan allowing all subscribers to retain their original
phone number, including the dialing code, upon transition between the local cellular
network operators and lines (the Numbers Mobility Program). Under the
Numbers Mobility Program, the subscribers ability to distinguish between an
intra-network call and a call with a network of another operator is retained, with a focus
on simplicity, speed and efficiency of the mobility process, without payment on the part
of the subscriber or the need for him/her to apply to the abandoned company. As a result
of the cellular network operators advanced preparations and equipping prior to the
Numbers Mobility Program, sales volumes of mobile cellular phones in Q4 2007 increased in
comparison to preceding quarters

In April 2008, the Ministry of
Communications shortened to 18 months the maximum commitment period of non-business
customers to cellular network operators. The effect of this change could increase the
mobility of consumers between cellular network operators.

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

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

|Name                           | Jurisdiction | Ownership and Voting Interest
|------------------------------ | ------------ | -----------------------------
|Scailex Vision (Tel-Aviv) Ltd. | Israel       | 77.1%(1)(2)                  

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

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

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

On September 29, 2008, following our
purchase of the Suny Telecom and Dynamic business operations from Suny, we entered into a
lease with Suny with respect to two buildings:

| |  | a
building in Petach Tikva, Israel in which we lease 1,508 square meters of office space
from Suny (the owner of the property is a third party  Amos & Daughters
Investments and Properties Ltd.)  for approximately NIS 45,240 ($13.2
thousand) a month; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
building in Petach Tikva, Israel comprising 2,475 square meters, which serves as the
Dynamic building (containing storage areas, laboratories, offices, and employeesdining
room) for approximately NIS 74,250 (approximately $21.7 thousands) a month. For a
complete description of the Dynamic stores, see Item 4B. Business Overview.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The term of the lease is for 60
months from September 29, 2008; however, either of the parties may rescind the agreement
for either or both buildings by giving 180-day prior notice.

In January 2007, we entered into a
lease for 400 square meters of office space in Herzliya, Israel for approximately $9,000 a
month, which included rent and monthly management fees. In September 2007 we moved into
those offices after renovations thereof. On July 30, 2008, as a result of the sale of IPE
to Suny on June 30, 2008, this lease was terminated.

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

None.

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

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

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For so long as our ordinary shares
were both on the TASE and Nasdaq, we prepared our financial results in accordance with
U.S. GAAP. As a result of the delisting of our shares from Nasdaq in September 2006, we
were no longer considered a dual-listed company for purposes of Israeli law, and as such,
we were required by Israeli law to prepare our financial statements in accordance with the
Israeli Securities Law Regulations. Therefore, in accordance with Israeli law, we have
prepared our financial reports from the third quarter of 2006 and onwards in accordance
with IFRS for the purposes of reporting in Israel, and we submit our financial statements
to the SEC in accordance with U.S. GAAP, in accordance with the SEC rules and regulations.
The Company also translates into the English language its IFRS financial statements that
it submits in Israel and then submits those reports to the SEC under cover of a Form 6-K.

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

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

OVERVIEW

Historically, we were an operating
company until 2000, after which our operations were carried out by our then active
subsidiaries, which focused on the industrial inkjet digital printing market. In recent
years, we have sold substantially all of our operations and undergone substantial changes
and developments, including:

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

| |  | the
sale of the businesses of Scailex Vision to Hewlett Packard in November 2005; in which we
ended our involvement in the wide format inkjet digital printing market;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
sale of our entire holdings in Objet in June 2005;
| | - | ------------------------------------------------------

| |  | the
sale of the operations of Real Time Image Ltd. and XMPie;
| | - | -------------------------------------------------------------

| |  | the
reduction in our holdings of Jemtex to 15% in August 2006, after which we discontinued
           our operations in the industrial inkjet digital printing industry, as
described above in            "Item 4B. Business Overview" above;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
purchase, through our then 80.1% subsidiary, PCH, of approximately 13.4% of the share
capital of ORL in February through May 2007, and the purchase of additional shares in
ORL, bringing our holding to 15.76% of ORLs outstanding share capital;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
purchase of Linuras entire shareholding in PCH on March 26, 2008, for the inclusive
consideration of $57.2 million. With the purchase of Linuras share in PCH, PCH
became a wholly owned subsidiary of the Company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
sale of 100% of the issued and paid-up share capital of our former wholly owned
subsidiary, PCH, to IPE, our previous controlling shareholder, on June 30, 2008, for the
consideration of approximately NIS 1.14 billion (approximately $340.8 million), following
which we no longer had any interest in ORL; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
purchase from Suny of assets in the Suny Telecom and Dynamic businesses for the
consideration of approximately NIS 225,809,000 (approximately $74.8 million).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

As of the date of this Report, we
hold approximately 80% of our assets in financial investments.

37

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FINANCIAL HIGHLIGHTS

In 2003, we recorded net income of
approximately $1.4 million, which was primarily derived from approximately $8.8 million of
net income from discontinued operations that resulted from the sum of the operational
results of Scailex Vision, SDP and Jemtex in 2003 offset by a net loss of $7.4 million
from continuing operations (mainly from headquarter expenses, impairments of our cost
investments in Dor and Real Time Image Ltd., and losses derived from the Companys
proportionate share in Objets 2003 financial results).

In 2004, we recorded net income of
approximately $47.3 million, which was primarily derived from net income from discontinued
operations of $47.9 million (of which was as a result of the sale of SDP to Kodak) offset
primarily by losses of $0.7 million from continuing operations (mainly from operating
expenses incurred by our headquarters that were offset by income derived from our deposits
and investments).

In 2005, we recorded net income of
approximately $106.1 million, which was derived from: (1) net income from continuing
operations of $5.2 million that was mainly from finance income related to yield from the
Companys cash balances and income of $2.9 million in capital gains derived from the
sale of Objet, offset by general and administrative expenses related to consultants and
headquarter expenses; and (2) net income from discontinued operations of $100.9 million of
which net income of $92.3 million related to a capital gain from the sale of Scailex
Visions business, net income of $4.3 million related to the activities of Scailex
Vision through the closing of the transaction in November 2005 and net income of $8.8
million related to the sale of SDPs business. This net income was offset by a loss
of $4.5 million related to Jemtexs operations and an amortization of Jemtexs
technology in 2005.

In 2006, we recorded net income of
approximately $22.5 million which was comprised of $11.4 million of net income related to
continued operations and net income of $11.1 million related to discontinued operations.

Net income from continued operations
in 2006 derived mainly from financial income reduced by general and administrative
expenses relating to consultant and headquarters expenses. The reduction in net income as
compared to net income in 2005 occurred mainly as a result of Scailex Visions sale
to HP in 2005 which generated net income from discontinued operations. The net income from
continued operations increased due to the growth of the cash balance of the Company and
the increase of the monetary interest rate in the United States, where substantially all
our cash was held.

In 2007, our net income decreased to
approximately $15.3 million as a result of: (1) a decrease of $10.6 million in net
financial income as a result of the decrease in cash and securities due to the investment
in ORL, which reduced our interest income; (2) an increase in financial expenses mainly
due to exchange rate differences on a capital note issued to the minority shareholders in
a subsidiary; and (3) a decrease in income from discontinued operations. The decrease in
net income was partially offset by a dividend of $10.7 million received from ORL, and by
the fact that we had no other expenses, including tax expenses, in 2007.

On June 30, 2008, we sold 100% of the
share capital of our then wholly owned subsidiary, PCH, to IPE, our then controlling
shareholder, for the total sum of approximately NIS 1.14 billion (approximately $340.8
million). In 2007, because the majority of our assets were cash, available-for-sale
financial assets (mainly comprising of our shares in ORL) and securities held-to-maturity,
any increase in our equity was attributable to our holdings in ORL. Following the sale of
PCH, as described above, we no longer had any interest in ORL. See also Item 10C.
Material Contracts.

In the first half of 2008 we recorded
net income of approximately $95.7 million which was derived from net financial income of
approximately $1.2 million, other income of approximately $95.0 million and income from
discontinued operations of approximately $2.1 million. This income was set off mainly by
general and administrative expenses of approximately $2.5 million and tax expenses of
approximately $0.3 million.

38

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In the first half of 2007, we
recorded net income of approximately $4.9 million which was derived from net financial
income of $5.7 million and income from discontinued operations of $0.4 million. This
income was set off mainly by general and administrative expenses of $1.3 million.

On September 29, 2008, we purchased
from Suny assets of the Suny Telecom and Dynamic businesses for the total sum of
approximately NIS 255,809,000 (approximately $74.8 million), subject to certain
adjustments. Suny Telecom is engaged in the business of importing mobile cellular phones
into Israel, and Dynamic is engaged in the business of reselling mobile cellular phones
and related parts and services on behalf of Cellcom Israel Ltd., a major Israeli cellular
network operator.

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

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

EXPLANATORY NOTES

| | Discontinued
Operations (Jemtex): In August 2006, we decreased our holdings in Jemtex
from approximately 75% to approximately 15% (on a fully diluted basis).As a
result of the sale, the results of operations of Jemtex are reported as discontinued
operations and the consolidated results from continuing operations no longer include
revenues and expenses attributable to Jemtex. Similarly, assets and liabilities relating
to Jemtex are presented on our balance sheet separately as assets and liabilities of
discontinued operations. Our consolidated financial statements for prior periods have
been reclassified to reflect these changes. See Note 1b to our 2007 annual consolidated
financial statements.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Discontinued
Operations (Scailex Vision):In November 2005, we completed the sale of
substantially all of the assets and business of Scailex Vision to HP. As a result of the
sale, the results of operations of Scailex Vision are reported as discontinued operations
and the consolidated results from continuing operations no longer include revenues and
expenses attributable to Scailex Vision. Similarly, assets and liabilities relating to
Scailex Vision are presented on our balance sheet separately as assets and liabilities of
discontinued operations. Our consolidated financial statements for prior periods have
been reclassified to reflect these changes. See Note 1b(2) to our 2007 annual
consolidated financial statements.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Discontinued
Operations (SDP):In January 2004, we completed the sale of substantially
all of the assets and business of SDP to Kodak. As a result of the sale, the results of
operations of SDP are reported as discontinued operations and the consolidated results
from continuing operations no longer include revenues and expenses attributable to SDP.
Similarly, assets and liabilities relating to SDP are presented on our balance sheet
separately as assets and liabilities of discontinued operations. Our consolidated
financial statements for prior periods have been reclassified to reflect these changes.
See Note 1b(1) to our 2007 annual consolidated financial statements.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Definition
of Segments:Prior to the sale of SDPs and Scailex Visions
businesses, we reported in two segments: high speed digital printing (SDP) and wide
format digital printing (Scailex Vision). In conjunction with the commencement of
reporting the results of operations of SDP and Scailex Vision as discontinued operations,
we modified the definition of our business segments and our results of operations were
reported in two segments  Corporate (Scailex Corporation) and Industrial inkjet
printing (Jemtex). After reducing our holdings in Jemtex to 15% in 2006, we present our
holdings in Jemtex on a cost investment basis and we began to report our financial
statement with one segment, the corporate segment. See Notes 1a and 1b to our 2007 annual
consolidated financial statements.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
our acquisition of the Suny Telecom and Dynamic businesses on September 29, 2008, we are
reporting in three segments  Corporate, Wholesale (Suny Telecom), and Retail
(Dynamic).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
Revenues. As described above, as a result of the sale of SDPs and
Scailex Visions businesses and the reduction of our interest in Jemtex, our
consolidated financial statements for prior periods have been reclassified to reflect the
discontinuation of such operations. As a result, no data regarding revenues or cost of
revenues is presented below.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

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FINANCIAL HIGHLIGHTS FOR
2007 AND FOR THE SIX MONTHS ENDED JUNE 30, 2008

Some of the key aspects of our
operating results in 2007 are as follows:

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

| | Net
income from continuing operations was $13.8 million compared to net income from
continuing operations of 11.4 million in 2006. The increase in income was principally due
to the dividend of $10.7 million that we received from ORL, and which is presented as
other income. There was a moderation in the increase of net income from continuing
operations due to a decrease in income from interest resulting from the decrease in cash
invested in daily deposits and a decrease in the balance of marketable securities due to
the investment in the shares of ORL.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
income (including from discontinued operations) was $15.3 million. The net income from
discontinued operations aggregated $1.4 million and mainly consisted of: (1)
approximately $1 million received from Jemtex; and (2) net profit of $0.4 million from
the discontinued operations of Scailex Vision.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Some of the key aspects of our
operating results in the first half of 2008 are as follows:

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

| | Net
income from continuing operations was approximately $93.6 million compared to net income
from continuing operations of $4.5 million in the first half of 2007. The net income for
the first half year of 2008 was derived mainly from the capital gain from the sale of PCH
of approximately $78.5 million, a dividend received from our shares in ORL of
approximately $11.2 million, and a gain resulting from the purchase of notes held by
minority interest in PCH of approximately $5.2 million.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
income (including from discontinued operations) was approximately $95.7 million. The net
income from discontinued operations aggregated approximately $2.1 million and mainly
derived from the updating of the provision in respect to the amount held with a trustee
after the sale of Scailex Vision resulting from the settlement agreement signed with HP
in respect of claims filed by HP (see Item 8A. Legal Proceedings).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COMPARISON OF FINANCIAL
RESULTS 2005, 2006, 2007, AND THE FIRST SIX MONTHS OF 2008

Costs and Expenses

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

Operating Expenses

Operating expenses are comprised of
general and administrative expenses and in the year 2007 they amounted to $3.6 million,
which included primarily salaries and related costs for our executive and administrative
staff, insurance, legal and accounting expenses, both in Israel and abroad, as well as
investor relations expenses.

General and administrative expenses
increased from $3.0 million in 2006 to $3.6 million in 2007 mainly due to the professional
fees paid to consultants for evaluating new investments. In 2006 and in 2005, general and
administrative expenses were $3.0 million, relating to headquarter expenses, and they were
mainly used for payment of salaries and related expenses, directors and officers
insurance, investor relations expenses and consultant fees.

40

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In the first half of 2008, the
general and administrative expenses amounted to $2.5 million compared to $1.3 million in
the first half of 2007. This increase was mostly due to payments for professional services
in respect of examination of new investments and due to a one time expense of $0.5 million
for the purchase of a run off insurance policy for the Companys directors as a
result of the transfer of the control of the Company.

Financial and Other
Income and expenses

Net financial income consisted
primarily of interest earned on bank overnight deposits and on marketable bonds (U.S.
government and U.S. agency bonds) offset by financing expenses, such as bank charges and
foreign exchange differences.

|                                             | Year ended December 31,
|-------------------------------------------- | -----------------------
|
|
|
|
|Interest income                              |                        
|Loss on marketable securities                |                        
|Bank Charges and net foreign exchange losses |                        
|Total financial income, net                  |                        

Total net financial income amounted
to $2.6 million in 2007 compared to $13.2 million in 2006. The significant decrease was
due to the decrease in income from interest as a result of the decrease in cash invested
in daily deposits, and the balance of marketable securities due to the investment in the
shares of ORL. It was further reduced due to an appreciation of the NIS against the US
Dollar with respect of loans received from the minority holder in PCH and nominated in
NIS.

Net financial income increased from
$4.3 million in 2005 to $13.2 million in 2006, due primarily to the significant increase
in the Companys cash balance arising from the sale of operations of Scailex Vision
to Hewlett-Packard (See Note 1b(2) to our 2007 annual consolidated financial statements)
and due to an increase in dollar interest rates.

Furthermore, the average overnight
LIBOR rate which we received on our cash deposits was 5.1% in 2007 compared to 4.9% in
2006 and compared to 3.3% in 2005. This rate increased from 2.35% in the beginning of 2005
to 4.34% at the beginning of 2006 and to 5.34% at the beginning of 2007. The LIBOR rate
decreased to 4.82% at the end of 2007.

Six Months Ended June 30, 2008 and
2007:

|                                                        | Six months ended June 30,
|------------------------------------------------------- | -------------------------
|
|
|
|
|Interest income                                         |                          
|Loss on marketable securities                           |                          
|Bank Charges and net foreign exchange gain / losses net |                          
|Total financial income, net                             |                          

41

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Total net financial income amounted
to $1.2 million in the first half of 2008 compared to $5.7 million in the same period of
2007. The decrease resulted from the decline in interest received due to the decrease in
cash and cash equivalents as a result of the purchase of shares of ORL during 2007 and the
purchase of the minority share in PCH in the first quarter of 2008. In addition, the
decrease in the average monetary interest rate from an average of 5.2% in the first half
year of 2007 to an average of 3.0% in the first half year of 2008 caused further decrease
in the interest income.

Net other income for the Company in
2007 amounted to $10.8 million and was mostly due to a dividend received from ORL. In
2006, other income amounted to $3.1 million and was mostly derived from dividends received
from RTI, which the Company recorded as income of $2.6 million, as well as a gain from the
sale of XMPie shares for $1.3 million, which was recorded as income. In 2005, other income
amounted to $0.9 million, derived mainly from receipt of a $0.8 million dividend from Dor.

Other income of the Company in the
first half of 2008 amounted to $95.0 million and was mostly due to a capital gain from the
sale of PCH of approximately $78.5 million, income from a dividend the Company received
from ORL of $11.2 million and a gain from purchasing notes held by minority interest in
PCH of $5.2 million. The other income for the corresponding period in 2007 was $0.1
million.

Net income from continuing operations
amounted to $13.8 million in 2007, compared to $11.4 million in 2006. The increase in net
income was principally due to the dividend received from ORL in the amount $10.7 million
that offset a decrease in net financial income.

Net income from continuing operations
amounted to $93.6 million in the first half of 2008, compared to $4.5 million in the same
period in 2007. This increase was mostly due to a capital gain from the sale of PCH,
income from a dividend the Company received from ORL, and a gain from purchasing notes
held by minority interest in PCH.

In 2007, net income from discontinued
operations amounted to $1.4 million and mainly consisted of:(1)
          $1.0 million received from Jemtex; and (2) net profit of $0.4 million from the
          discontinued operations of Scailex Vision.

In 2006, net income from discontinued
operations amounted to $11.1 million and mainly consisted of: (1) a price adjustment to
proceeds from the sale of Scailex Vision assets and operations, amounting to approximately
$2.8 million (net of tax and minority); (2) income of $4.8 million derived from linkage
and interest differentials on a principal amount of a tax refund received by SDP from the
U.S. tax authorities relating to a tax return amendment that SDP filed for prior years;
and (3) tax income net of minority of approximately $3.1 million related to reduced tax
income related to discontinued operations in previous years. This income was offset by
Jemtex operational losses amounting to approximately $2.3 million. The income from
discontinued operations in 2005 was $100.9 million and derived mainly from the capital
gain resulting from the sale of Scailex Vision to Hewlett Packard.

In the first half of 2008, net income
from discontinued operations amounted to $2.1 million and mainly derived from the updating
of the provision in respect to the amount held with a trustee after the sale of Scailex
Vision resulting from the settlement agreement signed with HP in respect of claims filed
by HP (see Item 8A. Legal Proceedings). The income from discontinued operations in the
corresponding period in 2007 was $0.4 million and mainly consisted of a receipt of $1
million from Jemtex, which was offset mainly by an expense resulted from increasing
reserves for claims in respect of the asset of Scailex Vision held in the trustee.

Taxes

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

42

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Capital gains derived after January
1, 2003, are subject to capital gains tax at a rate of 25%. See Item 5B 
Corporate Tax Rate below for additional information.

As of June 30, 2008, our aggregate
losses for tax purposes were approximately $500 million.

As of the end of 2007, our aggregate
losses (ordinary losses, capital losses, and losses from securitites) for tax purposes
were $496.6 million compared to $439.5 million as of December 31, 2006. We did not create
any deferred tax assets on these losses since we believe that it is not more likely than
not that these deferred tax assets will be utilized. As of the end of 2005, our losses for
tax purposes were $385.2 million. The increase in 2006 was mainly due to the losses for
tax purposes that were incurred in 2006 as a result of the partial sale of our interest in
Jemtex and the liquidation of our fully owned subsidiary, SDC.

A number of factors may impact future
taxable income, including those discussed under Risk Factors in Item 3D, as
well as any tax planning strategies.

The Company recorded no taxes on
income in 2007. The Companys tax expenses amounted to approximately $1.5 million in
2006, stemming mainly from the write-off of a tax asset of a foreign subsidiary that was
not utilized until that company entered into a liquidation process in July 2006. This
figure compares to the minimal tax benefit in 2005.

In the first half of 2008, the
Company recorded a tax expense of $0.3 million due to a settlement with the Israeli tax
authorities as to final assessments of subsidiaries up to the tax year 2007.

Equity Investments

From June 2000 until June 2005, we
held an equity stake in Objet Geometrics Ltd. In 2005, we sold our holdings in Objet for a
consideration of $3.0 million. The capital gain from that sale was approximately $2.9
million and was reduced by our proportionate share in Objet losses in 2005, which amounted
to $0.1 million. See Item 4A. Principal Capital Expenditures and Divestitures.

IMPACT OF RELATED PARTY
TRANSACTIONS

We have entered into a number of
agreements with related parties. Please see Item 7B  Related Party
Transactions below for specific details as to these transactions and certain other
related party transactions entered into by us.

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

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

IMPACT OF INFLATION AND
EXCHANGE RISKS

Because the Companys main
currency was the US dollar since it was established, inflation in Israel had limited
influence on the Company. Since inflation in Israel has been relatively low during the
last two years, and we do not anticipate high inflation in the near future (inflation in
Israel through August 2008 was 4.4% and in 2007 it was 3.5%), we do not predict any
positive or negative influence on the Companys operation and asset value.

43

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New Israeli Shekel.The
Companys operational currency until June 30, 2008 was the US Dollar (see note 4B to
the interim financial statements included in this report as to the change in the
operational currency).Due to the sale of PCH and the change in the Companya
controlling shareholders, the Companys board of directors decided to hold the
Companys funds in NIS and in Israeli Banks. Due to this decision, the Company will
report its assets and operational results from July 1, 2008 and thereafter in NIS. The
tables below sets forth the annual and semi annual rates of devaluation (or revaluation)
of the NIS against the U.S. dollar.

|                          | Six Months Ended
June 30,
|------------------------- | -------------------------
|
|
|
|
|Revaluation (Devaluation) |                          

|                          | Year Ended December 31,
|------------------------- | -----------------------
|
|
|
|
|Revaluation (Devaluation) |                        

Untilthe end of June 2008, the income
and expenses not denominated in, or linked to, dollars were translated to dollars, when
recorded, at prevailing exchange rates for the purposes of our financial statements.
Accordingly, our Israeli operations experienced a decrease in dollar terms in 2003, 2004,
2006, 2007 and in the first half of 2008, and an increase in 2005, and in the first half
of 2007. The representative dollar exchange rate for converting the shekel to dollars, as
reported by the Bank of Israel, was NIS 3.846 on December 31, 2007 (NIS 4.225 on
December 31, 2006) and NIS 3.352 on June 30, 2008 (NIS 4.249 on June 30, 2007).

Other currencies.Prior to the
sale of SDP and Scailex Vision we had a significant amount of activity in non-dollar
currencies. However, subsequent to the sale of SDP and Scailex Vision, the volume of
activity in non-dollar currencies became nominal. Since November 2005, substantially all
of the Companys assets and operations has been in U.S. dollars. Since the sale of
PCH, substantially all our assets have been denominated in NIS. See also Item 11.
Quantitative and Qualitative Disclosures about Market Risk.

# CRITICAL ACCOUNTING
POLICIES

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

44

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Deferred tax assets

The Company records deferred taxes
due to carry-forward losses and deductions for tax purposes when there is a reasonable
expectation of their realization against future taxable income. The deferred taxes are
calculated according to the tax rates that are expected to apply at the time of their
utilization. As of June 30, 2008, a full valuation allowance was provided against the
deferred tax assets.

RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

Reporting Standards
adopted by Scailex

| | 1. | In
February 2007, the FASB issued FASB No. 159, The Fair Value Option
               for Financial Assets and Financial LiabilitiesIncluding an Amendment
of                FASB Statement No. 115. This standard permits an entity to choose
to                measure many financial instruments and certain other items at fair
value. Most                of the provisions in FASB No. 159 are elective; however,
the amendment to                FASB No. 115, Accounting for Certain Investments in
Debt and Equity                Securities, applies to all entities with
available-for-sale and trading                securities. The fair value option
established by FASB No. 159 permits all                entities to choose to measure
eligible items at fair value at specified election                dates. A business
entity will report unrealized gains and losses on items for                which the fair
value option has been elected in earnings (or another performance
               indicator if the business entity does not report earnings) at each
subsequent                reporting date. The fair value option: (a) may be applied
instrument by                instrument, with a few exceptions, such as investments
otherwise accounted for                by the equity method; (b) is irrevocable
(unless a new election date                occurs); and (c) is applied only to
entire instruments and not to portions                of instruments. FASB No. 159
is effective as of the beginning of an                entitys first fiscal year
that begins after November 15, 2007. The                Company does not expect the
adoption of FASB No. 159 to have a material                impact on its
consolidated financial statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
December 2007, the FASB issued FASB 141(R), Business                Combinations,
the objective of which is to improve the relevance,                representational
faithfulness, and comparability of the information that a                reporting entity
provides in its financial reports about a business combination                and its
effects. The new standard requires the acquiring entity in a business
               combination to recognize all (and only) the assets acquired and
liabilities                assumed in the transaction; establishes the acquisition-date
fair value as the                measurement objective for all assets acquired and
liabilities assumed; and                requires the acquirer to disclose to investors
and other users all of the                information they need to evaluate and
understand the nature and financial effect                of the business combination.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
December 2007, the FASB issued FASB 160 Noncontrolling Interests in
               Consolidated Financial Statements  an amendment of ARB No.51",
the                objective of which is to improve the relevance, comparability, and
transparency                of the financial information that a reporting entity provides
in its                consolidated financial statements by establishing accounting and
reporting                standards by requiring all entities to report noncontrolling
(minority)                interests in subsidiaries in the same way  as equity in
the consolidated                financial statements. Moreover, Statement 160 eliminates
the diversity that                currently exists in accounting for transactions between
an entity and                noncontrolling interests by requiring they be treated as
equity transactions.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Both
FASB 141(R) and FASB 160 are effective for fiscal years beginning after December 15,
2008. The Company does not believe that adoption of these standards will have any impact
on its financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

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| | 4. | In
March 2008, the Financial Accounting Standards Board (the FASB)
               issued Statement of Financial Accounting Standards No. 161,
Disclosures                about Derivative Instruments and Hedging Activities (SFAS
161). SFAS                161 changes the disclosure requirements for derivative
instruments and hedging                activities. The Company will be required to
provide enhanced disclosures about                (a) how and why derivative
instruments are used, (b) how derivative                instruments and related
hedged items are accounted for under Statement of                Financial Accounting
Standards No. 133, Accounting for Derivative                Instruments and Certain
Hedging Activities (SFAS 133), and its                related
interpretations, and (c) how derivative instruments and related
               hedged items affect the Companys financial position, financial
               performance, and cash flows. This statement is effective for financial
               statements issued for fiscal years and interim periods beginning after
               November 15, 2008. The Company is currently evaluating the
requirements of                SFAS 161 and has not yet determined the impact of
adoption, if any, on its                financial position, results of operations or cash
flows.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of
               Generally Accepted Accounting Principles (SFAS 162).
               SFAS 162 identifies the sources of accounting principles and the
framework                for selecting the principles to be used in the preparation of
financial                statements that are presented in conformity with generally
accepted accounting                principles in the United States. This Statement is
effective 60 days                following the SECs approval of the Public
Company Accounting Oversight                Board amendments to AU Section 411,
The Meaning of Present Fairly in                Conformity with Generally Accepted
Accounting Principles. We do not expect                SFAS 162 to have a
material impact on our consolidated financial position,                results of
operations and cash flows.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

IMPACT OF GOVERNMENTAL
POLICIES

In February 2007, we entered into a
Memorandum of Understanding (the MOU) with Israel Corp. for the joint
acquisition of ORL shares and control thereof. Pursuant to the MOU, we initially purchased
through PCH, our then 80.1% subsidiary, 12.62% of the outstanding shares of ORL, and
Israel Corp. acquired 40.98% of the outstanding shares. Israeli law requires that in order
to exercise the rights associated with control of ORL or 24% or more of ORLs share
capital, including the right to receive dividends, the right to appoint directors and
officials, and the right to exercise voting rights in the Annual General Meeting, a
control permit from the Minister of Finance and the Prime Minister must be obtained,
pursuant to the Israeli Government Companies Order (Declaration of the States Vital
Interests in ORL) (2007). In addition, upon the acquisition of 25% or more of ORLs
share capital, Israeli law requires receipt of approval by the Commissioner of the Israeli
Antitrust Authority. While we received the required approval of the Antitrust
Commissioner, we experienced delays in receiving the control permit. As a result, in May
2007, we and Israel Corp. revoked the MOU and entered into an irrevocable Deed of
Undertaking, pursuant to which the parties agreed to apply separately for the control
permit, and in the event that PCH succeeded in receiving the control permit by May 15,
2009, the parties would enter into the Control Agreement for the joint control of ORL.
After signing the Deed of Undertaking, PCH acquired additional ORL shares (independent of
Israel Corp.), increasing its holdings to approximately 15.76% of the outstanding share
capital of ORL.

Following the delays in receiving the
control permit, we sold 100% of the share capital of our wholly owned subsidiary, PCH, to
IPE, our controlling shareholder, for the total sum of approximately NIS 1.14 billion
(approximately $338 million), whereby selling our interest in ORL. See Item 3B. Risk
Factors, Item 4B. Business Overview and Item 10C. Material
Contracts.

46

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

OVERVIEW

On June 30, 2008, our net working
capital from continuing operations was $359.5 million, compared to $422.4 million on
December 31, 2007. The net working capital decreased primarily as a result of a payment of
$57.2 million in respect of the purchase of the minority share in PCH.

On December 31, 2007, our net
working capital from continuing operations was $422.4 million, compared to
$271.8 million on December 31, 2006. The net working capital increased primarily as a
result of loans received from the minority shareholders of PCH which were converted into a
capital note and presented as a long term liability in the amount of $53.9 million used
for the purchase of ORLs shares.

On December 31, 2006, the
Companys net working capital from continuing operations was $276.1 million as
compared to $230.3 million in 2005. The increase in 2006 was primarily due to an increase
in the cash and cash equivalents related to continued operations that derived from a cash
allocation from discontinued operations to continued operations resulting from a decrease
in discontinued liabilities and from an increase in short-term portion of financial
instruments held to maturity from long-term due to upcoming maturity of the financial
instruments.

Cash, cash equivalents, short-term
investments as of June 30, 2008 for continued and discontinued operations were $19.3
million, compared to $428.5 million at December 31, 2007. The decrease was mainly due to
our sale of our holdings in PCH for $340.8 million which we received from the buyer on
July 1, 2008 and presented in the balance sheet as of June 30, 2008 as receivable from a
related party. In addition, the sum of $57.2 million was used for the purchase of the
minority share in PCH on March 26, 2008.

Cash, cash equivalents, and
short-term investments as of December 31, 2007 for continued and discontinued
operations were $421.9 million (of which $6.6 million were from discontinued operations)
compared to $273.2 million at December 31, 2006 (of which $3.2 million were from
discontinued operations). The increase in 2007 was primarily attributable to loans
received from the minority shareholders of PCH in the amount of $53.9 million which were
used to purchase shares of ORL.

The cash, cash equivalents,
short-term investments for continued and discontinued operations as of December 31,
2006 were $273.2 million compared to $230.4 million at December 31, 2005. The decrease in
2006 was primarily attributable to the dividend of approximately $34.2 million paid by
Scailex Vision in February 2006 to the minority holders of that company, which was offset
by an increase in current maturity of held-to-maturity securities due to their upcoming
maturity.

Our working capital is sufficient for
the Companys present business requirements.

Cash Flows Cash flow from
operations.

We had positive cash flows from
operations in the first half of 2008, which amounted to $19.3 million, mostly due to a
dividend received from ORL in the amount of $11.2 million and cash provided by
discontinued operations of $7.4 million. The cash flow from operations in the first half
of 2007, which amounted to $8.7 million, was mostly due to a decrease in cash allocated to
discontinued operations in the amount of $6.6 million and cash from interest received on
the Companys deposits and securities, which was offset by general and administrative
expenses.

We had positive cash flow from
operations in 2007, which amounted to $21.5 million, mostly due to a dividend received
from ORL in the amount of $10.7 million and financial income of approximately $9.6
million.

47

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We had positive cash flow from
operations in 2006, which amounted to $24.7 million, stemming mainly from a decrease in
the cash allocated to discontinued operations as a result of a dividend distributed by
Scailex Vision to its minority shareholders and payments of other liabilities in respect
of discontinued operations, a tax refund received by SDP from the U.S. tax authorities and
from financial income derived from interest received with respect to Companys funds.

We had positive cash flow from
operations in 2005, totaling $26.9 million, which was mostly due to positive cash flow
from current operations of Scailex Vision up to the date of the sale of its assets, and
positive cash flow from operations of the Company itself that derived mainly from
financial income derived from Company investments and deposits.

Cash flow from investment
activities.

The cash used in investing activities
in the first half of 2008 amounted to $64.3 million, which consisted mainly of $57.2
million used to purchase the minority share in PCH. The cash used in investing activities
in the first half of 2007 amounted to $165.8 million consisted mainly an investment of
$205.8 million in purchasing shares of ORL, which was partly financed by selling
investments in marketable securities in the amount of $40.1 million.

The cash used in investment
activities in 2007 amounted to $195.9 million and consisted mainly of an investment of
$242.6 million in purchasing shares of ORL that was reduced by the realization and
maturity of bonds in the total amount of $47.1 million.

In 2006, $0.4 million used for
investment activities, and in 2005 $184.6 million was generated from investment
activities. The cash used in investment activities in 2006 was related primarily to tax
payments related to the Scailex Vision sale adjusted mainly by the receipt in 2006 of
additional consideration of approximately $6.6 million from the sale of the business of
Scailex Vision and by the receipt of a dividend stemming from the sale of the operations
of RTI. The cash generated from investment activities in 2005 was related primarily to the
proceeds received from the sale of Scailex Visions business.

Cash flow from financing
activities.

The net cash used in financing
activities in the first half of 2008 was $52.0 million, attributed to distribution of
dividend to the Companys shareholders of $44.9 million and distribution of dividend
of $7.1 million to the minority shareholders of Scailex Vision. The net cash from
financing activities in the first half of 2007 was $35.8 million, attributed mostly to
loans received from the minority shareholders of PCH in the amount of $41.0 million, which
were offset by dividend distributed by Scailex Vision to its minority shareholders in the
amount of $5.6 million.

The net cash from financing
activities in 2007 was $48.1 million, attributed mainly to loans received from the
minority shareholders of PCH in the amount of $53.9 million which were offset by a
dividend distributed by Scailex Vision to its minority shareholders in the amount of $6.3
million.

Net cash used in financing activities
in 2006 was approximately $34.2 million, consisting mainly of a distribution of a
dividend by Scailex Vision to its minority shareholders in February 2006. Net cash used in
financing activities in 2005 was approximately $43.2 million, consisting mainly of
repayment of loans drawn by Scailex Vision.

In sum, the net cash flow (cash and
cash equivalents) used in the first half of 2008 was $96.9 million, as compared to $121.3
million in the corresponding period in 2007. The net cash flow (cash and cash equivalents)
used in 2007 amounted to $129.9 million.

The cash, cash equivalents and
marketable securities investment (short- and long-term) balance as of June 30, 2008 was
$22.4 million, as compared to $437.4 as of December 31, 2007.

The cash, cash equivalents and
marketable securities investment (short- and long-term) balance as of December 31, 2007
was $437.4 million (of which $6.6 million was presented as current assets from
discontinued operations) compared to a balance of $303.6 million as of December 31, 2006
(of which $7.4 million was presented under current assets from discontinued operations).
The above balances exclude funds in the amount of $15.8 million held in escrow under terms
of the sale of the business of Scailex Vision to Hewlett Packard.

48

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

Capital Expenditures

Capital expenditures in fixed assets
in the first half of 2008 were nominal, compared to capital expenditures in fixed assets
which amounted to $0.2 million in the first half of 2007, which were invested in the new
offices the Company leased in Herzliya.

Capital expenditures in fixed assets
in 2007 amounted to $0.7 million which were invested in the new offices the Company leases
in Herzliya, while our capital expenditures in fixed assets of continuing operations in
2005 and 2006 were nominal.

Credit Facilities

The Company has a large cash balance
and has no outstanding bank liabilities. Through the end of 2007, the Company had a
liability in its financial reports in respect of a capital note issued to the minority
shareholders in PCH in the amount of $53.9 million. These capital notes were assigned to
the Company in March 26, 2008 at the time the Company purchased the minority interest in
PCH. (see Item 10C. Material Contracts.).

Tax Audits

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

| |  | In
Israel, we have received, or are considered to have received, final tax assessments
through the 2002 tax year. Scailex Vision has final tax assessments through the 2007 tax
year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In
the United States, in partial settlement of an audit by the Internal Revenue Service
(IRS) of our U.S. subsidiaries for the years 1992 through 1996, we consented to a partial
assessment by the IRS for approximately $10.6 million of federal taxes on certain
agreed upon issues. In February 2004, we reached a settlement with the IRS, whereby we
agreed to an assessment of $5.9 million of additional federal income taxes for these
years (rather than $29.6 million as initially proposed by the IRS, excluding interest
accrued thereon). We had previously established balance sheet reserves on account of this
audit which turned out to be sufficient. Accordingly, we paid as a final additional cash
cost of the IRS audit (taking into consideration the full federal tax assessment, state
taxes and interest thereon, and after application of a $21.5 million advance payment), an
amount of approximately $11.6 million. In December 2004, as a result of the conclusion of
this IRS audit, we filed amended federal tax returns for the years 1994, 1995 and 1997,
requesting a refund of $7.8 million of federal taxes. Since we estimate that there is a
high likelihood that we will receive the refund, we recorded a federal income tax
receivable of $7.8 million as part of discontinued operations in 2005. In July 2006, the
Company received the requested refund in the amount of $12.6 million which included an
additional $4.8 million related to interest accrued on the principal amount. The total
refund was recorded in discontinued operations. In 2006, a tax audit was undertaken for
SDPs 2003 tax year and concluded with no material results. In 2006, SDP and SDC
were liquidated.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

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

Cash Outlook for 2008

Our management believes that existing
cash and short-term investments will be sufficient to meet operating requirements in 2008.

On March 26, 2008, the Company
completed the purchase of the minority 19.9% interest of Linura Holding AGs
(Linura) in PCH, and received, by way of assignment, the capital note that PCH
had issued to Linura. The total consideration for the purchase was $57.2 million. On June
30, 2008, we sold 100% of the share capital of PCH to IPE, for the total sum of
approximately NIS 1.14 billion (approximately $340.8 million), following which we no
longer had any interest in ORL.

On September 29, 2008, we purchased
from Suny assets of the Suny Telecom and Dynamic businesses for the total sum of
approximately NIS 255,809,000 (approximately $74.8 million), subject to certain
adjustments.

EFFECTIVE CORPORATE TAX
RATE

Israeli companies are generally
subject to corporate tax on their taxable income at the rate of 27% (compared to 29% for
the 2007 tax year, 31% for the 2006 tax year and 34% for the 2005 tax year). Following an
amendment to the Israeli Income Tax Ordinance which came into effect on January 1, 2006,
the corporate tax rate is scheduled to decrease as follows: 26% for the 2009 tax year and
25% for the 2010 tax year and thereafter. Israeli companies are generally subject to
capital gains tax at a rate of 25% for capital gains derived after January 1, 2003

See below under Item 10E 
Taxation and in Note 8 to our 2007 annual consolidated financial statements for more
information on our income taxes.

MARKET RISK

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

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

Following the sale of Scailex
Visions business in November 2005 and the sale of a majority of our holdings in
Jemtex, we are not conducting research and development activities.

As part of the SDP transaction in
January 2004 and the Scailex Vision transaction in November 2005, Kodak and
Hewlett-Packard acquired all the applicable intellectual property of these subsidiaries
relating to the digital printing businesses that they acquired.

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

Our plan of operation is to explore
and consider strategic investments and business opportunities. There is no assurance that
any of these alternatives will be pursued or, if one is pursued, the timing thereof or
terms on which it would occur. Since this may result in the engagement of new areas of
operations, our financial data reported in this Report is not necessarily indicative of
our future operating results or financial position.

There is substantial competition in
all aspects of the cellular communications market in Israel, and we expect this to
continue in the future due to the highly penetrated state of this market. Further,
technologies such as satellite-based personal communications services, wireless broadband
access services such as WiMAX, Wi-Fi and other technologies that have the capacity to
handle cellular calls may enter this market and compete with traditional cellular
providers, thus further intensifying competition in this market. In March 2008, a public
commission appointed by the Ministry of Communications recommended to publish a WiMAX
frequencies tender for mobile use. Any of these developments in the market may require us
to reduce prices and/or cause a reduction in the purchases made by our customers, either
of which would adversely affect our results of operations.

50

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

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

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

The table below summarizes, as of
June 30, 2008, our following contractual obligations to third parties for the periods
indicated:

|                                             | Payments Due by Period (in $ millions)
|-------------------------------------------- | --------------------------------------
|
|
|
|
|Long-term debt                               |                                       
|                                             |                                       
|Operating leases (facilities and vehicles) 1 |                                       
|                                             |                                       
|Total contractual cash obligations           |                                       

1            This amount relates to our lease in
Herzliya. The rental fees decreased after we moved into our new offices in Petach Tikva in
the beginning of August 2008.

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

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

The following table sets forth
certain information with respect to our directors and senior management, as of September
29, 2008:

|Name                          | Age |  | Director
Since |  | Position                          
|----------------------------- | --- |  | -------------- |  | ----------------------------------
|
|
|
|
|Ilan Ben Dov (2)              | 51  |  | 2008           |  | Chairman of the Board of Directors
|Yahel Shachar                 | 46  |  | --             |  | Chief Executive Officer           
|Shachar Rachim                | 37  |  | --             |  | Chief Financial Officer           
|Moshe Cohen                   | 56  |  | --             |  | Internal Auditor                  
|Yossi Arad (2)                | 45  |  | 2007           |  | Director                          
|Dror Barzilai (1)(2)(3)(4)    | 55  |  | 2006           |  | Director                          
|Iris Beck (1)(5)(6)           | 43  |  | 2008           |  | Director                          
|Yoav Biran (1)(3)(4)(5)(6)    | 69  |  | 2005           |  | Director                          
|Arie Ovadia (2)               | 60  |  | 2006           |  | Director                          
|Yehiel Finegold (3)           | 60  |  | 2008           |  | Director                          
|Shalom Singer (1)(2)(3)(5)(6) | 62  |  | 2006           |  | Director                          

The business address of each of our
directors and senior management is c/o Scailex Corporation Ltd., 48 Ben Zion Galis Street,
Segula Industrial Area, Petach Tikva, 49277, Israel.

|(1) | Designated
as independent director in accordance with NASDAQ           Marketplace
Rules.
|--- | -------------------------------------------------------------------------------------------

|(2) | Member
of the financial investments committee of the board of directors.
|--- | ------------------------------------------------------------------------

|(3) | Member
of the audit committee of the board of directors.
|--- | --------------------------------------------------------

|(4) | An
External Director pursuant to the Companies Law.
|--- | -----------------------------------------------------

|(5) | Member
of the remuneration committee of the board of directors.
|--- | ---------------------------------------------------------------

|(6) | Member
of the nominating committee of the board of directors.
|--- | -------------------------------------------------------------

Ilan Ben Dov serves as
Chairman of the Board of Directors and as Joint Chief Executive Officer of Suny. Mr. Ben
Dov also serves as Chairman of the Board of Directors of Tao Tsuot. In addition, Mr. Ben
Dov currently serves as a director in Tapuz Anashim Ltd., as well as a director in
subsidiaries of Suny, Ben Dov Holdings Ltd., Ben Dov Holdings and Management, Harmonia
(Ben Dov) Ltd., Derech HaLotus Ltd., Refuat HaLotus Ltd., I. Ben Dov Investments Ltd., and
Darban Investments.

Yahel Shachar joined Scailex
in December 2001 and was appointed Chief Financial Officer and Corporate Secretary in
February 2002. In 2006, he was appointed Chief Executive Officer of Scailex. Before he
joined Scailex, Mr. Shachar served as Chief Operating Officer at BVR Technologies Ltd.
from 1998 to 2001. From 1995 to 1998, he was an attorney with Goldfarb, Levy, Eran &
Co., an Israeli law firm. Mr. Shachar serves as a director of Scailex Vision (Tel Aviv)
Ltd., and Ham-let (Israel-Canada) Ltd. Mr. Shachar holds an LL.M. degree from Georgetown
University (specializing in corporate, tax and securities law) in Washington, D.C., and an
LL.B. degree from the Tel Aviv University, and is a member of the Israeli and New York bar
associations.

Shachar Rachim joined Scailex
in March 2004 as the Controller of Scailex Corporation Ltd. In 2006, he was appointed
Chief Financial Officer of Scailex. Before joining Scailex, he served as Assistant
Controller for Discount Investments Ltd. and as a senior accountant at
PriceWaterhouseCoopers in Tel-Aviv. He holds a BA in economics and accounting from Ben
Gurion University and a masters degree in business administration from ESG, France.
He is a certified public accountant in Israel.

Moshe Cohen has been a senior
partner for 25 years in the accounting firm of Chaikin, Cohen, Rubin  Certified
Public Accountants. Mr. Cohen serves as a director in various private companies and as the
Internal Auditor of a number of other public companies. He holds a BA in economics and
accounting from Tel Aviv University and he is a certified public accountant in Israel.

Yossi Aradhas, during the
last five years, served as Chief Executive Officer of Tao Tsuot Ltd., as Vice President of
Investments of Suny Electronics Ltd. from 2003 to 2005, and as joint Chief Executive
Officer of Migdal Asset Management Ltd. from 2001 to 2003. Mr. Arad serves as a director
of Tao Tsuot Ltd., Tao Tsuot Real Estate Ltd., Tao Tsuot Bonds Ltd., Tao Tsuot
Underwriting and Offering Ltd., Durban Investments Ltd., Shamir Food Industries Ltd.,
Azorim Investments, Development and Construction Ltd. and Ten Oil Company Ltd. He holds a
bachelors degree in Economics and Business Management and a master degree in business
administration from Tel-Aviv University, Israel.

Dror Barzilai has served as
Chief Executive Officer of Nestle Ice Creams (Israel), a subsidiary of the Osem Group. In
addition, Mr. Barzilai serves as an external director of Clal Credit Insurance Ltd. and as
the Chairman of its audit committee, and as an external director and an audit committee
member of Clal Gemel Ltd. and Carmit Candy Industries Ltd. Mr. Barzilai is a
certified public accountant (Israel) and holds a bachelor degree in accounting and
economics from Tel Aviv University, Israel. He also has graduated from the Advanced
Management Program at Harvard Business School.

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Iris Beck served as Vice
President of Marketing and Content and as a Consultant for Special Affairs of Partner
Communications Ltd. in the last five years. Prior to that, Ms. Beck worked at Lever Israel
(local subsidiary of Unilever) from 1996 and held senior positions such as Marketing
Director, Technical Director, and General Manager. Ms. Beck holds a bachelors degree
in Economics from Haifa University, Israel and a masters degree in Marketing and
Business Administration from Bar Ilan University, Israel.

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

Dr.
          Arie Ovadia is a director of IPE, Straus Elite Ltd., Real Estate
          Participations In Israel Ltd., Orda Print Industries Ltd., Tadiran
          Communications Ltd., Mehedrin Ltd., Carmel Olefins Ltd., Giron Ltd. and Destiny
          Investments Ltd. In addition, in the past he served as Chairman of the Phoenix
          Holdings Ltd. and acted as an advisor to corporations and served as a member of
          the Israel Accounting Standards Board and has served as a lecturer at Tel Aviv
          University and at the College of Management. He holds a P.hD. in economics from
          the University of Pennsylvania, Wharton School.

Yehiel Finegold has served as
the Internal Auditor of Eden Springs Ltd. and as Deputy Chief Executive Officer and Chief
Financial Officer of Suny during the last five years. Mr. Finegold is a director of Suny.
Mr. Finegold holds a bachelors degree in Economics and in Business Administration
from Bar-Ilan University, Israel.

Shalom Singer serves as a
partner of Singer Barnea & Co. Ltd. and as Chairman of Clal Insurance Company
Ltd.s Investment Committee of Profit Participating Policies. From 2003 to 2005, Mr.
Singer served as the Chairman and CEO of Kagam Central Pension Fund. From 1999 to 2002 he
served as Executive Vice President of Elbit Medical Imaging Ltd. From 1991 until 1992 he
served as the Director General of the Israeli Ministry of Finance. Mr. Singer is a
director of Scope-Metal Trading & Technical Services Ltd., IPE, Scailex Vision and
Robert Marcus Loss Adjusters Ltd. He holds a bachelors degree in accounting from
Haifa University, Israel.

Additional Information

Upon the sale of Clals and
Discounts entire holdings in Scailex (constituting 18,800,255 shares, representing
approximately 49.4% of Scailexs outstanding share capital) to IPE on July 18, 2006,
the following directors resigned from the Board: Arie Mientkavich, Shimon Alon, Avraham
Asheri, Raanan Cohen, Avi Fischer, Nachum Shamir, Shay Livnat and Ophira
Rosolio-Aharonson. They were replaced immediately by the following seven new directors:
Eran Schwartz, Irit Ben-Ami, Dr. Arie Ovadia, Modi Peled, Arie Silverberg, Shalom Singer
and Arie Zief. Mr. Eran Schwartz, CEO of IPE, was appointed Chairman of our board of
directors, replacing Mr. Arie Mientkavich, who served as the Chairman since June 2006,
when he replaced Mr. Ami Erel, who held the position since 2003.

In addition, Mr. Yahel Shachar, the
former CFO of Scailex, was appointed as CEO of Scailex, replacing Mr. Raanan Cohen. Mr.
Shachar Rachim, the former controller of Scailex, was appointed as CFO.

Mr.
          Yoav Biran was elected as one of our external directors at our 2005 Annual
          General Meeting which was held on December 29, 2005. He succeeded Ariella
          Zochovitzky, who had been our external director since 2002. Mr. Dror Barzilai
          was elected as our other external director at our 2006 Annual General Meeting,
          which was held on December 31, 2006. He succeeded Mr. Gerald Dogon, who had
          served in such capacity since 2003.

Mr.
          Yossi Arad was appointed to the Companys board of directors on November
          14, 2007. His appointment was approved at our Annual General Meeting held on
          December 31, 2007.

53

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Upon the sale of IPEs entire
holdings in Scailex (constituting 19,112,255 shares, representing approximately 50.6% of
Scailexs outstanding share capital) to Suny ElectronicsLtd. on June 30,
2008, the following directors resigned from the Board: Eran Schwartz, Irit Ben Ami, Mr.
Arie Zief, Mr. Arye Silverberg, and Mordechai (Modi) Peled. Mr. Ilan Ben Dov, CEO of Suny,
was appointed Chairman of our board of directors, replacing Mr. Eran Schwartz, who had
served as the Chairman since July 2006, when he replaced Mr. Arie Mientkavich, who had
held the position since June 2006.

Mr.
          Ilan Ben Dov, Ms. Iris Beck, and Mr. Yehiel Finegold were appointed to the
          Companys board of directors on July 1, 2008. Their appointments were
          approved on July 1, 2008.

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

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

General

The total salary and benefits of the
directors and the CEO and related expenses for the fiscal year ended December 31, 2007
amounted to approximately $0.7 million.

The following table sets forth with
respect to all directors and senior management of Scailex, as a group, all cash and
cash-equivalent forms of remuneration paid by Scailex during the fiscal year ended
December 31, 2006 and 2007:

|                                                     | Salaries, fees,
directors' fees,
compensation
and bonuses | Other benefits*
|---------------------------------------------------- | --------------------------------------------------------- | ---------------
|
|
|
|
|2007: All directors and senior management as a group |                                                           |                
|(consisting of 13 persons)                           |                                                           |                
|                                                     |                                                           |                
|2006: All directors and senior management as a group |                                                           |                
|(consisting of 11 persons)**                         |                                                           |                

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

|** | These
sums include a one-time payment to the CEO and the CFO of the Company from two of our
former major shareholders, after the control of the Company was transferred, in the
amounts of $250 thousands and $25 thousands, respectively.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total payments by the Company and its
subsidiaries to the CEO for the fiscal year ended December 31, 2007 equaled: $258
thousands; to the CFO, $163 thousands; to the Chairman of the Board, $304 thousands; and
to the Internal Auditor, $11 thousands.

In accordance with the approval of
our shareholders in 2000, and a recent adoption by the board of directors of newly
promulgated regulations, our external directors receive annual directors fees and
participation fees equivalent to the maximum fees that were generally permitted for each
external director under regulations issued pursuant to the Companies Law (NIS 95,100 per
annum (approximately $27,800) per annum for directors fees and participation fees of NIS
3,660 (approximately $1,070 per board or committee meeting), although new regulations were
approved in 2003, which would, in certain circumstances, permit us to pay higher fees.
Directors fees and participation fees of a similar amount are paid to all our other
directors, other than directors who are office holders of our principal shareholders, and
other than Mr. Ovadia, who receives NIS 126,900 (approximately $37,100) per annum and NIS
4,760 (approximately $1,400) per board or committee meeting as an expert director. Except
as aforesaid, we did not compensate any of our other directors in 2007.

54

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Pursuant to our 2003 Option Plan, in
2004, options exercisable for 120,000 ordinary shares were granted to the Companys
CFO at the time, Yahel Shachar, who presently serves as the Companys CEO. In
addition, options exercisable for 48,000 ordinary shares, were granted to the
Companys Controller at the time, Shachar Rachim, who currently serves as the
Companys CFO. The options were granted with an exercise price of $3.70 per share,
and were exercisable in three equal parts, beginning in January 2005 for the
Companys CEO and in March 2005 for the Companys CFO. In February 2007, Mr.
Shachar exercised 80,000 options for Company shares, and Mr. Rachim exercised 32,000
options for Company shares at an exercise price of $3.70 per option. Immediately after
exercising those options, the two sold the shares to IPE at a price of approximately $9.14
per share. See Item 6E. Share Ownership below.

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

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

INTRODUCTION

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

ELECTION OF DIRECTORS

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

Under an amendment to the Israeli
Companies Law, our board of directors was required to determine, by April 19, 2006, the
minimum number of directors who must have accounting and financial expertise
(as such term is defined in regulations promulgated under the Companies Law). Our board
determined that the board should include at least two directors who have accounting
and financial expertise. We have determined that Messrs. Yossi Arad, Yehiel
Finegold, Arie Ovadia, Shalom Singer and Dror Barzilai have the requisite accounting
and financial expertise.

ALTERNATE DIRECTORS

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

55

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EXTERNAL DIRECTORS

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

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

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

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

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

The term affiliation includes:

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

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

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

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

Pursuant to an amendment to the
Companies Law, effective as of January 19, 2005, (1) an outside director must have either
accounting and financial expertise or professional qualifications
(as such terms are defined in regulations promulgated under the Companies Law) and (2) at
least one of the outside directors must have accounting and financial
expertise. We believe that Mr. Barzilai has the requisite accounting and
financial expertise and that Mr. Biran has the requisite professional
qualifications.

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

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

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

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

56

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The initial term of an outside
director is three years and may be extended for an additional three years. The terms of
office of Mr. Barzilai and Mr. Biran commenced in December 2006 and December 2005,
respectively.

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

INDEPENDENT DIRECTORS

In October 2006, we were de-listed
from Nasdaq because the Company was determined by the Nasdaq staff to be a public shell
lacking any business operations. As of the date of this Report, the Companys shares
are quoted on the OTC Bulletin Board in the United States.

Of the eight (8) members of our board
of directors, our board of directors has determined that, except for Ilan Ben Dov, Yossi
Arad and Yehiel Finegold, all other directors qualify as independent directors
within the meaning of the Nasdaq Marketplace Rules, including all the members of our audit
committee.

COMMITTEES OF THE BOARD

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

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

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

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

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

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

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

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

Pursuant to Israeli Companies
laws and regulations, our audit committee must consist of at least two (2) external
directors within the meaning of such laws. Our audit committee comprises Mr. Singer,
chairman of the audit committee, Messrs. Barzilai and Biran (our outside directors), all
of whom are independent within the meaning of applicable Nasdaq and SEC rules, and Mr.
Yehiel Finegold. In addition, we have adopted a charter for the audit committee.

57

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Our audit committee assists the board
in fulfilling its responsibility for oversight of the quality and integrity of our
accounting, auditing and financial reporting practices and financial statements and the
independence qualifications and performance of our outside auditors. Our audit committee
also has the authority and responsibility to oversee our outside auditors, to recommend
for shareholder approval the appointment and, where appropriate, replacement of our
outside auditors and to pre-approve audit engagement fees and all permitted non-audit
services and fees. Our Articles of Association allows for the appointment of our auditors
for a complete fiscal year, beyond the Annual General Meeting.

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

Remuneration
Committee. Our board of directors has also appointed a remuneration
committee, which is currently comprised of Shalom Singer (chairman of the committee), Yoav
Biran, and Iris Beck, , all of whom are independent within the meaning of Nasdaq
Marketplace Rules. The role of the remuneration committee is to review the salaries and
incentive compensation of our executive officers and to make recommendations on such
matters for approval by the board of directors. The members of the remuneration committee
also administer our share incentive and stock option plans, subject to additional board
approval where required pursuant to the Companies Law.

Financial Investments
Committee. Our board of directors has also appointed a financial
investments committee, which is currently comprised of Dr. Arie Ovadia (chairman of the
committee), and Messrs. Dror Barzilai, Ilan Ben Dov, Yossi Arad, and Shalom Singer. The
role of the financial investments committee is to review and manage our financial
investments and cash management in accordance with the principles approved by the board of
directors.

Nominating
Committee. In March 2005, our board of directors established a nominating
committee, which is currently comprised of Messrs. Shalom Singer (chairman of the
committee), Yoav Biran and Ms. Iris Beck, all of whom are independent within the meaning
of the Nasdaq Marketplace Rules. The role of the nominating committee is to recommend to
our board nominees for election as directors at the annual meetings of shareholders and to
identify candidates to fill any vacancies on the board.

INTERNAL AUDITOR

Under the Companies Law, our board of
directors is also required to appoint an internal auditor proposed by the audit committee.
The role of the internal auditor is to examine, among other things, whether our activities
comply with the law and orderly business procedure. The internal auditor may not be an
interested party or officer holder, or a relative of any interested party or office
holder, and may not be a member of our independent accounting firm.

The Companies Law defines the term
interested party to include a person who holds 5% or more of the
companys outstanding share capital or voting rights, a person who has the right to
appoint one or more directors or the general manager, or any person who serves as a
director or as the general manager. Mr. Moshe Cohen of Chaikin, Cohen, Rubin, an Israeli
accounting firm, serves as our internal auditor.

APPROVAL OF SPECIFIED
RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

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

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

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

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

58

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

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

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

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

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

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

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

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

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

INSURANCE &
INDEMNIFICATION OF DIRECTORS AND SENIOR MANAGEMENT

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

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

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

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

59

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Our articles were amended in December
2000 to contain provisions in line with the aforesaid provisions and, having obtained the
approvals required under the Companies Law and our articles, we have procured the
permitted insurance for our office holders. In December 2003, the Companys
shareholders set the maximum annual premium for such insurance at $1.0 million. The
Company has insurance coverage for $30 million that is in effect until June 30, 2009. The
annual premium for such coverage is approximately $0.18 million. On May 29, 2008, an
Extraordinary General Meeting of Scailex approved the procurement by the Company of a
directors and officers liability run-off insurance policy for the directors
and other officeholders in the Company and its subsidiaries in the event that both the
sale of PCH to IPE and the sale of all of IPEs shares in Scailex to Suny take place.
Following approval of the resolution by the General Assembly, we purchased the run-off
policy for a period of seven years as of the execution date of the Suny Agreement, which
occurred on June 30, 2008, at the inclusive sum insured per event and for the period of US
$30,000,000. The total premium paid by Scailex in respect of this policy for the entire
said period was US $540,000.

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

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

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

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

In addition, our articles of
association provide that:

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

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

In April 2004, the Companys
audit committee, board of directors and shareholders, in that order, also resolved to
indemnify the Companys office holders, including any future director or officer of
the Company who may be considered a controlling shareholder (as such term is
defined under the Companies Law), by providing them with a Letter of Indemnification to be
substantially in the form approved by the shareholders. In December 2005, the Company
approved certain revisions to the Letter of Indemnification. These changes include
provisions that the maximum indemnification amount payable by the Company to all officers
eligible for indemnification is not to exceed $100 million, except for exceptional cases
to be approved by the Companys shareholders and audit committee. See Exhibit
4(c)(3) in Item 19 for the form of the Letter of Indemnification to office holders.

60

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On April 30, 2007, the Companys
General Meeting approved the grant of Letters of Exculpation to current and future Company
office holders, relieving them from liability to the Company, directly or indirectly, for
any damage caused or that may be caused to the Company resulting from a breach of an
office holders duty of care owed the Company, subject to certain limitations set
forth by applicable Israeli law.

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

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

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

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

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

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

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

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

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

|                                                        | As of December 31,
|------------------------------------------------------- | ------------------
|
|
|
|
|Approximate numbers of employees by geographic location |                   
|                                                        |                   
|United States                                           |                   
|                                                        |                   
|Israel                                                  |                   
|                                                        |                   
|Total workforce                                         |                   
|                                                        |                   
|                                                        |                   
|Approximate numbers of employees by category            |                   
|                                                        |                   
|General and administrative                              |                   
|                                                        |                   
|Total workforce                                         |                   
|                                                        |                   

* Excludes the employees of Scailex
Vision and Jemtex for these years as a result of the sale of Scailex Visions
business in November 2005 and the reduction of holdings in Jemtex in August 2006.

** The contract between Scailex and
the employee in the United States terminated in June 2007.

*** The Company recruited a new
employee to fill a part-time (60%) secretarial position commencing

**** On September 29, 2008, after
acquiring the operational activities from Suny Telcom and Dynamic, the Company had
approximately 458 employees in Israel (as per the workforce data of the purchased
operations as of August 2008).

61

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Following the acquisition of the Suny
Telecom and Dynamic businesses, the number of our employees significantly increased. For
more information regarding the employees of the Suny Telecom and Dynamic businesses, see
Item 4B. Business Overview  Suny Telecom Business and Item 4B.
Business Overview  Dynamic Cellular Business above.

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

Our employees are not generally
represented by labor unions. Nevertheless, with respect to our employees in Israel,
certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and Israels Coordination Bureau of Economic
Organizations (including the Manufacturers Association) are applicable to such
employees by Israeli governmental order. These provisions principally concern
cost-of-living wage increases, paid vacation and holidays, length of the workday, and
other conditions of employment. However, we generally provide our employees with benefits
and conditions beyond the required minimums, including payment to managers insurance
policies and pension funds and contributions to funds to provide severance. Employee
agreements are generally for an undetermined term and each party may terminate the
relationship at will. As of the reporting date, the Company has no material dependency on
any employee.

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

SECURITY OWNERSHIP OF OUR DIRECTORS AND EXECUTIVE OFFICERS

Apart for Ilan Ben Dov, who, as of
September 29, 2008, held 33,435,599 shares, directly and indirectly, constituting
89.25% of the outstanding shares of the Company, none of our directors own any of
our shares or hold any stock options for the purchase of our shares. Although several of
our other directors are directors or officers of our major shareholders or their
affiliates, such individuals disclaim beneficial ownership of any of the shares held by
these major shareholders.

None of our executive officers own
any of our shares or hold any stock options for the purchase of our shares, except for our
CEO, Mr. Yahel Shachar, and our CFO, Mr. Shachar Rachim, who were granted options. Mr.
Shachar beneficially owns 40,000 shares, all of which are in the form of stock options
which are exercisable within 60 days of the date of this Report. Mr. Rachim beneficially
owns 16,000 shares, all of which are in the form of stock options, which are exercisable
within 60 days of the date of this Report. The exercise price of all the stock options
held by Mr. Shachar and Mr. Rachim is $3.70 (reduced to $2.52265 on May 22, 2008 due
to a dividend distribution) per share and they expire in September 2014. All of these
options were granted pursuant to our 2003 Stock Option Plan described below. See
Item 6A. Directors and Senior Management above.

62

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STOCK OPTION PLANS

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

| |  | 1991
Plan. In September 1991, our shareholders approved the Israel Key Employee
Share Incentive Plan 1991, primarily designed for employees of Scailex and its Israeli
subsidiaries. Terms of the options granted under this plan, such as length of term,
exercise price, vesting and exercisability, were determined by our board of directors.
This plan expired in September 2001, except with respect to outstanding options granted
under such plans. Accordingly, no further options can be granted under this plan. Options
exercisable for 15,500 shares remain outstanding under this plan and expire in December
2008.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2001
and 2003 Plans. In December 2001, our shareholders approved the adoption
of the 2001 Stock Option Plan, primarily designed for key employees of Scailex and its
subsidiaries. In December 2003, our shareholders approved the adoption of the 2003 Share
Option Plan, designed for employees and officers of the Company who are Israeli
residents. Under the 2003 plan, the options are allocated pursuant to Section 102 of the
Income Tax Ordinance and regulations thereof. The aggregate number of our shares
authorized and reserved for issuance under the 2001 and 2003 plan is 1,900,000 shares,
such shares being available for issuance under either of the two plans. Terms of the
options granted under these plans, such as length of term, exercise price, vesting and
exercisability, are determined by our board of directors. In 2004, pursuant to the 2003
plan, our board of directors approved the grant to the Companys current Chief
Executive Officer and Chief Financial Officer of options for the purchase of a aggregate
of 168,000 shares, which constituted 0.4% of our issued share capital (on a fully diluted
basis). In February 2007, options were exercised for the purchase of 112,000 of these
shares, leaving a balance of options exercisable for 56,000 shares outstanding. There
have been no option grants under the 2001 plan. Currently, all outstanding options under
the 2003 plan expire in September 2014.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

* The data presented in this column are as of September 23, 2008.

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

REPURCHASE PROGRAM

In May 1998, our board of directors
approved a program for our repurchase of up to two million of our ordinary shares, to be
held for the benefit of employees within the framework of our stock option plans. These
ordinary shares are held by a trustee for reissuance to employees upon the exercise of
existing stock options. Under the approved program, we may not purchase ordinary shares
from our major shareholders. A balance of 448,975 ordinary shares is held by the trustee
pursuant to the program, purchased with funds provided by us. On July 17, 2008, our board
of directors approved a plan for our repurchase of up to one million of our ordinary
shares. According to the resolution, our management is authorized to purchase, from time
to time, on or off the TASE, shares in a total financial volume of up to NIS 25 million
over a period of twelve months from the date of the resolution. From July to September 29,
2008, we repurchased 717,381 shares for in aggregate a consideration of approximately $5.7 million.

63

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

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

Unless otherwise stated, all data in
this Item 7 is as of September 29, 2008, at which date there were 43,579,388 of our
ordinary shares outstanding, including:

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

| |  | the
4,952,050 ordinary shares purchased by us in a self tender offer in 2004 which are deemed
issued but considered treasury shares (or dormant shares as such term is
defined under the Israeli Companies Law) that carry no rights, including voting rights
and the right to receive dividends, while owned by us. These shares will be available for
us to sell in the future without further shareholder action (except as required by
applicable law).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
717,381 ordinary shares repurchased by us from July to September 29, 2008 pursuant to the
repurchase plan approved on July 17, 2008 and described in Item 6E above.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Percentages given in the table below
are based upon 37,460,982 ordinary shares carrying voting rights outstanding as of
September 29, 2008 (namely, the total number of outstanding ordinary shares of 43,579,388,
less the 448,975 ordinary shares, 4,952,050 ordinary shares, and 717,381 ordinary shares,
referred to above).

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

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

The following table sets forth the
number of our ordinary shares owned by any person who is known to us to own beneficially
more than 5% of our ordinary shares as of September 29, 2008:

|Name and Address             | Number of
Shares
Owned | Percent of
Shares
Outstanding
|---------------------------- | ---------------------- | -----------------------------
|
|
|
|
|Suny Electronics Ltd. (1)(3) |                        |                              
|Ilan Ben Dov (1)(2)(3)       |                        |                              
|Tao Tsuot Ltd. (3)           |                        |                              

| | (1) | On June 30, 2008, Suny purchased
IPEs entire holding of Scailexs ordinary shares, constituting approximately
50.06% of Scailexs issued share capital for approximately $219.4 million.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As
described in footnote (3) below, Mr. Ben Dov may be deemed to beneficially own all of the
shares held directly by Tao Tsuot Ltd. and Suny Electronics Ltd. Accordingly, the number
of shares listed as owned by Mr. Ben Dov includes the shares that are listed as owned by
Tao and Suny.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tao
directly owns 9, 262, 485 ordinary shares of the Company, and Mr. Ben Dov, directly
           and through Harmony (Ben Dov) Ltd., a company wholly-owned by Mr. Ben Dov,
beneficially            owns 83.27% of the shares of Tao. Accordingly, Mr. Ben Dov,
Harmony (Ben Dov) Ltd. and Tao            are the beneficial owners of the 9,262,485
ordinary shares of the Company that are            directly held by Tao. Mr. Ben Dov and
Harmony (Ben Dov) Ltd. are also the beneficial            owners of 117,062 ordinary
shares of the Issuer that are directly held by Harmony (Ben            Dov) Ltd.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

64

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| | Suny
directly owns 24,056,052 ordinary shares of the Company, and Ben Dov Holdings Ltd., a
company wholly-owned by Mr. Ben Dov, owns 68.59% of the shares of Suny. Accordingly, Mr.
Ben Dov, Ben Dov Holdings Ltd. and Suny are the beneficial owners of the 24,056,052
ordinary shares of the Issuer that are directly held by Suny.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mr.
            Ben Dov may therefore be deemed to have the sole voting and dispositive power
          as to the aggregate 33,435,599 ordinary shares of the Issuer held of record by
          Tao, Harmony (Ben Dov) Ltd. and Suny.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Based upon public filings with the
SEC by Ilan Ben Dov, Ben Dov Holdings Ltd., a company wholly owned by Mr. Ben Dov, and
Suny, in August 2004, Mr. Ben Dov, Ben Dov Holdings Ltd., and Suny became the beneficial
owners of 2,043,997 ordinary shares which were held directly by Suny, representing 5.37%
of our outstanding ordinary shares at the time. Since July 2004, Mr. Ben Dov, Ben Dov
Holdings Ltd., and Suny and/or their affiliates, purchased, from time to time, additional
ordinary shares, and Tao, in which Mr. Ben Dov directly and indirectly have an 83.27%
interest, and Harmony (Ben Dov) Ltd., a company wholly owned by Mr. Ben Dov, also acquired
ordinary shares. In addition, in June 2008, Suny purchased all 19,112,255 of IPEs
ordinary shares in Scailex (then representing 50.06% of our outstanding shares).
Accordingly, based on public filings made in September 2008, Mr. Ben Dov may now be deemed
to have the sole voting and dispositive power as to the aggregate of 33,435,599 ordinary
shares of the Company, (representing 89.25% of our outstanding shares), due to his
holdings in Suny, Tao and Harmony. See shareholder table above in this Item 7 describing
the holdings of these entities and a description of the proposed sale of shares to Suny.

On July 18, 2006, the Companys
then principal shareholders, Clal and Discount, completed the sale of all of the
18,800,255 Scailex shares held by them, representing approximately 49.4% of Scailexs
outstanding share capital, to a fully owned subsidiary of Israel PetrochemicalsEnterpriseLtd. (IPE), an Israeli holding company whose shares are traded on
the Tel Aviv Stock Exchange. IPEs controlling shareholder is Modgal Industries Ltd.,
which holds 60.91% of IPE share capital. 50.14% of Modgal Industries Ltd. is held by
Modgal Ltd., a company held by Gima Investments Ltd. (50%), I.D. Federman Holdings Ltd.
(47%) and Eran Schwartz (3%).

The shares were acquired by IPE for
an aggregate purchase price of $165.0 million, and an additional $2.6 million to be paid
within 10 business days from closing due to an adjustment in the purchase price relating
to the $12.6 million tax refund received by Scailex. The purchase price is subject to
certain additional adjustments according to the sale agreement.

In February 2007, IPE purchased
112,000 shares from two executives of the Company and an additional 200,000 shares on
TASE, increasing its total holdings in the Company to 50.06%.

RECORD HOLDERS

Based on a review of the information
provided to us primarily by our transfer agent, as of September 23, 2008, we had 280
shareholders of record, of whom 248 were registered with addresses in the United States,
representing approximately 34.05% of our outstanding ordinary shares. These numbers are
not representative of the number of beneficial holders of our shares nor are they
representative of where such beneficial holders reside since many of these ordinary shares
were held of record by brokers or other nominees (including one U.S. nominee company, CEDE
& Co., which held approximately 33.90% of our outstanding ordinary shares as of said
date).

65

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Duties of Shareholders

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

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

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

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

# Purchase Agreement with
Suny

On August 21, 2008, Scailex
entered into an agreement (the Purchase Agreement) for the acquisition
of cellular operations (Cellular Activity) in the cellular end
equipment and retail market (the Area of Cellular Activity) of, a
controlling shareholder in Scailex, which was conducted through subsidiaries of Suny
Electronics: Suny Telecom (1994) Ltd. (Suny Telecom) and Din Dynamic
Ltd. (Dynamic). Suny Electronics, Suny Telecom and Dynamic are together
referred to as the Suny Group. The transaction closed on September 29,
2008.

Assets and Liabilities.
Pursuant to the Purchase Agreement, the purchased Cellular Activity consisted of all
assets and rights (tangible and intangible) of Suny Telecom and of Dynamic in the Area of
Cellular Activity (excluding the shares of Suny Electronics in the possession of Suny
Telecom, cash, cash equivalents and other financial assets), and of all liabilities of
Suny Telecom and Dynamic in the Area of Cellular Activity, including liabilities arising
from the agreements assigned to Scailex as part of the transferred assets or relating to
these agreements, and excluding the debt of the subsidiaries to Bank Leumi le-Israeli
B.M.; short term credit, short term loans (on call) and long term loans; valued added tax
balances payable and provisions for Income Tax (including Employees Income Tax and
National Insurance) for the period up to the Execution Date.

Employees.
          Together with the purchased Cellular Activity, the parties agreed to transfer
          the employees of Dynamic and Suny Telecom to Scailex (Relocated
          Employees). As of the closing date, the employer-employee relationship
          between the Relocated Employees and the Suny Group was terminated and the
          employer-employee relationship between such employees and Scailex commenced;

Consideration.
          In consideration of the acquisition of the Cellular Activity, Scailex paid
          Dynamic and Suny Telecom a total sum of NIS 255,809,000, which is composed of:
          (i) the Transferred Equity Capital (as defined in the Purchase Agreement),
          based on its value in Dynamic and Suny Telecom financial reports as at
          June 30, 2008, which will be adjusted within ninety (90) days of the day of
          Closing according to the financial data regarding the Transferred Equity Capital
          as of September 29, 2008, in the sum of NIS 90,144,000, which was transferred on
          the closing date; and (ii) the Cellular Activity value, which was NIS
          165,665,000;

66

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Non Compete. The Purchase
Agreement includes a non competition provision, pursuant to which the Suny Group
undertakes not to compete with Scailex, either directly or indirectly, in the Area of
Cellular Activity for a period of four years from the closing date.

Collections on behalf of
Scailex. Commencing from the closing date and for a period of 60 months
thereafter, the Suny Group continues to collect on behalf of Scailex all payments made to
Dynamic by customers in the Area of Activity in accordance with service and maintenance
agreements that were executed with them prior to the closing date, including payments made
by means of credit cards. In consideration of the said management and collection
management services, Scailex pays to the Suny Group an amount representing 4% of all
amounts collected as aforesaid by the Suny Group.

In addition, for a period of twelve
months commencing from the closing date, the Suny Group agreed to continue importing
mobile cellular phones (and related products) on behalf of Scailex. In consideration of
such import services, Scailex pays to the Suny Group handling and management fees in a sum
representing the cost of the products to the Suny Group plus 1%.

See Item 10C. Material
Contracts for more information about the agreement.

# Lease Agreement with Suny

Scailex is party to a lease agreement
(the Lease Agreement), dated September 29, 2008, with Suny Electronics
with respect to two buildings:

| |  | A
building situated at 8 Rakevet Street, Petach Tikva, Israel: The property, owned by
Suny Electronics, serves at present as the Dynamic building (housing, inter alia,
storage areas, laboratories, offices and employees dining room). In consideration
of the lease, Scailex will pay to Suny Electronics the sum of NIS 30 per square
meter. Suny Electronics leases to Scailex the entire building, comprising 2,475 square
meters, for an aggregate monthly payment of NIS 74,250. Scailex will further bear all
payments relating to ongoing expenses and expenses relating to maintenance of the
leasehold.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
building situated at 48 Ben Zion Galis, Petach Tikva, Israel: Scailex will such lease an
area in the building from the principal lessee  Suny (the owner of the property is
a third party  Amos & Daughters Investments and Properties Ltd.). The building
serves at present as the Suny Telecom building (housing, inter alia, Suny Telecom
offices  the engineering, support and product development departments, the
marketing department and the department of cellular operators sales). Suny
Electronics will sub-lease to Scailex an area covering approximately 1,508 square
meters in the building, in consideration of NIS 30 per square meter per month, NIS
45,240 per month in total. Scailex will further bear all payments relating to
ongoing expenses and expenses relating to maintenance of the leasehold, proportionate to
the area sublet to it.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The term of the lease is for 60
months from September 29, 2008; however, either of the parties may rescind the agreement
for either or both buildings by giving 180-day prior notice. The rents are linked to the
Consumer Price Index and, where applicable, are subject to VAT.

# Services Agreement with
Suny Electronics for Consulting, Management and Other Services

Pursuant to the Services Agreement,
dated September 29, 2008, Suny Electronics provides Scailex with various services, as an
independent contractor, with respect to the activity purchased pursuant to the Purchase
Agreement, including:

| |  | Consultation
and management services rendered by officers of Suny Electronics, in connection with: (i)
the Cellular Activity purchased under the Purchase Agreement, including in respect of
contacts and negotiations with Samsung and with the cellular operators in Israel and in
respect of contacts with the lessees of the properties in which the branches of the chain
of stores and the laboratories are situated; (ii) overseas expansion of the Cellular
Activity purchased in Israel; and (iii) identification and management of business
opportunities in this area and in additional areas overseas.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Additional
Services consisting of a security officer and services of wage computations.
| | - | ---------------------------------------------------------------------------------------

67

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The Service Agreement is for a term
is for 60 months from September 29, 2008; however, either of the parties may give a
notice of termination of the Services Agreement by 90-day prior written notice(services of
wage computations require 60-day prior notice ).

In consideration of the services,
Scailex is to pay to Suny Electronics the sum of NIS 220,000 per month plus VAT, plus
an amount representing 2.5% of Scailexs operating profit in the Area of Activity (as
defined in the Purchase Agreement), as set out in the report of Scailexs board of
directors with respect to the calendar quarter to which the report refers. Where either of
the parties to the agreements gives a notice of cancellation of the services of wage
computations, the monthly Services Fees will be reduced by 30,000 shekels per month.

The Services Agreement includes
standard provisions in respect of confidentiality, proprietary rights and payment of
taxes.

Service Agreement with Suny for
Provision of Services by Scailex to Suny

Pursuant to this Agreement, the
Company provides to Suny, as an independent contractor, Chief Financial Officer
(CFO) services via Scailexs CFO (to the extent of 25% of the time
of the CFO), as well as additional services (automation services, housekeeping and
building maintenance, company secretary services and assistance services relating to
consolidation of the financial statements, as well as accounting services and treasury
management if these will be agreed upon in writing by the parties in the future), via
individuals on behalf of Scailex. The agreement is for a term of 60 months from
September 29, 2008; however, either of the parties may give notice to the other party of
termination of the agreement by a 90-day prior written notice. In connection with the
services, Suny Electronics will pay to Scailex a sum of NIS 35,000 per month plus
VAT.

# Globecom Management
Agreement

On May 1, 2007, the Company entered
into a management agreement with Globecom Investments Ltd., (Globecom), a
private company under the control of Mr. Eran Schwartz, the former Chairman of the Board
of Scailex. Under the agreement, Globecom, through Mr. Schwartz, provided management
services to the Company. The term of the agreement was for 18 months, commencing on July
2006, when Mr. Schwartz became Chairman of the Companys board of directors. The
agreement was terminated as a result of the resignation of Mr. Schwartz on July 1, 2008.
Such termination was in accordance with the termination provisions in the Globecom
agreement.

The management agreement set forth
that the scope of services provided were determined in accordance with actual needs of the
Company. The monthly aggregate cost paid by the Company for such services under the
agreement was approximately $26,000, which was linked to the Israeli consumer price index.
Globecom was also entitled to the reimbursement of reasonable expenses.

The agreement set forth that Globecom
and Schwartz were to have received indemnification rights and insurance coverage similar
to the rights and coverage offered to other Company office holders. The agreement included
non-competition provisions which applied for the term of the agreement and apply for an
additional six months beyond termination.

Sale of Scailex
Visions Business

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

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

Not
applicable.

68

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

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

FINANCIAL STATEMENTS

Our consolidated financial statements
are set forth in Item 18.

LEGAL PROCEEDINGS

We are from time to time named as a
defendant in certain routine litigation incidental to our business. We are currently not
party to any legal proceedings which would reasonably be expected to have a material
adverse effect on our financial position. For a discussion of other pending legal
proceedings, see Note 6b to our consolidated financial statements included in this Report.

In connection with the legal
proceedings relating to the asset purchase agreement with Hewlett-Packard, under which
Hewlett-Packard agreed to acquire substantially all of the assets and business of Scailex
Vision for $230 million and as described below, Hewlett-Packard filed an indemnity claim
with the escrow agent in October 2006 seeking the release to it of $5.26 million from the
escrow funds, claiming Scailex Vision was in breach of certain representations warranties
in their purchase asset agreement. On May 5, 2008, a settlement agreement was signed
between Scailex Vision and HP, which concludes the reciprocal claims between the parties
with respect to the sum in escrow. Within the scope of a settlement agreement, HP and
Scailex Vision agreed that, out of the inclusive total balance of the escrow funds: the
sum of approximately $7.8 million is being released to Scailex Vision, the sum of
approximately $7.4 million is being released to HP, while the balance, at the sum of
approximately $0.6 million, shall be retained by the trustee to secure a particular claim
in respect whereof HP is entitled to indemnification. Additionally, HP agreed to pay to
Scailex Vision 75% of any payment HP receives from the Mexican tax authorities in
connection with any final judgment or settlement of the claims involving the escrow funds.
See Item 10C. Material Contracts  Escrow Settlement Agreement below.

DIVIDEND POLICY

Except as described below, we did not
distribute any dividends (in cash or otherwise), bonus shares or declared any split,
recapitalization or make any rights offerings to the holders of our shares since the third
quarter of 1996. Payment of dividends is considered by the Board from time to time, and a
payment, or non-payment, of a dividend should not be considered indicative as to the
payment of future dividends. For general information on the applicable tax rate on
dividends, please see in Item 10E.  Taxation below.

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

On May 22, 2008, we distributed
$1.17735 per ordinary share, or approximately $44.9 million, to our shareholders of record
as of May 5, 2008.

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

Except as otherwise disclosed in this
Report, no significant change has occurred since December 31, 2007.

69

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

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

Our ordinary shares have been listed
and traded on TASE since 2001 under the symbol SCIX. Our shares were listed
for trade on the Nasdaq Global Market from 1980 until October 2006. In October 2006, our
ordinary shares were de-listed from Nasdaq as a result of a determination by the Nasdaq
staff that we are a public shell lacking any business operations. As at the date of this
Report, the Companys shares are traded on TASE and are quoted on the OTC Bulletin
Board (OTCBB) in the United States.

All share prices below on Nasdaq and
on the OTCBB are reported in U.S. dollars, and all share prices below on TASE are reported
in NIS. As of December 31, 2007, the exchange rate was equal to NIS 3.855 per $1.00 (NIS
4.225 on December 31, 2006).

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

|Annual High and Low    | NASDAQ /OTCBB | The Tel Aviv Stock Exchange
|---------------------- | ------------- | ---------------------------
|
|
|
|
|2003                   |               |                            
|2004*                  |               |                            
|2005                   |               |                            
|2006                   |               |                            
|2007                   |               |                            
|Quarterly High and Low |               |                            
|2008                   |               |                            
|First Quarter          |               |                            
|Second Quarter         |               |                            
|Third Quarter          |               |                            
|2007                   |               |                            
|First Quarter          |               |                            
|Second Quarter         |               |                            
|Third Quarter          |               |                            
|Fourth Quarter         |               |                            
|2006                   |               |                            
|First Quarter          |               |                            
|Second Quarter         |               |                            
|Third Quarter          |               |                            
|Fourth Quarter         |               |                            
|Most Recent Six Months |               |                            
|April 2008             |               |                            
|May 2008 *             |               |                            
|June 2008              |               |                            
|July 2008              |               |                            
|August 2008            |               |                            
|September 2008         |               |                            

* On April 10, 2008, we announced a
distribution of NIS 3.93 ($1.17735) per ordinary share and, effective May 5, 2008, the
ordinary share price was adjusted (downwards) on the OTCBB, and TASE to reflect such
dividend. The earlier share prices reflected in the table above were not adjusted to
reflect this adjustment.

On September 29, 2008, the last
reported sale price of our ordinary shares on the OTCBB was $7.17 per share.

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

Not Applicable.

70

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

In October 2006, our ordinary shares
were de-listed from Nasdaq as a result of a determination by the Nasdaq staff that we are
a public shell lacking any business operations. Our ordinary shares are listed on TASE and
are quoted on the OTCBB. The shares trade on both markets under the symbol
SCIXF

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

Not Applicable.

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

Not Applicable.

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

Not Applicable.

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

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

As of December 31, 2007 our
authorized share capital was 60,000,000 ordinary shares. As of December 31, 2007 and
September 29, 2008, our issued and outstanding share capital was 43,579,388 ordinary
shares, respectively. All of our issued ordinary shares are fully paid. Our ordinary
shares have no par value.

As of December 31, 2007 and September
29, 2008, we hold, at cost, 5,401,025 ordinary shares and  6,118,406  ordinary shares
as treasury shares, respectively.

We did not issue any shares during
the last three years, other than 112,000 shares issued upon exercise of employee options.

For information relating to options
exercisable for ordinary shares, see the description of our share incentive plans in Item
6.E Share Ownership.

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

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

We were first registered under
Israeli law on November 2, 1971 as a private company, succeeding a predecessor
corporation, Scientific Technology Ltd., which was founded on September 5, 1968. In May
1980, we became a public company. In December 2005, we changed our name from Scitex
Corporation Ltd. to Scailex Corporation Ltd. We are registered with the
Registrar of Companies in Israel under number 52-003180-8.

OBJECTS AND PURPOSES

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

71

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DIRECTORS

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

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

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

SHARES

In December 2007, the general meeting
approved the increase of the Companys registered capital. As a result, our
registered capital is divided into 60,000,000 ordinary shares of nominal (par) value NIS
0.12 each. There are no other classes of shares. All of our outstanding shares are fully
paid and non-assessable. The shares do not entitle their holders to preemptive rights.

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

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

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

VARIATION OF RIGHTS

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

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GENERAL MEETINGS

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

Under the Companies Law, shareholder
meetings generally require prior notice of not less than 21 days. In December 2006, the
General Meeting adopted an amendment to the Companys Articles of Association that
allows notice of General Meetings to be duly given to Israeli shareholders by means of
publication in two Israeli daily publications and duly given to shareholders outside of
Israel by means of publication in one international daily publication or by international
wire service. The function of the annual general meeting is to receive and consider the
directors report, profit and loss account and balance sheet, to elect directors and
appoint auditors and fix their fees, and to transact any other business which under the
Articles or by law are to be transacted at our annual general meeting.

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

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

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

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

LIMITATION ON RIGHTS TO
OWN SHARES

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

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DIVIDEND AND LIQUIDATION
RIGHTS

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

CHANGE OF CONTROL

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

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

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

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

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

NOTIFICATION OF
SHAREHOLDING

There are no specific provisions of
our Memorandum or Articles governing the ownership threshold above which shareholder
ownership must be disclosed; however the Israeli Securities Law (1968) sets forth certain
thresholds and situations in which disclosure is required, such as possessing 5% or more
of the issued capital or voting power of a company, or possessing the ability to appoint a
director or a CEO, or the fact that a shareholder serves as a director or a CEO of a
company.

CHANGES IN CAPITAL

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

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

| | THE
AGREEMENT FOR THE ACQUISITION OF CELLULAR ACTIVITY DATED AUGUST 21, 2008
|- | ----------------------------------------------------------------------------

On August 21, 2008, Scailex
entered into an agreement (the Purchase Agreement) for the acquisition
of cellular operations (Cellular Activity) in the cellular end
equipment and retail market (the Area of Cellular Activity) of Suny
Electronics Ltd. (Suny Electronics), a controlling shareholder in
Scailex, which was conducted through subsidiaries of Suny Electronics: Suny Telecom (1994)
Ltd. (Suny Telecom) and Din Dynamic Ltd. (Dynamic).
Suny Electronics, Suny Telecom and Dynamic are together referred to as the Suny
Group. The transaction closed on September 29, 2008.

Assets and Liabilities.
Pursuant to the Purchase Agreement, the purchased Cellular Activity consisted of all
assets and rights (tangible and intangible) of Suny Telecom and of Dynamic (the
Subsidiaries) in the Area of Cellular Activity (excluding the shares of
Suny Electronics in the possession of Suny Telecom, cash, cash equivalents and other
financial assets), and of all liabilities of Suny Telecom and Dynamic in the Area of
Cellular Activity, including liabilities arising from the agreements assigned to Scailex
as part of the transferred assets or relating to these agreements, and excluding the debt
of the subsidiaries to Bank Leumi le-Israeli B.M.; short term credit, short term loans
(on call) and long term loans; valued added tax balances payable and provisions for
Income Tax (including Employees Income Tax and National Insurance) for the period up
to the Execution Date.

Suny Electronics activities in
the field of the Internet and in the area of cellular content as well as real estate were
not transferred pursuant to the Purchase Agreement.

Employees.
          Together with the purchased Cellular Activity, the parties agreed to transfer
          the employees of Dynamic and Suny Telecom to Scailex (Relocated
          Employees). As of the closing date, the employer-employee relationship
          between the Relocated Employees and the Suny Group was terminated and the
          employer-employee relationship between such employees and Scailex commenced;

Consideration.
          In consideration of the acquisition of the Cellular Activity, Scailex paid
          Dynamic and Suny Telecom a total sum of NIS 255,809,000, which is composed of:
          (i) the Transferred Equity Capital (as defined in the Purchase Agreement),
          based on its value in Dynamic and Suny Telecom financial reports as at
          June 30, 2008, which will be adjusted within ninety (90) days of the day of
          Closing according to the financial data regarding the Transferred Equity Capital
          as of September 29, 2008, in the sum of NIS 90,144,000, which was transferred on
          the closing date; and (ii) the Cellular Activity value, which was NIS
          165,665,000;

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Condition of Assets. Subject
to the accuracy of the representations made by the Suny Group, Scailex accepted the
tangible assets comprising the transferred assets and/or the transferred liabilities
as is in their physical condition, including the quality, nature and age of
the items of the transferred inventory and the transferred fixed assets.

Indemnification Obligations.
As part of the indemnification mechanism prescribed in the Purchase Agreement, the Suny
Group undertook to indemnify Scailex for each of the following occurrences: (i) should it
transpire that any of the representations made by the Suny Group in the Purchase Agreement
is either misleading or inaccurate; (ii) should a conclusive judgment be entered against
Scailex in a third party claim on the ground of any act or omission on the part of the
Suny Group prior to the closing date, even if the legal proceeding has not yet ended; and
(iii) should the Suny Group violate its duty of confidentiality and/or duty of
non-competition under the Agreement.

The indemnity undertaking is valid
for 36 months from the closing date; however, where the ground for indemnification is
in connection with ownership or proprietary rights specified in the representations of the
Suny Group, the indemnity undertaking is unlimited in time. The indemnity undertaking will
commence as of a cumulative amount of damages of NIS 500,000 up to a maximum indemnity
amount of NIS 75 million.

The indemnification mechanism and the
provisions relating thereto apply inversely, mutatis mutandis, also to Scailex,
which will thus be compelled to indemnify the Suny Group in the event that any of the
representations made by it in the Purchase Agreement is either misleading or inaccurate.

Non Compete.The Purchase
Agreement includes a non competition provision, pursuant to which the Suny Group
undertakes not to compete with Scailex, either directly or indirectly (including via its
employees and/or officers therein and/or controlling shareholders therein), in the Area of
Cellular Activity for a period of four years from the closing date.

Name Change. Pursuant to the
Agreement, the Suny Group gave its consent to the change of Scailexs name to a name
that includes the word Suny.

Collections on behalf of
Scailex. Commencing from the closing date and for a period of 60 months
thereafter, the Suny Group continues to collect on behalf of Scailex all payments made to
Dynamic by customers in the Area of Activity in accordance with service and maintenance
agreements that were executed with them prior to the closing date, including payments made
by means of credit cards. In consideration of the said management and collection
management services, Scailex pays to the Suny Group an amount representing 4% of all
amounts collected as aforesaid by the Suny Group.

In
addition, for a period of twelve months commencing from the closing date, the Suny Group
agreed to continue importing mobile cellular phones (and related products) on behalf of
Scailex in connection with the Activity. In consideration of such import services, Scailex
pays to the Suny Group handling and management fees in a sum representing the cost of the
products to the Suny Group plus 1%.

For a description of the Services
Agreements with Suny see Item 7B. Related Party Transactions.

| | DISTRIBUTION
AGREEMENT FOR CELLULAR PHONE DEVICES - CDMA DATED JULY 10, 1998
|- | ----------------------------------------------------------------------------

In July 1998, Suny Telecom entered
into a distribution agreement with Samsung (the CDMA Agreement) pursuant to
which Suny Telecom was granted rights to market mobile cellular phones manufactured by
Samsung, using CDMA technology. In August 2008, the CDMA Agreement was extended for a
period of two additional years, ending on December 31, 2009.

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The CDMA Agreement, as amended in
December 2003, provided that in each year of activity, Suny Telecom must meet several
sales targets as prescribed in the Agreement, including market share and purchase quotas
of cellular phones.

Suny Telecoms commitment to
comply with the terms of the CDMA Agreement is conditional on Samsungs compliance
with various terms prescribed in the CDMA Agreement, including supply of several new CDMA
telephone models to be approved by a cellular operator in Israel, fulfilling relevant
timelines and creating a variety of products with such price profiles as prescribed in the
CDMA Agreement.

Samsung may terminate the CDMA
Agreement each year should Suny Telecom fail to meet the targets prescribed in the CDMA
Agreement, provided that Samsung has fulfilled its obligations under the CDMA Agreement
(as described above).

The CDMA Agreement includes
provisions regarding the parties participation in expenses relating to the
advertising and sales promotion of cellular phones in Israel, the purchase of accessories
by Suny Telecom from Samsung, and principles concerning technical support and post-sales
service.

| | DISTRIBUTION
AGREEMENT FOR CELLULAR PHONE DEVICES - GSM DATED FEBRUARY 27, 2008
|- | -------------------------------------------------------------------------------

In February 2001, Suny Telecom
entered into a distribution agreement with Samsung (the GSM Agreement)
pursuant to which Suny Telecom was granted rights to market mobile cellular phones
manufactured by Samsung using GSM technology. In August 2008, the GSM Agreement was
extended, effective from August 12, 2008, for a period of one additional year.

The GSM Agreement, as amended in
September 2004, provided that in each year of activity, Suny Telecom must meet several
sales targets as prescribed in the GSM Agreement, including targeted market shares and
purchase quotas for purchase of cellular mobile phones.

Suny Telecoms commitment to
comply with the terms of the GSM Agreement is conditional on Samsungs compliance
with various terms prescribed in the GSM Agreement, including supply of several new GSM
telephone models to be approved by cellular operators in Israel, fulfilling relevant
timelines and creating a variety of products with such price profiles as prescribed in the
GSM Agreement.

Samsung may terminate the agreement
once a year should Suny Telecom fail to meet the targets prescribed in the GSM Agreement,
provided Samsung has fulfilled its own obligations as provided in the GSM Agreement.

The GSM Agreement includes provisions
regarding the parties participation in expenses relating to advertising and sales
promotion of cellular phones in Israel, purchase of accessories by Suny Telecom from
Samsung, and principles concerning technical support and after-sales service.

| | THE
PCH SALE AGREEMENT DATED APRIL 10, 2008
|- | -------------------------------------------

On June 30, 2008, Scailex sold to
IPE, its controlling shareholder, all of Scailexs shares (PCH
Shares) in Petroleum Capital Holdings Ltd. (PCH), such shares
constituting 100% of PCHs issued share capital. As a result of our sale of PCH, we
no longer had any interest in ORL. This sale was made pursuant to an agreement (the
PCH Sale Agreement), dated April 10, 2008, between Scailex and IPE.

The main principles of the PCH Sale
Agreement are as follows:

On the consummation date of the PCH Sale
Agreement, Scailex transferred PCHs Shares to IPE. In addition to the purchase of
all of PCHs Shares, IPE purchased capital notes from Scailex at the inclusive par
value of NIS 1,028,320,561 (approximately $304.7 million), which are unlinked and
interest free, which were issued by PCH in respect of funds injected into PCH by its
shareholders (the Capital Notes), subject to partial payment, as
specified in paragraph 6, below. IPE also received, by way of transfer and
assignment, all of the rights and obligations of Scailex and PCH pursuant to and by virtue
of an irrevocable deed of undertaking dated May 10, 2007 from the Israel Corporation
Ltd. (Israel Corporations Deed of Undertaking and Israel
Corporation, respectively). Israel Corporations Deed of Undertaking
regulates the relations between Scailex, PCH and the Israel Corporation as shareholders of
Oil Refineries Ltd. (ORL), pursuant whereto, Israel Corporation
undertook to engage with Scailex and PCH, under certain conditions, in an agreement for
the joint control of ORL.

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In consideration for the purchase of
PCHs Shares, the Capital Notes and the rights of Scailex and PCH pursuant to Israel
Corporations Deed of Undertaking, in addition to the assignment and transfer to IPE
of all of Scailexs rights and obligations pursuant to the rental agreement under
which Scailex is renting its offices in Herzliya Pituach (the Rental
Agreement and the Rented Premises respectively) in the amount
of approximately $0.86 million, IPE paid the sum of NIS 1,144,312,022 (approximately
$338 million) to Scailex on the consummation date of the PCH Sale Agreement (the
Consideration).

PCHs Shares were sold to IPE as
is, with the exception of certain representations, while each party undertook to indemnify
the counter party in relation to inaccuracy or incompleteness of the representations
given, an undertaking that shall expire on May 31, 2009. IPE further undertook to
indemnify Scailex in respect of any damage or expense that might be caused to Scailex in
relation to any matter pertaining to Israel Corporations Deed of Undertaking, and to
the assignment thereof to IPE, this solely in respect of the period during which Scailex
and PCH are jointly and severally liable pursuant to Israel Corporations Deed of
Undertaking.

On the consummation date of the PCH
Sale Agreement, the sole assets of PCH were shares of ORL, PCHs rights by virtue of
Israel Corporations Deed of Undertaking, and cash and cash equivalents at the sum
equivalent to the sum of the Last Dividend and the profits thereof, and the sole
liabilities of PCH were pursuant to the Capital Notes and Israel Corporations Deed
of Undertaking.

The foregoing description of the
PCH sale agreement is only a summary and does not purport to be complete and is qualified
by reference to the full text of the agreement filed by us as Exhibit 4(a)(10) in Item 19
in our Annual Report on Form 20-F for year ended December 31, 2007, as filed on June 30,
2008.

| | SHAREHOLDERS
AGREEMENT BETWEEN THE COMPANY, PCH AND LINURA DATED DECEMBER 21, 2006, AS AMENDED
|- | ----------------------------------------------------------------------------------------------

On December 21, 2006, we entered into
a shareholders agreement with (i) Linura Holding AG, or Linura, a Swiss company indirectly
held by one of the largest global companies involved in natural resources, and (ii)
Petroleum Capital Holdings Ltd., or PCH, a company owned 80.1% by us and 19.9% by Linura.

This agreement was terminated due to
our purchase of Linuras interest in PCH. The shareholders agreement governed the
formation and operation of PCH as well as PCHs participation in the privatization of
ORL by way of the State of Israels initial public offering of the shares of ORL.

Under the shareholders agreement, we
provided management and administrative services to PCH free of charge, excluding
out-of-pocket expenses incurred for such services, which were to be reimbursed by PCH.

PCH Board of Directors
and Decision-Making Process

Under the shareholders agreement, the
board of directors of PCH was to consist of at least three and no more than seven members.
So as long as Linura held 19.9% of the share capital of PCH, it was entitled to appoint
one director. We were entitled to appoint the Chairman of the Board of the Directors. The
Chairman did not have an additional vote.

For so long as Linura held at least
15% of the share capital of PCH, the following decisions were subject to both our and
Linuras approval as shareholders: (i) amendments to PCHs articles of
association; (ii) any merger, de-merger, reorganization, consolidation, acquisition, sale
or grant of an exclusive license to substantially all of PCHs assets; (iii)
decisions regarding bankruptcy, liquidation of the business or reconciliation or any other
settlement with creditors; and (iv) an application for the listing of shares or debt
securities of PCH on any recognized stock exchange.

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In addition, under the terms of the
agreement, for so long as Linura held at least 15% of the share capital of PCH, the board
of directors decision to approve any of the foregoing, or to approve a transaction
that is not within the normal course of business and/or a transaction in respect of the
sale of all of PCH assets or a significant part thereof were subject to the approval of
all members of the board of directors appointed by us and Linura.

In addition to the above decisions,
for as long as Linura held at least 19.9% of PCHs shares, the material terms of
financing obtained by PCH until obtaining control over ORL were subject to the approval of
all members of the board of directors appointed by us and Linura.

PCH Financing

As part of the shareholders
agreement, we and Linura committed to provide shareholder loans to PCH in accordance with
our pro rata shareholdings in PCH. If additional financing were requested by PCH, we and
Linura may each have provided additional shareholder loans to PCH. The shareholders
agreement also provided that PCH could not distribute dividends until all of the
shareholder loans were repaid to PCH.

Restriction on Transfer
of PCH Shares

Under the shareholders agreement,
until the date of expiration of the first Put Option and the first Call Option (each as
defined below), the parties were not permitted to transfer their holdings in PCH or any
rights under the shareholders agreement, other than permitted transfers such as the
transfer to subsidiaries. Following the restriction period, the parties were permitted to
transfer shares in PCH subject to the right of first refusal and tag along rights
described below.

The shareholders agreement further
provided that neither we nor Linura may transfer our holdings in PCH at any time if the
transfer violated the terms of PCHs control permit for the ORL shares (if granted)
under applicable Israeli Law or if the transfer would prevent PCH from obtaining such a
control permit.

Under the shareholders agreement, we
had a right of first refusal in the event that Linura desired to sell its PCH shares to a
third party. Prior to accepting a third partys offer, Linura must first have
presented us with the details of the offer after which we would have had 30 days to match
the third partys offer.

The shareholders agreement also
granted Linura a right of first opportunity in the event that we decided to sell our PCH
shares to a third party. Prior to offering our PCH shares to a third party, we must first
have presented the terms of the contemplated offer to Linura, which would have had 30 days
to accept the proposed offer. If Linura refused to accept the contemplated offer, we would
have had the right to force Linura to sell its shares in PCH to a third party on the same
terms as the proposed offer.

The shareholders agreement also
granted Linura the right to join the sale of our PCH shares to a third party, pro-rata to
Linuras holdings in PCH.

Transfers of ORL Shares

In the event that PCH elected to sell
its entire holdings in ORL to a third party, the shareholders agreement provided that we
and Linura would have had a right to purchase the ORL shares first, pro-rata to our
holdings in PCH.

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First Put & Call
Options

Under the terms of the agreement, if,
within twelve (12) months from the date of the public offering of ORL shares PCH had not
acquired control of ORL, Linura would have been able to force us to purchase all of
Linuras PCH shares. The purchase price of Linuras PCH shares was equal to the
amount of Linuras capital investment in PCH, plus interest, minus dividends and
returns of capital contributions.

If Linura failed to exercise the
above option within thirty days from the date it would have become entitled to exercise
such right, we would have had the right to purchase all of Linuras PCH shares
according to a pricing mechanism stipulated in the shareholders agreement.

Second Put & Call
Options

On the first anniversary of the date
of acquisition of the control of ORL, Linura would have been able to require Scailex to
purchase all of Linuras PCH shares at a purchase price equal to the amount of
Linuras capital investment in PCH, minus dividends and returns of capital
contributions.

If Linura failed to exercise the
above option within thirty (30) days following the first anniversary of the date of
acquisition of control of ORL, we would have had the option to purchase all of
Linuras shares in PCH according to a pricing mechanism stipulated in the
shareholders agreement.

ORL Undertaking

Under the shareholders agreement, the
parties acknowledged that a party nominated by Linura would use its best efforts to offer
ORL competitive terms on crude oil and petroleum products. For as long as Linura held
19.9% of the share capital of PCH, and subject to legal restrictions, we and Linura agreed
to use our utmost efforts through PCH to increase the share of crude oil and/or petroleum
products supplied by such nominated party to ORL and/or the purchase by the nominated
party of any petroleum products designated for export by ORL, provided however, that the
nominated company extended the most competitive offers to ORL and that ORLs
competitive status as a purchaser or supplier, as applicable, would not have been
adversely affected.

Addendum to the
Shareholders Agreement

On May 10, 2007, the parties to the
shareholders agreement agreed that in the event that the shareholders agreement
contradicts the definitive Control Agreement to be entered into by PCH, Scailex and Israel
Corp., as set forth below, the Control Agreement shall prevail.

| | THE
SHARE PURCHASE AGREEMENT BETWEEN SCAILEX AND LINURA, DATED MARCH 26, 2008
|- | -----------------------------------------------------------------------------

On March 26, 2008, the Company
completed the purchase of the minority 19.9% interest of Linura Holding AGs
(Linura) in PCH, and received, by way of assignment, the capital note that PCH
had issued to Linura. The total consideration for the purchase was $57.2 million. With the
purchase of Linuras share in PCH, a 15.76% shareholder in ORL, PCH became a wholly
owned subsidiary of the Company.

The main principles of the Share
Purchase Agreement are as follows:

Linura agreed to sell Scailex its
entire shareholdings in PCH and assign its Capital Note (as defined below) to Scailex, on
an AS IS basis all in the framework of the Shareholders Agreement.

Scailex and Linura agreed on a
purchase price of $57.2 million for 199 ordinary shares of PCH owned by Linura
constituting 19.9% of the issued share capital of the Company, and the outstanding capital
note dated August 9, 2007, issued by PCH in favor of Linura on the nominal amount of NIS
232,299,895.

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Linura represented and warranted that
it was the sole lawful and beneficially owner of its shares and the capital note, and that
such shares and capital note were free and clear of any options, first refusal rights,
voting trust and other voting agreements, and of all liens, claims, charges, encumbrances
and/or other third party rights of any kind whatsoever, save for Scailexs rights
under the Shareholders Agreement between Scailex, Linura, and PCH as described and
referenced below.

Linuras shares and the capital
note were transferred and assigned to Scailex.

The foregoing description of the
share purchase agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement filed by us as Exhibit 4(a)(9) in
Item 19  of our Annual Report on Form 20-F filed on June 30, 2008.

| | MEMORANDUM
OF UNDERSTANDING DATED FEBRUARY 18, 2007 (INCLUDING ADDENDUM THERETO DATED FEBRUARY19,
2007) AND DEED OF UNDERTAKING DATED MAY 10 2007, AMONG THE COMPANY, PCH AND THE ISRAEL
CORP.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Memorandum of
Understanding

The Memorandum of Understanding
described below was revoked on May 10, 2007.

On February 18, 2007, PCH and the
Company (collectively the Scailex Group) entered into a binding Memorandum of
Understanding (the Memorandum of Understanding or MOU) with Israel
Corp. for the joint acquisition and control of ORL, pursuant to which Israel Corp. and
Scailex Group agreed to submit a joint proposal for the purchase of shares of ORL as part
of the public offering of shares of ORL by the State of Israel. The parties agreed that
Israel Corp. would hold 80% of the shares of ORL to be acquired and the Scailex Group
would hold the remaining 20% of such shares (the Preliminary Stake Ratio).

The parties agreed in the MOU that
they would mutually determine the number and price of the ORL shares to be purchased and
that, in the event of a dispute, each party would be entitled to act in its sole
discretion and, in such an event, the Memorandum of Understanding would be revoked.

The Scailex Group was granted the
option (Call) to increase its share in the acquisition from the Preliminary
Stake Ratio to 45% of the shares to be purchased by the parties as part of the offering
within 120 days from the date of either: (a) the receipt of mandatory regulatory approvals
required to control ORL; or (b) nine months from the date of execution of the Memorandum
of Understanding, whichever is earlier. The purchase price of a share acquired pursuant to
the Call option was to be the average NIS cost of ORL shares in the relevant offering,
linked to increases in the consumer price index, plus 5% annual interest, subject to
standard adjustments.

The parties agreed that the terms and
conditions of the MOU would apply to the purchase, either jointly or severally, of any
additional shares of ORL after the public offering. Decisions with regard to the purchase
of shares of ORL in the secondary market following completion of the offering, whether on
the stock exchange or outside the stock exchange, including a public offering, would be
mutually agreed upon.

Under the MOU, each of the parties
was entitled to acquire additional shares of ORL, provided that it would offer the other
party, within three (3) business days from the date of the acquisition, the opportunity to
purchase a proportional share of the shares it purchased as if, on the same date the Call
Option had been exercised (i.e., 55% to Israel Corp. and 45% to PCH,) at cost plus
market interest until the date of actual payment. However, the terms of the MOU were not
to apply to acquisitions of additional shares or securities of ORL by any of the parties
that were to cause the shares subject to the MOU to exceed 45% of ORLs issued share
capital.

Appointment of Directors;
Officers

Furthermore, as part of the MOU, the
parties agreed to appoint directors to the board of directors of ORL, its committees and
its subsidiaries, pro rata to each partys holding, provided that the Scailex Group
would be entitled to appoint at least one director to ORLs board of directors or
committees and provided that the Scailex Group and Israel Corp. are able to affect the
appointment of two or more directors.

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The parties agreed that the manner of
appointment and discharge of the executive officers of ORL would be set forth in the
Control Agreement to be entered into by the parties at a future date. The parties also
agreed that each party would nominate one external director.

Voting at the General
Meeting

The MOU further provided that prior
to any general meeting of ORL, the parties would convene a preliminary meeting to decide
(pro rata to their holdings in ORL) on how they would vote and act at the general meeting,
and the parties would proceed in accordance with their mutual decision.

Dividends

Under the MOU, the parties undertook
to act pursuant to the provisions of all applicable laws so that ORL and its subsidiaries
would adopt a dividend policy providing for the distribution of at least 75% of the annual
profits that are deemed distributable.

Right of First Refusal

If the Scailex Group wishes to sell
its shares in ORL to a third party, Israel Corp. would have the right of first refusal
with respect of the shares offered for sale and would be entitled to purchase all the
shares being offered for sale as follows: (1) during the first year from the signing of
the MOU, at the average cost price of ORL shares acquired by the Scailex Group, with the
value linked to increases in the CPI, plus interest at a rate of 5% annually, subject to
the customary adjustments (the foregoing will not apply if the third party holds more than
45% of ORLs issued share capital prior to the sale); and (2) after the end of one
year from the signing of the MOU, or in the event that the third party holds more than 45%
of ORLs issued share capital prior to the sale, according to the price offered by
the third party.

Tag Along

If Israel Corp. desires to sell its
shares in ORL, in whole or in part, to a third party, the Scailex Group would be entitled
to join the aforementioned sale in proportion to its holdings of the ORL shares to which
the provisions of this MOU apply.

Rights of Parties in the
Event of Exercise of the Call

If the Call were to be exercised, the
parties would grant each other the right of first refusal with respect to the shares of
ORL held by each party, and each party would have the right (tag along right) to join the
other (provided the right of first refusal is not exercised) in the case of a sale of all
or a portion of the holdings of the other party, to a third party, pro rata to such
partys respective holdings of the ORL shares to which the provisions of this MOU
apply. If ORL shares are transferred to a third party, the acquiring party must become a
party to the Memorandum of Understanding or the definitive agreement that follows the
Memorandum of Understanding, and all provisions of the MOU or the definitive agreement
shall apply mutatis mutandis to the third party.

Minority Interests

The Scailex Group was granted
customary minority rights, such as group veto rights with respect to certain decisions
affecting ORL or its subsidiaries and affiliated companies, including: modifications to
the articles of association, structural changes (mergers, reorganization, material
acquisitions/sales, etc.), liquidations, stay of proceedings, the registration of
securities or debt for trading, and transactions with interested parties. Israel Corp.
undertook that, for so long as Israel Corp. and Scailex Group are in control of ORL, it
would act in manner conducive to Scailex Group fulfilling its undertakings to Linura,
subject to the provisions of any applicable law.

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Buy/Sell

At the end of twelve (12) months from
the date of exercise of the Call, one party to the agreement would be entitled to offer to
purchase all shares of the other party to which the provisions of the MOU apply at the
price set in the offering, and the second party would be bound to either accept the offer
or, alternatively, acquire all the shares of the offering party to which the provisions of
the MOU apply at a price determined in the offer, all per the election of the second
party.

Linura Supplier
Undertaking

The parties agreed that so long as
Linura holds at least 19.9% of the shares of PCH, and subject to any applicable legal or
regulatory restrictions, the parties would use their best efforts to significantly
increase the share in the supply of crude oil and petroleum products sold to ORL and/or
any purchase of petroleum products designated by ORL for export, by the company nominated
by Linura. The foregoing is contingent upon the nominated company extending the most
competitive terms to ORL and ORLs competitive status as a purchaser or supplier, as
applicable, not being adversely affected.

Addendum to the MOU Dated
February 19, 2007

On February 19, 2007, the parties
signed an addendum to the MOU provided that the provisions of the Memorandum of
Understanding and any amendment or addition thereto will be subject to any financial
arrangement made or to be made between either of the parties and a bank or insurance
company (the Lien Holder), that will finance the purchase of ORL shares and
whose loan will be secured by a pledge of ORL shares.

Upon violation of the financial
arrangement by one of the parties and notification by the Lien Holder that it intends to
foreclose on all or a portion of the lien, the Lien Holder would be entitled to allow the
second party to pay all the debts of the first party that were immediately payable and be
entitled to receive all the rights of the Lien Holder to the ORL shares subject to the
lien in the form of an irrevocable assignment.

The party that receives ORL shares in
the form of the aforementioned irrevocable assignment would realize the lien subject to
the provisions of the Memorandum of Understanding.

Joint Purchase of ORL
Shares

Pursuant to the provisions of the
MOU, the Scailex Group and Israel Corp. submitted a joint offer as part of the public
offering. On February 20, 2007, the Company received notification that the joint offer was
accepted and that PCH and Israel Corp. had been issued 920 million shares of ORL, which
constitutes approximately 46% of the total share capital of ORL. In accordance with the
terms of the MOU, out of the total number of shares of ORL purchased jointly by the
Scailex Group and Israel Corp., PCH purchased 184 million ordinary shares (9.2% of the
issued share capital of ORL), and Israel Corp. purchased 736 million shares (36.8% of the
issued share capital). The shares in the offering were acquired based on a valuation of
ORL of NIS 6.6 billion and a share value of NIS 3.30 per share.

During February and March 2007, PCH
and Israel Corp. acquired an additional 107.24 million shares of ORL on the Tel Aviv Stock
Exchange. As consideration for these additional shares, PCH paid a total amount of
approximately NIS 142.8 million at an average price of approximately NIS 2.96 per share.
As a result of the aforementioned purchases, Israel Corp. and Scailex (through PCH) held
jointly, as of March 28, 2007, 53.6% of the issued share capital of ORL, with PCH holding
252.4 million shares, or 12.62% of the issued share capital, and Israel Corp. holding
819.5 million shares, or 40.98% of the issued share capital of ORL.

Notwithstanding the foregoing, the
rights in the shares of ORL were limited, including the ability to exercise common control
of ORL under a shareholder agreement, until the shareholders received the mandatory
regulatory approvals in Israel, which included approval by the Israel Antirust Authority
for the acquisition of 25% or more of the ORL share capital and receipt of a control
permit for control of 24% or more of ORL from the Minister of Finance and the Prime
Minister. The Scailex Group and Israel Corp. had received the necessary approval from the
Israeli Antitrust Commissioner, but never received the control permit, due to issues
relating to the control of PCH.

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Deed of Undertaking

The parties decided to revoke the MOU
and the Addendum to the MOU on May 10, 2007 and entered into an irrevocable deed of
undertaking (the Deed of Undertaking), which has since been terminated.

The Deed of Undertaking allowed the
parties to file separately for a control permit for the acquisition of ORL. The parties
entered into the Deed of Undertaking in order to expedite the acquisition of the control
of ORL since Scailex, PCH and Israel Corp. believed that it was in the best interests of
ORL to establish control by its new shareholders as soon as possible. The decision to
apply separately stemmed from the fact that the parties assumed that Israel Corp., which
until February 2007, formerly held 26% of ORL, would succeed in obtaining a control permit
in a relatively short time. Furthermore, PCH experienced delays in receiving the control
permit due to the fact that additional information was requested about Linura, which holds
19.9% of PCH. The revocation of the MOU enabled Israel Corp. to submit a separate
application for the control permit for the acquired ORL shares from the Finance Minister
and the Prime Minister.

The following is a summary of the
main points of the Deed of Undertaking:

The parties agreed that if the
Scailex Group received the mandatory regulatory approvals, including a control permit and
a possible additional approval from the Israeli Antitrust Commissioner, on or before May
15, 2009, Israel Corp and the Scailex Group would have entered into the Control Agreement
for the joint control of ORL, as described below.

The call option (theCall Option), which was to be granted to PCH pursuant to the Control
Agreement (as described below), would have been exercisable until May 15, 2009 or until
120 days after the mandatory governmental approvals for the exercise of the ORL shares
would have been obtained, whichever would have been earlier. Exercise of the Call Option
would have enabled PCH to purchase and receive by way of transfer from Israel Corp. 230
million shares of ORL (the Underlying Shares), so that, subsequent to exercise
of the Call Option, PCH would have held 45% of the 50.25% control core (the Control
Core Shares) in ORLs share capital, and Israel Corp. would have held 55% of
the Control Core Shares in ORLs share capital.

The price of the Underlying Shares
would have been the cost price for purchasing the Control Core Shares in the sale
offering, namely NIS 3.30 per share for a total of NIS 759 million, plus index linkage
differentials and linked interest at the rate of 5% per annum, less any dividends
distributed (if any), plus index linkage differentials and interest as aforesaid.

The sale and transfer of PCHs
shares of ORL to a third party or sale of the control of PCH or Scailex to a third party
would have been subject to Israel Corp.s right of first refusal to purchase all
shares of ORL or the relevant PCH securities in accordance with the provisions of the
Control Agreement.

The right of PCH and Scailex to enter
into the Control Agreement may be transferred to a third party in the event that: (i) PCH
sold all of its shares in ORL to a third party (and Israel Corp. does not exercise its
right of first refusal), or (ii) Scailex sold the control of PCH to a third party, and
that third party obtains all the requisite approvals, including approval of the Israeli
Antitrust Commissioner and a control permit, on or before May 15, 2009. In either such
case, Israel Corp. will enter into the Control Agreement with the third party and all
provisions thereof, including the Call Option, will apply. Until the Control Agreement
came into effect, Israel Corp. was entitled to exercise its power of control in ORL
(provided that it had received the required control permit) at its discretion and without
any restrictions.

On the signing date of the Deed of
Undertaking, PCH signed an irrevocable power of attorney empowering Israel Corp. to vote
in its name and on its behalf at the general meetings of shareholders of ORL in respect of
the 100 million shares of ORL that PCH owns. The power of attorney will expire when the
Control Agreement is signed or six months after the date of the Deed of Undertaking,
whichever is earlier.

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In May 2007, following the adoption
of the Deed of Undertaking, PCH purchased, independent of Israel Corp., additional shares
of ORL, bringing its total holdings to 13.39% of the share capital of ORL.

The Contemplated
Definitive Agreement for Joint Control of ORL by Israel Corp. and Scailex Group (the Control
Agreement)

Set forth below are the main points
of the contemplated, definitive Control Agreement that was attached to the Deed of
Undertaking and was to have been signed by Israel Corp. and by the Scailex Group upon
receipt by the Scailex Group of all regulatory approvals required under applicable law,
including a control permit to hold the shares of ORL and any additional approvals that may
be required by the Antitrust Commissioner. The contemplated Control Agreement would have
related only to approximately 50.25% of the issued and paid-up share capital of ORL and
includes all bonus shares that would be distributed (if any) in respect of said shares and
all shares to be purchased following an offering of said shares and which are and will be
held by Israel Corp. and PCH. (the Control Core Shares). As indicated above,
the Deed of Undertaking was terminated, and the Control Agreement was not signed.

Undertakings relating to
the Transfer and/or Purchase of Securities

Freeze period

The agreement prescribes a freeze
period of six months commencing as of the signing date of the Control Agreement, during
which, neither party may transfer the Control Core Shares held by it, other than to a
person or corporation, which controls or is controlled by the relevant party or is
controlled by the controlling shareholders of the relevant party (an Authorized
Transferee).

Transfer Restrictions

Commencing on the expiration of the
freeze period described above, a party may not transfer and/or sell its Control Core
Shares to a third party (other than an Authorized Transferee) unless: (i) the party sells
and/or transfers all (but not a portion) of the Control Core Shares that it is holding;
and (ii) the other party is entitled to (A) purchase all the Control Core Shares being
offered for sale or transfer in accordance with the right of refusal rights described
below (Scailex Group right of first refusal would have taken effect only as of the date of
exercise by the Scailex Group of the Call Option described below) or (B) tag along in the
sale transaction of the Control Core Shares in accordance with the tag along rights
described below (Israel Corp. tag along right to take effect only as of the date of
exercise by Scailex Group of the Call Option described below).

Purchase of Additional
Shares

In the event that the parties decide
by mutual consent to increase the number of Control Core Shares, they would then purchase
additional Control Core Shares in proportion to their holdings of Control Core Shares at
the time. If a party desires to purchase additional shares in ORL that would not be deemed
to be Control Core Shares, the party would be free to act upon such shares at its
discretion, so long as the conditions described below under Right to Participate in
the Purchase of Shares are satisfied and so long as it notifies the other party in
advance and votes such additional shares at General meetings of ORL in conjunction with
all of the Control Shares that it possesses. Unless otherwise agreed upon by the parties,
a party may not purchase additional shares if it would cause ORL to be de-listed from TASE
or create an obligation to issue in full or in part a tender offer.

The right of first refusal

Following the freeze period, and
subject to the provisions described above under - Undertakings relating to the
Transfer and/or Purchase of Securities  Transfer Restrictions, if either party
wishes to transfer the Control Core Shares that it holds, the other party would have the
right of first refusal to purchase all (but not a portion) of the Control Core Shares that
are offered for sale by the selling party under the same terms as are offered by the
proposed buyer.

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The transfer of control in PCH and/or
Scailex and/or the Israel Corp. (subject to certain conditions) would also constitute
events that would entitle the other party to exercise its right of first refusal.

In the case of the change in control
of PCH, Israel Corp. would have the right to purchase all the securities that are the
subject of the change of control in PCH on the same terms as contemplated in the change in
control transaction. In the event of a change in the control of Scailex or of the
corporation controlling Scailex (other than IPE and the corporations that control it) to a
third party at which time the Control Core Shares held by the Scailex Group constitute a
majority of the assets of the entity undergoing a change in control, Israel
Corp. would be entitled to purchase all (but not less than all) of the Control Core Shares
then held by the Scailex Group at the average market price during the 60 trading days that
preceded the notice of sale, plus a 15% premium. The Scailex Group would have had the
right to purchase, at the average market price during the 60 trading days that preceded
the notice of sale, plus a 15% premium, all (but not less than all) of the Control Core
Shares then held by Israel Corp. in the case of a change in control of Israel Corp.

As indicated above, Scailex
Groups right of first refusal rights would only come into effect on the date on
which the Scailex Group exercised the Call Option.

Tag-along right

Following the freeze period, and
subject to the provisions described above under - Undertakings relating to the
Transfer and/or Purchase of Securities  Transfer Restrictions, if either party
wishes to transfer the Control Core Shares that it holds, then, provided that the right of
first refusal was not exercised, the other party would have the right to join in the sale
under the same terms as are offered by the proposed buyer. The other party would have the
right to include in the sale the same proportion of its Control Core Shares as the selling
party proposes to sell of its own Control Core Shares.

As indicated above, Israel
Corp.s tag-along right would come into effect only on the date on which the Scailex
Group would have exercised the Call Option.

Right to Participate in
the Purchase of Shares

If one party acquires additional
securities of ORL, it would be obligated to notify the other party of its purchase,
specifying the terms of the purchase, and the other party would have the right to purchase
shares from the purchasing party pro rata to the number of Control Core Shares held at
that time by the purchasing party as opposed to the number of Control Core Shares held by
the other party. For this purpose, PCH would be deemed to have exercised the call option
right described below if the purchase transaction occurred during the option period. The
price to be paid for these shares would be the same price at which they were purchased by
the purchasing party plus a customary prime shekel interest rate.

Call option

Israel Corp. would have granted PCH a
Call Option to obligate Israel Corp. to sell and transfer 230 million shares of ORL (the
Underlying Shares) to PCH so that PCH would have held 45% of the Control Core
Shares, and Israel Corp. would have held 55% of the Control Core Shares. The call option
had to have been exercised with respect to all, but not a portion, of the Underlying
Shares. The call option could have been exercised for a period of 120 days from the date
of receipt of the mandatory control permit, but no later than May 15, 2009. The call
option would expire at such time as PCH would hold less than 10% of ORLs share
capital. The purchase price for the Underlying Shares would be NIS 3.3 multiplied by the
number of Underlying Share, plus increases in the Israeli consumer price index plus linked
interest at the rate 5% per annum, compounded semi-annually, from the date Israel Corp.
purchased the Underlying Shares less any dividends or bonus shares distributed in respect
of the Underlying Shares.

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Pledge and Lien
Restrictions on the Securities of ORL

A party to the Control Agreement may
not pledge or place a lien on the Control Core Shares that it holds, unless such pledge or
encumbrance is in favor of a reputable bank or insurance company or is made in order to
secure debentures issued under a public offering or an offering to institutional
investors; provided, however, that the exercise of such a pledge would be subject to first
refusal rights of the other party, which must be exercised within ten days of receiving
notice of such contemplated pledge.

Buy-Sell Mechanism

Following the expiration of the
six-month freeze period described above and throughout the time the agreement is in
effect, each party to the agreement would have the right, subject to the exercise of the
Call Option, to (i) purchase all of the Control Core Shares held by the other party at
that time, or to sell to the other party all of the Control Core Shares that it holds and
(ii) terminate the agreement. The party desiring to activate this mechanism would deliver
a notice to the other party that it is willing to either sell to the other party all of
the Control Core Shares held by the notifying party at the price determined by the
notifying party or to purchase all of the Control Core Shares held by the other party at
the same price. The receiving party would then be required to select one of the
alternatives, and the parties would complete the transaction chosen by the receiving
party.

Appointment of directors

The parties to the Control Agreement
would undertake therein to exercise their voting power in the following manner:

| |  | So
long as the Call Option has not been exercised, ORLs board of directors would
consist of nine members (including two external directors), with Israel Corp. nominating
five directors and PCH nominating two directors. Recommendation for nominations of the
two external directors would be made by mutual agreement.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | From
such time as the Call Option is exercised, ORLs board of directors would consist of
11 members (including two external directors), with Israel Corp. nominating five
directors and recommending one external director, and PCH nominating four directors and
recommending one external director for nomination.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the event the ratio of Control
Core Shares is changed, then the right of the parties to nominate directors would be
adjusted to reflect their changed holdings. Subject to applicable law, the above ratios
regarding each partys representation on ORLs board of directors would apply
for all the Board Committees as well, except the audit committee, as well as for any
subsidiary or affiliate of ORL. Subject to law, the chairman of the board of directors
would be nominated by the Israel Corp. Subject to applicable law and the exercise of the
Call Option, the CEO, auditors, accountants and legal advisors of ORL and its subsidiaries
would be nominated by consent of the parties.

Voting at General Meetings

The Control Agreement provides that
the parties would agree in advance how to vote in General Meetings on certain matters that
could materially affect ORL, its subsidiaries or affiliates (so long as each party holds
at least 10% of ORLs issued share capital). These matters include: the decision to
enter into new type of business; offering of shares or other securities by ORL or any
subsidiary; amendments to the Articles of Association of ORL; mergers or reorganization of
ORL or any subsidiary; extraordinary transactions; appointment of accountants; liquidation
or a related stay of proceedings (similar to Chapter 11 proceedings in the
United States); or a material sale or purchase by ORL. In the absence of agreement on any
of the above matters, such matter would be decided by an agreed adjudicator. In addition,
the parties would act to amend ORLs articles of association so that resolutions
regarding the matters above would need to be approved by a General Meeting of ORL
shareholders or would require approval by a supermajority of 75% of all directors present
at the vote.

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Dividend policy

The parties to the Control Agreement
would act, subject to any applicable laws, so that ORL and its subsidiaries would adopt a
dividend policy according to which at least 75% of the annual distributable profit would
be distributed each year.

Term of the agreement

The Control Agreement would terminate
(a) in accordance with the relevant provisions in the agreement or (b) on the date on
which one of the parties ceases to hold at least 10% of ORLs share capital.

Scailexs guarantee

Scailex would guarantee all of
PCHs obligations pursuant to the Control Agreement.

| | RE-ORGANIZATION
CONTRACT BETWEEN THE COMPANY AND SENIOR MANAGEMENT OF JEMTEX
|- | ----------------------------------------------------------------------------

In August 2006, the Company entered
into an agreement for the reorganization of Jemtex whereby the Company transferred the
majority of its holdings in Jemtex to Jemtexs two senior managers, Mr. Avraham Raby
and Dr. Yehoshua Sheinman, for no consideration under certain terms. As a result of this
transaction, the Companys holdings in Jemtex declined from approximately 75% to
approximately 15% (on a fully diluted basis). Under the terms of the reorganization
agreement, the Company converted a sum of approximately $6.7 million, out of an aggregate
amount of approximately $9.7 million provided by the Company to Jemtex by way of loans,
into shares of Jemtex while the remaining amount of approximately $3.0 million was to be
paid to the Company over a period of five to seven years, unless Jemtex paid the Company a
sum of $1.0 million by January 4, 2007, whereupon the debt would be deemed to have been
repaid in full.

The agreement further provided that
until the repayment of the outstanding loan amount or the payment of $1.0 million by
January 4, 2007, the Company would be protected against dilution and its holdings in
Jemtex would remain 15% of Jemtexs fully diluted capital. In addition, it was
determined that so long as the outstanding loan amount stands at $3.0 million and has not
been repaid, the Company would be allowed to invest a sum of up to $5.0 million dollars in
Jemtex, based on a Companys valuation of Jemtex of $20 million. The reorganization
agreement also included undertakings by the senior management of Jemtex to continue their
employment with Jemtex for up to five years. In the event that the senior managers
employment is terminated, the agreement calls for 50% of their shares to be transferred to
Jemtex and 50% to the Company.

On January 4, 2007, pursuant to an
investment agreement Jemtex undertook with a third party investor, the Company was paid
$1.0 million (plus interest), and in accordance with the terms of the reorganization
agreement set forth above, the Company forgave the $3.0 million in outstanding loans and
deemed this loan to be paid in full. With the introduction of the third party investor, a
number of the provisions of the reorganization agreement were amended as follows: (i) the
Company relinquished the veto rights granted to it by Jemtexs articles of
association; (ii) a term was added whereby, after the month of August 2009, the Company
would retain its right to receive at least $3.0 million dollars from the assets available
for distribution in the event of the liquidation of Jemtex or events deemed to be the
liquidation of Jemtex (such as the sale of all or a majority of the shares or assets of
Jemtex, etc.) by means of an agreement whereby the senior management of Jemtex would share
equally with the Company the assets available for distribution in such an event; and the
Company would be entitled to receive 50% of the shares of the senior management in the
event that the senior managers employment was terminated, while the third-party investor
would receive the remaining 50% of senior management shares; and (iii) the Company was
granted an option to invest $3.0 million in shares of Jemtex (based on a Company valuation
of Jemtex of $20 million) by August 2009.

88

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In light of the signing of the
reorganization agreement with Jemtex and the Companys reduced holdings in Jemtex,
the Company ceased to consolidate the financial results of Jemtex in its financial
statements and classified the activity of Jemtex as discontinued operations. For
additional details see Note 1b(3) to the Companys consolidate financial statements.

| | AGREEMENT
FOR SALE OF REAL TIME IMAGE LTD.
|- | ------------------------------------------

In July 2005, IDX Information
Corporation Systems acquired the activities of Real Time Image Ltd. (Real Time
Image). Real Time Image was incorporated in Israel in 1997, and engaged at the date
of the sale in the development of products enabling the transfer of medical documents on
the Internet without compression. The Company, which at the time of the acquisition held
approximately 14.9% of the issued share capital of Real Time Image, has received a sum of
approximately $2.6 million from the sale as consideration and an additional sum of
approximately $0.5 million was received in 2007.

| | AGREEMENT
FOR SALE OF XMPIE
|- | ---------------------------

On November 9, 2006, Xerox
Corporation acquired XMPie Inc., a private company incorporated in the State of Delaware,
in which the Company had held a 2.3% interest. As of the date of this report, the Company
has received as consideration a sum of approximately $1.3 million. An additional $0.2
million owed to the Company pursuant to the sale was being held in trust in accordance
with the sale agreement, out of which $0.1 million was received by the Company in May
2008.

| | MANAGEMENT
AGREEMENT WITH GLOBECOM
|- | ----------------------------------

On April 30, 2007, the Companys
shareholders approved a management agreement with Globecom , a private company under the
control of Mr. Eran Schwartz, the Chairman of the board of directors of Scailex. Under the
agreement, Globecom, through Mr. Eran Schwartz is to provide management services to the
Company. The agreement commenced July 2006, when Mr. Schwartz became Chairman of the
Companys board of directors and will remain in effect until six (6) months have
elapsed after the date that one of the parties issues a termination notice to the other.
The monthly aggregate cost to be paid by the Company for such services under the agreement
is approximately $26,000, to be linked to the consumer price index. For a complete
description of the Globecom management agreement see Item 7B. Related Party
Transactions.

| | SALE
OF SCAILEX VISIONS BUSINESS
|- | ---------------------------------

We currently own approximately 77.1%
of Scailex Visions outstanding share capital.

In August 2005, Scailex Vision
entered into an asset purchase agreement with Hewlett-Packard, under which Hewlett-Packard
agreed to acquire substantially all of the assets and business of Scailex Vision for $230
million (subject to net working capital adjustments) in cash and to assume substantially
all of Scailex Visions liabilities related to the ongoing business. The sale was
completed on November 1, 2005. At closing, $23.0 million of the proceeds was deposited in
escrow for a period of 24 months to cover possible indemnification claims, $1.0 million
was deposited for a period of 12 months to cover tax liabilities of the year 2005 (this
escrow was released in November 2006), and an additional $27.0 million was utilized to
repay Scailex Visions retained liabilities, mainly to Israeli banks. In April 2006,
Hewlett-Packard paid Scailex Vision an additional approximately $6.6 million to
account for the net working capital adjustment in the purchase price, i.e., in
addition to the $230 million. Hewlett-Packard also transferred to Scailex Vision funds in
an aggregate amount of $1.1 million that were retained by Scailex Visions
subsidiaries following the closing.

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

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Hewlett-Packard filed an indemnity
claim with the escrow agent in October 2006 seeking the release to it of $5.26 million
from the escrow funds, claiming Scailex Vision was in breach of certain representations
warranties in their purchase asset agreement. Scailex Vision rejected these claims, but
there is no assurance that Scailex Vision will be successful in defending its position. On
May 5, 2008, a settlement agreement was signed between Scailex Vision and HP, which
settled the reciprocal claims between the parties with respect to the sum in escrow.
Within the scope of a settlement agreement, HP and Scailex Vision agreed that, out of the
inclusive total balance of the escrow funds: the sum of approximately $7.8 million is
being released to Scailex Vision, the sum of approximately $7.4 million is being released
to HP, while the balance, at the sum of approximately $0.6 million, shall be retained by
the trustee to secure a particular claim in respect whereof HP is entitled to
indemnification.

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

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

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

In February 2006, Scailex Vision
distributed a cash dividend equivalent to the amount available for distribution following
the conclusion of the transaction for the sale of assets to HP. The amount of the net
accumulated dividend that was distributed amounted to approximately $135 million (of which
$101 was received by the Company).

In February 2007, with the consent of
the court, Scailex Vision reduced its share capital and distributed an additional dividend
of $20 million to its shareholders (out of which $14.3 was received by the Company).
Additionally, in June 2008, with the consent of the court, Scailex Vision reduced its
share capital and distributed an additional dividend of $25 million to its shareholders
(out of which $17.9 was received by the Company).

| | ESCROW
SETTLEMENT AGREEMENT, DATED MAY 5, 2008, BETWEEN SCAILEX CORPORATION LTD. AND
HEWLETT-PACKARD COMPANY
|- | ------------------------------------------------------------------------------------------------------------

On May 5, 2008, a settlement
agreement was signed between Scailex Vision and HP, which settles the reciprocal claims
between the parties with respect to the sum in escrow. Within the scope of the settlement
agreement, HP and Scailex Vision agreed that, out of the inclusive total balance of the
escrow funds: the sum of approximately $7.8 million would be released to Scailex Vision,
the sum of approximately $7.4 million would be released to HP, while the balance, at the
sum of approximately $0.6 million, shall be retained by the trustee to secure a particular
claim in respect of which HP is entitled to indemnification. Additionally, HP has agreed
to pay to Scailex Vision 75% of any payment HP receives from the Mexican tax authorities
in connection with any final judgment or settlement of the claims involving the escrow
funds.

The foregoing description of the
escrow settlement agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement filed by us as Exhibit 4(a)(11)
in Item 19 to our Annual Report of year ended December 31, 2007.

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| | SALE
OF SDPS BUSINESS
|- | ----------------------

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

We completed the sale on January 5,
2004. At closing, $15 million of the proceeds of the sale, which amount was released 20
business days after closing, was placed in a custody account to cover unknown federal tax
liens. Furthermore, $10 million of the proceeds of the sale was placed in a custody
account to cover possible indemnification claims, $5 million of which was released to
Scailexs account in January 2005 and the remaining $5 million of which was released
in January 2006.

In July 2006, SDP was
liquidated.

The foregoing description of the
asset purchase agreement is only a summary and does not purport to be complete and is
qualified by reference to the full text of the agreement incorporated herein by reference
as Exhibit 4(a)(2) in Item 19 to our Annual Report of year ended December 31, 2007.

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

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

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

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

# CERTAIN MATERIAL U.S.
FEDERAL INCOME TAX CONSIDERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WE BELIEVE WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY UNDER U.S. FEDERAL INCOME TAX LAW

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

As a result of the sale of Scailex
Visions business in November 2005, we believe we became a PFIC in 2006, and we
believe that we were a PFIC in 2007, and we believe we are a PFIC in 2008 as well. U.S.
holders who hold ordinary shares during a period when we are a PFIC will be subject to the
rules described below, even if we cease to be a PFIC, subject to specified exceptions for
U.S. holders who made a qualified electing fund (a QEF) election.

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

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

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

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

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

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

The special PFIC rules described
above will not apply to a U.S. holder if the U.S. holder makes an election to treat us as
a QEF in the first taxable year in which the U.S. holder owns ordinary shares or in which
we are a PFIC, whichever is later, and if we comply with specified reporting requirements.
Instead, a shareholder of a QEF is required for each taxable year in which we are a PFIC
to include in income a pro rata share of the ordinary earnings of the QEF as ordinary
income and a pro rata share of the net capital gain of the QEF as long-term capital gain,
subject to a separate election to defer payment of taxes. If deferred, the taxes will be
subject to an interest charge. We will supply U.S. holders with the information needed to
report income and gain under a QEF election if we are classified as a PFIC. U.S. holders
should consult their tax advisors about the availability and procedure for filing a
retroactive QEF election or amended return.

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

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

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

We intend to waive certain benefits
that we are entitled to under the U.S.-Israel income tax treaty that would otherwise
exempt us from the application of the U.S. accumulated earnings tax (the AET).
Under the AET, we will generally be subject to a 15% tax on certain accumulated earnings
if we accumulate earnings and profits beyond the reasonable needs of the
business (as defined in the Code).

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

NON-U.S.
          HOLDERS OF ORDINARY SHARES

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

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

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

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

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

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

INFORMATION REPORTING AND
BACKUP WITHHOLDING

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

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

94

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# ISRAELI TAX
CONSIDERATIONS

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

TAX REFORM IN ISRAEL

On January 1, 2003 a comprehensive
tax reform took effect in Israel. Pursuant to the reform, resident companies are subject
to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept
of controlled foreign corporation (C.F.C) was introduced according to which a
foreign company may become subject to Israeli taxes on certain income of a non-Israeli
subsidiary if, among other things, the subsidiarys primary source of income is
passive income (such as interest, dividends, royalties, rental income or capital gains).

The tax reform also substantially
changed the system of taxation of capital gains.

Capital gains tax is reduced to 25%,
except with respect to capital gains from marketable securities, with transitional
provisions for assets acquired prior to January 1, 2003. For further discussion see below
Capital Gains Tax.

GENERAL CORPORATE TAX
STRUCTURE

The corporate tax rate applicable in
2007 was 29%. This rate was reduced to 27% in 2008 and has been scheduled to be reduced to
26% in 2009 and 25% in 2010 and beyond (those rates are effectively reduced for income
derived from an Approved Enterprise or Privileged Enterprise under
the Law for Encouragement of Capital Investments  1959).

TAXATION UNDER
INFLATIONARY CONDITIONS

The Income Tax Law (Inflationary
Adjustments)  1985 (Inflationary Adjustments Law) is intended to
neutralize the erosion of capital investments in business and to prevent tax benefits
resulting from deduction of inflationary interest expenses. This law applies a
supplementary set of inflationary adjustments to the normal taxable profits computed under
regular historical cost principles.

Under the Inflationary Adjustments
Law, results for tax purposes are measured in real terms, in accordance with the changes
in the consumer price index. In addition, subject to certain limitations, depreciation of
fixed assets and losses carried forward are adjusted for inflation on the basis of changes
in the consumer price index.

The salient features of the
Inflationary Adjustments Law can be described generally as follows:

| |  | A
special tax adjustment for the preservation of equity, based on changes in the CPI,
whereby certain corporate assets are classified broadly into fixed (inflation-resistant)
assets and non-fixed assets. Where shareholders equity (as defined in the
Inflationary Adjustment Law), exceeds the depreciated cost of fixed assets (as defined in
the Inflationary Adjustment Law), a tax deduction which takes into account the effect of
the annual rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable
income for companies in any single year, with the unused portion carried forward on a
CPI-linked basis, without limit). If the depreciated cost of such fixed assets exceeds
shareholders equity, then such excess, multiplied by the annual inflation rate, is
added to taxable income.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to certain limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the consumer price index
(from the beginning of the 1982 fiscal year, and as of the 1985 fiscal year, with respect
to equipment); and gains on the sale of certain traded securities are taxable. However,
dealers in securities are subject to the regular tax rules applicable to business income
in Israel.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Income Tax Law (Inflationary
Adjustment Law), 1985 has been abolished from the tax year 2008, subject to transitional
provisions.

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TAXATION OF OUR
SHAREHOLDERS

Capital Gains

Capital gain tax is imposed on the
disposal of capital assets by an Israeli resident, and on the disposal of such assets by a
non- Israel resident if those assets are either (i) located in Israel; (ii) are shares or
a right to a share in an Israeli resident corporation; and (iii) rights in a foreign
corporation whose majority of assets is directly or indirectly, rights to assets located
in Israel (with respect to the applicable portion of the capital gain). The Israeli Tax
Ordinance distinguishes between Real Gain and the Inflationary
Surplus. Real Gain is the excess of the total capital gain over Inflationary Surplus
computed generally on the basis of the increase in the Israeli CPI between the date of
purchase and the date of disposal.

The capital gain accrued by
individuals on the sale of an asset purchased on or after January 1, 2003 will be taxed at
the rate of 20%. However, if the individual shareholder is a Controlling
Shareholder (i.e., a person who holds, directly or indirectly, alone or
together with other, 10% or more of one of the Israeli resident companys means of
control at the time of distribution or at any time during the preceding 12 months period)
such gain will be taxed at the rate of 25%. In addition, capital gain derived by an
individual claiming deduction of financing expenses in respect of such gain will be taxed
at the rate of 25%. The real capital gain derived by a corporation will be generally
subject to tax at the rate of 25%. However, the real capital gain derived from sale of
securities, as defined in Section 6 of the Inflationary Adjustment Law, by a corporation,
which was subject upon August 10, 2005 to the provisions of Section 6 of the Inflationary
Adjustment Law, will be taxed at the corporate tax rate (27% in 2008). The capital gain
accrued at the sale of an asset purchased prior to January 1, 2003 will be subject to tax
at a blended rate.

The marginal tax rate for individuals
(up to 47% in 2008) and the regular corporate tax rate for corporations (27% in 2008) will
be applied to the gain amount which bears the same ratio to the total gain realized as the
ratio which the holding period commencing at the acquisition date and terminating on
January 1, 2003 bears to the total holding period. The remainder of the gain realized will
be subject to capital gains tax at the rates applicable to an asset purchased after
January 1, 2003 (see aforementioned).

Individual and corporate shareholders
dealing in securities in Israel are taxed at the tax rates applicable to business income
(in 2008  27% tax rate for a corporation and a marginal tax rate of up to 47% for
individual). Notwithstanding the foregoing, if the shareholder is a non-Israeli resident,
then such taxation is subject to the provision of any applicable double tax treaty.
Moreover, capital gains derived from the sale of the shares by a non-Israeli shareholder
may be exempt under the Israeli income tax ordinance from Israeli taxation provided the
following cumulative conditions are met: (i) the shares were purchased upon or after the
registration of the shares at the stock exchange, (ii) the seller does not have a
permanent establishment in Israel to which the derived capital gain is attributed, and
(iii) if the seller is a corporation, less than 25% of its means of control are held by
Israeli resident shareholders. In addition, the sale of the shares may be exempt from
Israeli capital gains tax under an applicable tax treaty. Thus, the U.S.-Israel Double Tax
Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale,
provided (i) the U.S. resident controlled, either directly or indirectly, less than 10% of
an Israeli resident companys voting power at any time within the 12  month
period preceding such sale; (ii) the seller, being an individual, is present in Israel for
a period or periods of less than 183 days during the taxable year; and (iii) the capital
gain from the sale was not derived through a permanent establishment of the U.S. resident
in Israel.

Either the seller, the Israeli
stockbrokers or financial institution through which the sold securities are held is
obliged, subject to the above mentioned exemptions, to withhold tax upon the sale of
securities from the real capital gain at the rate of 25% in respect of a corporation and
20% in respect of an individual.

96

---

---

Generally, a detailed return,
including a computation of the tax due, should be submitted to the Israeli Tax Authority,
within 30 days of the completion of a transaction and advanced payment amounting to the
tax liability arising from the capital gain is due. At the sale of traded securities, the
aforementioned detailed return may not be submitted and the advanced payment should not be
paid if all tax due was withheld at the source according to applicable provisions of the
Israeli income tax ordinance and regulations promulgated thereunder.Capital gain
is also reportable on the annual income tax return.

DIVIDENDS

A distribution of dividend from
income attributed to an Approved Enterprise or a Privileged Enterprise
under the Law for Encouragement of Capital Investments  1959 will generally be
subject to tax in Israel at the rate of 15%, subject to a reduced rate under any
applicable double tax treaty. A distribution of dividend from income, which is not
attributed to an Approved Enterprise to an Israeli resident individual, will
generally be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if
the dividend recipient is a Controlling Shareholder (i.e., a person who holds,
directly or indirectly, alone or together with other(s), 10% or more of one of the Israeli
resident companys means of control at the time of distribution or at any time during
the preceding 12 months period). If the recipient of the dividend is an Israeli resident
corporation, such dividend will be exempt from income tax provided the income from which
such dividend is distributed was derived or accrued within Israel.

Under the Israeli income tax
ordinance, a non-Israeli resident (either individual or corporation) is generally subject
to an Israeli income tax on the receipt of dividends at the rate of 20% (25% if the
dividends recipient is a Controlling Shareholder (as defined above)); those
rates are subject to a reduced tax rate under an applicable double tax treaty. Thus, under
the Double Tax Treaty concluded between the State of Israel and the U.S. the following
rates will apply in respect of dividends distributed by an Israeli resident company to a
U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion
of the taxable year which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 10% of the outstanding shares of the
voting stock of the Israeli resident paying corporation and not more then 25% of the gross
income of the Israeli resident paying corporation for such prior taxable year (if any)
consists of certain type of interest or dividends  the tax rate is 12.5%, (ii) if
both the conditions mentioned in section (i) above are met and the dividend is paid from
an Israeli resident companys income which was entitled to a reduced tax rate
applicable to an approved enterprise under the Israeli Law for the
Encouragement of Capital Investments of 1959 the tax rate is 15%, and (iii) in all
other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S. Double
Tax Treaty will not apply if the dividend income was derived through a permanent
establishment of the U.S. resident in Israel.

An Israeli resident company whose
shares are listed in a stock exchange is obligated to withhold tax, upon the distribution
of a dividend attributed to an Approved Enterprises income, from the amount
distributed, at the following rates: (i) Israeli resident corporation  15%, (ii)
Israeli resident individual  15%, and (iii) non-Israeli resident  15%, subject
to a reduced tax rate under an applicable double tax treaty. If the dividend is
distributed from an income not attributed to the Approved Enterprise, the following
withholding tax rates will apply: (i) Israeli resident corporation  0%, (ii) Israeli
resident individual  20% (iii) non-Israeli resident  20%, subject to a reduced
tax rate under an applicable double tax treaty.

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

For information regarding dividend
restrictions, see Item 10.B Memorandum and Articles of Association  Dividend
and Liquidation Rights.

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

Brightman, Almagor, Zohar & Co.,
Certified Public Accountants, a Member Firm of Deloitte, Touche, and Tohmatsu, located at
One Azrieli Center, Round Building, Tel Aviv, 67021, Israel, have audited our consolidated
financial statements included in our annual report on Form 20-F for the year ended
December 31, 2007, as set forth in their report which is incorporated by reference into
this Report.

97

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

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

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

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

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

Not Applicable.

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

Since approximately 80% of the
Companys assets are cash and cash equivalents invested mostly in short-term deposits
in Israeli banks and short-term notes of the State of Israel, the major market risk for
the Company is a reduction in interest rates in Israel and a depreciation in the Israeli
shekel in the event we were to need foreign currency to acquire a business.

We do not actively hedge interest
rate exposure or share prices or engage in other transactions intended to manage risks
relating to interest rate and share price fluctuations. The interest income on our cash
equivalents and short-term investments is sensitive to changes in the general level of
market interest rates.

98

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PRESENTATION OF EXCHANGE
RATE AND INTEREST RATE RISK

Because the Companys
operational currency is the US dollar, the table below details the balance sheet exposure
to other currencies, primarily NIS, as of the periods indicated below (at fair value).
Explanatory notes are provided below the table.

|                        | U.S. Dollar
(in millions) | Other
Currencies
(in millions)
|----------------------- | ------------------------- | ------------------------------
|
|
|
|
|as of June 30, 2008     |                           |                               
|as of June 30, 2007     |                           |                               
|as of December 31, 2007 |                           |                               
|as of December 31, 2006 |                           |                               

| | The
amounts shown in the table represent monetary assets less liabilities (net liabilities
are represented in parentheses).
|- | ---------------------------------------------------------------------------------------------------------------------------

See Item 5. Operating And
Financial Review And Prospects  Impact of Inflation and Exchange Rates.

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

Not applicable.

# PART II

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

Not applicable.

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

Not applicable.

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

Not applicable.

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

Not applicable.

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

Not applicable.

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

Not applicable.

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

Not applicable.

99

---

---

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

Not applicable.

# PART III

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

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

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

Our audited financial statements for
the year ended December 31, 2007, and the related audit report of our independent
accountant, are incorporated herein by reference to our annual report on Form 20-F for the
year ended December 31, 2007, which was filed with the Securities and Exchange Commission
on June 30, 2008.

Scailex is filing as part of this
Report the following:

Scailex Corporation Ltd. Financial
Statements (Unaudited) as of June 30, 2008Consolidated
Balance Sheets as of June 30, 2008 and as of December 31, 2007Consolidated Statements
of Operations for the six-month periods ended June 30, 2008 and 2007Condensed
Consolidated Statements of Shareholders Equity for the six-month periods ended June
30, 2008 and 2007Consolidated
Statements of Cash Flows for the six-month periods ended June 30, 2008 and 2007Notes
to Consolidated Financial Statements as of June 30, 2008

Suny Telecom (1994) Ltd. Condensed
Financial Statements (Unaudited) for the Six-Month Period ended June 30, 2008Balance Sheet
as of June 30, 2008 and as of December 31, 2007Statement
of Operations for the three and six-month periods ended June 30, 2008 and for the year
ended December 31, 2007Statement
of Changes in Shareholders Equity for the three and six-month periods ended June 30,
2008 and for the year ended December 31, 2007Statement
of Cash Flows for the three and six-month periods ended June 30, 2008 and for the year
ended December 31, 2007Notes
to the Condensed Interim Financial Statements as of June 30, 2008

Suny Telecom (1994) Ltd. Financial
Statements for the Year ended December 31, 2007Report
of Certified Public AccountantsBalance Sheet
as of December 31, 2007, 2006 and 2005Statement
of Operations for the three years ended December 31, 2007Statement of
Changes in Shareholders Equity for the three years ended December 31, 2007Statement
of Cash Flows for the three years ended December 31, 2007Notes
to the Financial Statements as of December 31, 2007

Din Dynamic Ltd. Condensed
Financial Statements (Unaudited) for the Six-Month Period ended June 30, 2008Balance Sheet
as of June 30, 2008 and as of December 31, 2007Statement
of Operations for the three and six-month periods ended June 30, 2008 and for the year
ended December 31, 2007Statement
of Changes in Shareholders Equity for the three and six-month periods ended June 30,
2008 and for the year ended December 31, 2007Statement
of Cash Flows for the three and six-month periods ended June 30, 2008 and for the year
ended December 31, 2007Notes
to the Condensed Interim Financial Statements as of June 30, 2008

Din Dynamic Ltd. Financial
Statements for the Year ended December 31, 2007Report
of Certified Public AccountantsBalance Sheet
as of December 31, 2007, 2006 and 2005Statement
of Operations for the three years ended December 31, 2007Statement of
Changes in Shareholders Equity for the three years ended December 31, 2007Statement
of Cash Flows for the three years ended December 31, 2007Notes
to the Financial Statements as of December 31, 2007

Unaudited Pro Forma Condensed Combined Financial Statements for the Year ended December 31, 2007 and the Six Months Ended June 30, 2008Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2008Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2007
and six-month period ended June 30, 2008Notes
to Unaudited Pro Forma Condensed Combined Financial Statements

100

---

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

|1.1 |  | Memorandum
of Association of the Registrant. (1)
|--- |  | ------------------------------------------------

|1.2 |  | Amended
and Restated Articles of Association of the Registrant. (2)
|--- |  | -------------------------------------------------------------------

|4(a)(1) |  | Asset
Purchase Agreement, dated November 24, 2003, between Eastman Kodak
               Company, the Registrant, Scitex Digital Printing, Inc. and Scitex
Development                Corp. (3)
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(2) |  | Asset
Purchase Agreement, dated August 11, 2005, between Hewlett-Packard Company
               and Scitex Vision Ltd. and the First Amendment thereto, dated November 1,
2005.                (4)
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(3) |  | Jemtex
Reorganization Agreement, dated August 4, 2006, and amendments thereto
               dated September 2006 and January 4, 2007, between Scailex Corp. Ltd., Avi
Raby                and Yehoshua Sheinman. (5)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(4) |  | Shareholders
Agreement, dated December 21, 2006, and amendments thereto dated                February
2007 and May 10, 2007, between Scailex Corporation Ltd. and Linura
               Holdings AG (6)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(5) |  | Memorandum
of Understanding dated February 18, 2007 and addendum dated February                19,
2007, between Petroleum Capital Holdings Ltd., Scailex Corporation Ltd. and
               Israel Corporation Ltd. (7)
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(6) |  | Globecom
Management Agreement, dated May 1, 2007, between Scailex Corporation                Ltd.
and Globecom Investments Ltd. (8)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------

|4(a)(7) |  | Deed
of Undertaking, dated May 10, 2007, between Petroleum Capital Holdings
               Ltd., Scailex Corporation Ltd. and Israel Corporation Ltd. (9)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(9) |  | Share
Purchase Agreement, dated March 26, 2008, between Scailex Corporation Ltd.
               and Linura Holdings AG (10)
|------- |  | ---------------------------------------------------------------------------------------------------------------------------

|4(a)(10) |  | The
PCH Sale Agreement, dated April 10, 2008, between Scailex Corporation Ltd.
               and Israel Petrochemicals Enterprise Ltd. (11)
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(11) |  | Escrow
Settlement Agreement, dated May 5, 2008, between Scailex Corporation Ltd.
               and Hewlett-Packard Company [Translation from Hebrew] (12)
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(12) |  | Asset Purchase Agreement, dated
September 29, 2008, between Suny Electronics Ltd., Suny Telecom Ltd., and Din Dynamic
Ltd., on the one part, and Scailex Corporation Ltd., on the other part [Translation from
Hebrew]
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(13) |  | Service
Agreement, dated September 29, 2008, between Scailex Corporation Ltd.                and
Suny Electronics Ltd. relating to services provided by Scailex [Translation
               from Hebrew]
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(a)(14) |  | Service
Agreement, dated September 29, 2008, between Scailex Corporation Ltd.                and
Suny Electronics Ltd. relating to services provided by Suny [Translation
               from Hebrew]
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4(c)(1) |  | Form
of the Letter of Indemnification provided to office holders. (13)
|------- |  | ----------------------------------------------------------------------

|4(c)(2) |  | The
2001 Stock Option Plan (as amended, 2003). (14)
|------- |  | ---------------------------------------------------

|4(c)(3) |  | The
2003 Share Option Plan. (15)
|------- |  | --------------------------------

|4(d)(1) |  | Services
Agreement, dated November 1, 2001, between Clal and the Registrant (as
               amended, 2004). (16)
|------- |  | -------------------------------------------------------------------------------------------------------------------

|4(d)(2) |  | Services
Agreement, dated March 1, 2004, between Discount Investment Corporation
               Ltd. and the Registrant. (17)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------

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

|(1) | Incorporated
by reference to Exhibit 1.1 to our Annual Report on Form 20-F for           the year
ended December 31, 2005, filed June 28, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
by reference to Exhibit 1.2 to our Annual Report on Form 20-F for           the year
ended December 31, 2005, filed June 28, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

101

---

---

|(3) | Incorporated
by reference to Exhibit 4(a)(2) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
by reference to Exhibit 4(a)(5) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2003, filed June 28, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
by reference to Exhibit 4(a)(3) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 19, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated
by reference to Exhibit 4(a)(4) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 19, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated
by reference to Exhibit 4(a)(5) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 19, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated
by reference to Exhibit 4(a)(6) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 19, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated
by reference to Exhibit 4(a)(7) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 19, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated
by reference to Exhibit 4(a)(9) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 30, 2008.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated
by reference to Exhibit 4(a)(10) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2007, filed June 30, 2008.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated
by reference to Exhibit 4(a)(11) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2006, filed June 30, 2008.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated
by reference to Appendix B to our Proxy Statement filed under the                cover of
a Current Report on Form 6-K filed December 1, 2005.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(15) | Incorporated
by reference to Appendix B to our Proxy Statement filed under the           cover of a
Current Report on Form 6-K filed December 3, 2003.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Incorporated
by reference to Exhibit 4(d)(1) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | Incorporated
by reference to Exhibit 4(d)(3) to our Annual Report on Form 20-F           for the
fiscal year ended December 31, 2003, filed June 30, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

102

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# SCAILEX CORPORATION
LTD.

FINANCIAL STATEMENTSAS OF JUNE 30, 2008



---

---

# SCAILEX CORPORATION LTD.

FINANCIAL STATEMENTS AS OF JUNE 30, 2008

TABLE OF CONTENTS

|                                              | Page    
|--------------------------------------------- | --------
|
|
|
|
|                                              |         
|CONSOLIDATED FINANCIAL STATEMENTS -          
|Balance sheets                                | F-2-F-3 
|Statements of operations                      | F-4     
|Statements of changes in shareholders' equity | F-5     
|Statements of cash flows                      | F-6-F-7 
|Notes to financial statements                 | F-8-F-11

F - 1

---

---

SCAILEX CORPORATION LTD.CONSOLIDATED BALANCE
SHEETS

|                                                    | June 30 | December 31
|--------------------------------------------------- | ------- | -----------
|
|
|
|
|A s s e t s                                         |         |            
|CURRENT ASSETS:                                     |         |            
|Cash and cash equivalents                           |         |            
|Available-for-sale financial assets                 |         |            
|Securities held-to-maturity                         |         |            
|Receivable from related party                       |         |            
|Other receivables                                   |         |            
|Current assets of discontinued operations           |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            
|INVESTMENTS AND OTHER NON-CURRENT ASSETS:           |         |            
|Securities held-to-maturity                         |         |            
|Funds in respect of employee rights upon retirement |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            
|FIXED ASSETS                                        |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            
|                                                    |         |            

|               |               |                                   
|-------------- | ------------- | ----------------------------------
|
|
|
|
|               |               |                                   
|Shachar Rachim | Yahel Shachar | Ilan Ben Dov                      
|CFO            | CEO           | Chairman of the board of directors

Date of approval for the financial
statements by the board of the directors: August 5th, 2008

F - 2

---

---

SCAILEX CORPORATION LTD. CONSOLIDATED BALANCE SHEETS

|                                                                  | June 30 | December 31
|----------------------------------------------------------------- | ------- | -----------
|
|
|
|
|Liabilities and shareholders' equity                              |         |            
|CURRENT LIABILITIES:                                              |         |            
|Creditors and accruals                                            |         |            
|Income taxes payable                                              |         |            
|Current liabilities related to discontinued operation             |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            
|LONG-TERM LIABILITIES                                             |         |            
|Liability for employee rights upon retirement, net                |         |            
|Deferred income taxes                                             |         |            
|Capital note from minority shareholders in a subsidiary           |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            
|MINORITY INTEREST                                                 |         |            
|                                                                  |         |            
|SHAREHOLDERS' EQUITY:                                             |         |            
|Share capital - ordinary shares of NIS 0.12 par value (authorized |         |            
|- June 30, 2008 and December 31, 2007 - 60,000,000 shares;        |         |            
|issued and outstanding - June 30, 2008 and December 31, 2007 -    |         |            
|43,579,388 shares)                                                |         |            
|Capital surplus                                                   |         |            
|Accumulated other comprehensive income (loss)                     |         |            
|Retained earnings                                                 |         |            
|Treasury shares, at cost (June 30, 2008 and December 31, 2007 -   |         |            
|5,401,025 shares)                                                 |         |            
|                                                                  |         |            
|                                                                  |         |            
|T o t a l shareholders' equity                                    |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            
|                                                                  |         |            

|               |               |                                   
|-------------- | ------------- | ----------------------------------
|
|
|
|
|               |               |                                   
|Shachar Rachim | Yahel Shachar | Ilan Ben Dov                      
|CFO            | CEO           | Chairman of the board of directors

Date of approval for the financial
statements by the board of the directors: August 5th, 2008

The
accompanying notes are an integral part of the financial statements

F - 3

---

---

SCAILEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF OPERATIONS

|                                          | Period of six months ended June 30,
|----------------------------------------- | -----------------------------------
|
|
|
|
|GENERAL AND ADMINISTRATIVE EXPENSES       |                                    
|FINANCIAL INCOME, net                     |                                    
|OTHER INCOME, net                         |                                    
|                                          |                                    
|                                          |                                    
|INCOME BEFORE TAXES ON INCOME             |                                    
|                                          |                                    
|TAXES ON INCOME                           |                                    
|MINORITY INTEREST IN LOSS OF A SUBSIDIARY |                                    
|                                          |                                    
|                                          |                                    
|NET INCOME FROM CONTINUING OPERATIONS     |                                    
|NET INCOME FROM DISCONTINUED OPERATIONS   |                                    
|                                          |                                    
|                                          |                                    
|NET INCOME FOR THE PERIOD                 |                                    
|                                          |                                    
|                                          |                                    
|EARNING PER SHARE ("EPS") - BASIC:        |                                    
|Continuing operations                     |                                    
|Discontinued operation                    |                                    
|                                          |                                    
|Basic earnings per share                  |                                    
|                                          |                                    
|                                          |                                    
|Average number of shares (in thousands)   |                                    
|                                          |                                    
|                                          |                                    
|"EPS" - DILUTED:                          |                                    
|Continuing operations                     |                                    
|Discontinued operation                    |                                    
|                                          |                                    
|Diluted earning per share                 |                                    
|                                          |                                    
|                                          |                                    
|Average number of shares (in thousands)   |                                    
|                                          |                                    

The accompanying
notes are an integral part of these financial statement

F - 4

---

---

SCAILEX CORPORATION LTD. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                       | Share
capital | Capital
surplus | Accumulated other
comprehensive
income (loss) | Retained
earnings /
Accumulate
deficit | Treasury
Shares | Total
|------------------------------------------------------ | ------------- | --------------- | --------------------------------------------- | -------------------------------------- | --------------- | -----
|
|
|
|
|BALANCE AT JANUARY 1, 2008 (audited)                   |               |                 |                                               | 6,209                                  |                 |      
|CHANGES DURING THE SIX MONTHS ENDED                    |               |                
|JUNE 30, 2008(unaudited):                              |               |                
|Net income for the period                              |               |                 |                                               |                                        |                 |      
|Other comprehensive income (loss), in respect of       |               |                
|Available-for-sale securities                          |               |                 |                                               |                                        |                 |      
|Held-to-maturity securities amortization               |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|Total comprehensive income                             |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|Dividend distributed to the company's shareholders     |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|BALANCE AT JUNE 30, 2008(unaudited)                    |               |                 |                                               | 6,209                                  |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|                                                       |               |                
|BALANCE AT JANUARY 1, 2007 (audited)                   |               |                 |                                               | 6,205                                  |                 |      
|CHANGES DURING THE SIX MONTHS ENDED                    |               |                
|JUNE 30, 2007(unaudited):                              |               |                
|Income for the period                                  |               |                 |                                               |                                        |                 |      
|Other comprehensive income, in respect of:             |               |                
|Available-for-sale securities                          |               |                 |                                               |                                        |                 |      
|Held-to-maturity securities amortization               |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|Total comprehensive income                             |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|Exercise of options to ordinary shares                 |               |                 |                                               | 4                                      |                 |      
|Amortization of deferred stock compensation related to |               |                
|options granted to employees                           |               |                 |                                               |                                        |                 |      
|                                                       |               |                 |                                               |                                        |                 |      
|BALANCE AT JUNE 30, 2007 (unaudited)                   |               |                 |                                               | 6,209                                  |                 |      
|                                                       |               |                 |                                               |                                        |                 |      

The accompanying notes are an
integral part of these condensed financial statements.

F - 5

---

---

(Continued  1)

SCAILEX CORPORATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                     | Six months endedJune 30
|-------------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |                        
|Net income                                                           |                        
|Adjustments to reconcile net income from continuing operations       |                        
|to net cash provided by operating activities:                        |                        
|Income and expenses not involving cash flows:                        |                        
|Minority interests in a subsidiary                                   |                        
|Depreciation and amortization                                        |                        
|Amortization of deferred stock compensation                          |                        
|Loss from sale of available-for-sale securities and bonds interest   |                        
|income, net                                                          |                        
|Interest and foreign exchange differences on loans/capital note from |                        
|minority shareholders in a subsidiary                                |                        
|Capital gains                                                        |                        
|Accrued severance pay, net                                           |                        
|Gain from other investment                                           |                        
|Changes in operating asset and liability items:                      |                        
|Increase in other receivable                                         |                        
|Decrease in accounts payable and accruals                            |                        
|Net cash provided by discontinued operations                         |                        
|                                                                     |                        
|Net cash provided by operating activities                            |                        
|                                                                     |                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                |                        
|Disposal of investment in consolidated subsidiary (Appendix)         |                        
|Acquisition of available-for-sale marketable securities              |                        
|Proceeds from sale of marketable securities                          |                        
|Purchase of fixed assets                                             |                        
|Purchase of shares in a subsidiary                                   |                        
|                                                                     |                        
|Net cash used in investing activities                                |                        
|                                                                     |                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |                        
|Proceeds from exercise of options to ordinary shares                 |                        
|Loans received in a subsidiary, net                                  |                        
|Dividend distributed to the shareholders                             |                        
|Net cash used in discontinued operations                             |                        
|                                                                     |                        
|Net cash provided by (used in) financing activities                  |                        
|                                                                     |                        
|NET DECREASE IN CASH AND CASH EQUIVALENTS                            |                        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                     |                        
|                                                                     |                        
|CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                       |                        
|                                                                     |                        

The
accompanying notes are an integral part of these condensed financial statements.

F - 6

---

---

SCAILEX CORPORATION
LTD.CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS

# None cash activities:

| | 1. | The
consideration from the sale of fixed assets in the six months ended June 30,
               2008 in the amount of $856 thousands has not been received as of the
balance                sheet date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
consideration from the sale of holdings in a subsidiary in the six months
               ended June 30, 2008 in the amount of $340,825 thousands has not been
received as                of the balance sheet date.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Appendix  Disposal
of investment in consolidated subsidiary:

| |                                              | Period of six months ended June 30
| | -------------------------------------------- | ----------------------------------
|
|
|
|
| | The Composition:                             |                                   
| | Working capital (excluding cash and cash     |                                   
| | equivalents)                                 |                                   
| | Realized loss in respect of financial assets |                                   
| | available for sale                           |                                   
| | Capital gain from selling the subsidiary     |                                   
| | Receivables in respect of the sale of the    |                                   
| | subsidiary                                   |                                   
| |                                              |                                   
| |                                              |                                   
| |                                              |                                   

F - 7

---

---

SCAILEX CORPORATION
LTD. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2008 (UNAUDITED)

# Note 1  General:

| | The
interim statements of Scailex Corporation Ltd. (the Company) as of June 30, 2008 and for
the six and three months period then ended (the interim statements) were drawn up in
condensed form, in accordance with generally accepted accounting principles applicable to
interim statements. The accounting principles applied in preparation of the interim
statements are consistent with those applied in the annual financial statements.
Nevertheless, the interim statements do not include all the information and explanations
required for the annual financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
managements opinion, the interim financial statements reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation of the
financial information, in accordance with generally accepted accounting principles, for
the reported periods. Results for interim periods are not necessarily indicative of the
results to be expected for the entire year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2  Engagements and
events during the period of the report:

| | Following
are the main changes that occurred during the period of the report:
| | -----------------------------------------------------------------------------

| | A. | On
April 10, 2008, after the approvals of the Companys board of directors and audit
committee were given, the Company engaged in an agreement with Israel Petrochemical
Enterprises Ltd. (Petrochemicals), which at that time had been the Companys
parent company and controlling shareholder (by virtue of its holding of 50.06% of the
Companys share capital) for the sale of 100% of the issued share capital of the
wholly owned subsidiary Petroleum Capital Holdings Ltd. (PCH) to
Petrochemicals (PCH Sale Agreement). The transaction was approved during the
extraordinary general assembly of the Company convened on May 29, 2008.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 30, 2008, the PCH Sale Agreement was consummated, when the consideration for 100% of
PCHs share capital, for the capital notes that PCH had issued in respect of funds
injected into it by its shareholders, and for the rights of the Company and of PCH
pursuant to a letter of undertaking from the Israel Corporation Ltd. dated May 10, 2007,
was affixed at the sum of about $340.8 million in cash. The said sum was paid to the
Company in its entirety on July 1, 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---

SCAILEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2008
 (UNAUDITED)

| | On
the transaction consummation date, PCH held some 15.76% of the issued share capital of
Oil Refineries Ltd. (ORL); upon consummating the transaction and the sale of
the PCH shares, the Company no longer indirectly holds shares of ORL, which, as stated,
it had been holding through PCH.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the consummation of the transaction, the Company recorded a capital gain during the
second quarter at the sum of about $78.5 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Within
the scope of the sale of the control over the Company, the           Companys
rights pursuant to a lease under which it rented its offices in           Herzliya were
assigned, and all equipment and improvements in the leasehold were           sold for the
consideration of some $0.9 million. Following this sale, the           Company recognized
a nominal capital gain. After the balance-sheet date, on July           31, 2008, the
Company relocated its offices to 48 Ben Tsiyon Galis Street, in           Petach Tikva,
Israel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | On
April 10, 2008, Petrochemicals engaged in an agreement with Suny Electornics
          Ltd. (Suny), pursuant whereto Suny acquired all of
          Petrochemicals holdings of the Company (50.06% of the Companys
          issued share capital on that date), such that Petrochemicals ceased to be a
          shareholder of the Company, while Suny became the Companys controlling
          shareholder. On June 30, 2008, this agreement was consummated, once all the
          suspending conditions and conditions precedent stipulated in this agreement and
          in the PCH Sale Agreement were fulfilled, including the concurrent execution of
          the PCH Sale Agreement. The consideration paid to Petrochemicals in respect of
          this acquisition was some $219.4 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | On
June 30, 2008, upon the signing of the agreements for the sale of PCHs
          shares and for the acquisition of the control by Suny, the Company engaged in a
          run-off policy for directors and officeholders who held office in the Company
          and in its subsidiaries, including PCH. The Company purchased insurance
          effective for seven years, at the inclusive sum insured per event and for the
          period of $30 million, and for a premium at the sum of $0.54 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Following
the change in control, as stated above in clause c., and following           the
appointment of Mr. Ilan Ben Dov as the new chairman of the board of           directors,
on July 1, 2008, Mr. Eran Schwartz resigned from his office as           chairman of the
Companys board of directors, and ceased to provide the           services of active
chairman of the board to the Company that he had been           providing through
Globecom Ltd.. Pursuant to the agreements with Globecom Ltd.,           and in light of
the circumstances under which Mr. Schwartz resigned from his           office as
chairman, Globecom became entitled to a six-month advance notice fee,           which
totalled some $0.2 million; this sum was paid to Globecom after the
          balance-sheet date and has already been recognized as an expense in the current
          financial statements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | During
June 2008, after the approvals of the board of directors and general           assembly
of Scailex Vision (Tel Aviv) Ltd. (Scailex Vision) were           given, and
once the court approved the execution of the distribution, Scailex           Vision
distributed a dividend to its shareholders at the inclusive sum of $25           million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | On
May 20, 2008, PCH received a dividend from ORL, which totaled some $11.2
          million. This dividend was recognized as other income in the
          Statement of Operations for the second quarter of 2008.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

SCAILEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2008
 (UNAUDITED)

| | H. | On
March 26, 2008, the Company purchased the entire stake of Linura Holdings           A.G. (Linura)
in Petroleum Capital Holdings Ltd. (PCH),           a subsidiary of the
Company (19.9%) for the consideration of a total of $57.2           million, and received
by way of assignment the capital note that PCH had issued           to Linura. The
consideration was paid in a single payment. Upon consummation of           the
acquisition of Linuras PCH shares, PCH became a wholly owned           subsidiary
of the Company, and the PCH shareholders agreement was           nullified. The
Company held 15.76% of the share capital of ORL through PCH until           the sale of
PCH on June 30, 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the consummation of the said purchase, the Company generated a capital gain
at the sum of about $5.2 million during the first quarter of 2008. Furthermore, the
company recorded additional sum of $4.6 million as comprehensive income in its equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Pursuant
to the agreement from 2005 for the sale of the majority of the assets           and
operations of Scailex Vision to HP, $23 million (the Sum in           Escrow)
was deposited with a trustee to secure HPs indemnification           rights. On May
5, 2008, a settlement agreement was signed between Scailex Vision           and HP, which
concludes the reciprocal claims between the parties in relation to           the Sum in
Escrow.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Within
the scope of the settlement agreement, HP and Scailex Vision agreed that, out of the
total balance of the funds remaining in escrow, the sum of about $7.8 million is being
released to Scailex Vision, the sum of about $7.4 million is being released to HP, while
the balance, at the sum of about $0.6 million, is to remain in escrow to secure a
particular claim in respect whereof HP is entitled to indemnification.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
was further agreed that Scailex Vision shall be entitled to receive additional sums from
HP in the event that HP shall win the appeal that it filed against the tax authority in
Mexico on the matter of tax assessments. Scailex Vision shall be entitled to receive 75%
of any payment that HP receives in relation to that appeal, subject to the stipulation
that the sum that HP shall transfer to the Company shall not exceed about $3.9 million
(plus interest). Scailex Vision undertook to assume half of the litigation expenses in
respect of the said appeal; it has no material exposure in respect of these expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the settlement agreement, the provisions relating to HPs claims were
updated, and Scailex Vision generated a profit of some $2.4 million; the Companys
share of this profit is about $1.7 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | In
May 2008, Scailex Vision and one of its wholly owned subsidiaries signed tax
               assessment agreements for the years 2006-2007. Following the closure of
the                assessments, Scailex Vision updated the tax provisions in its books,
and, as a                result, recorded a profit of some $1.5 million, which was
allocated to                discontinued operations, as well as a tax expense at the sum
of about $0.3                million, which was allocated to current operations
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

SCAILEX CORPORATION LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2008
 (UNAUDITED)

# Note 3  Equity and
reserves:

| | On
April 10, 2008, the Company Board of Directors approved the distribution of a cash
dividend at the sum of Approximately $45 million, after determining that the distribution
meets the legal tests for a distribution, in conformance with the Companies Act, 5759
 1999; the dividend was distributed in cash to the Companys shareholders on
May 22, 2008 and accordingly the retained earnings in the shareholders equity were
reduced.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 4  Subsequent
events:

| | A | On
July 17, 2008, the Companys board of directors approved a plan to itself purchase
shares of the Company at the volume of up to 1 million ordinary shares of the Company
(about 2.6% of the Companys listed share capital). Within the scope of this plan,
the Companys management was authorized to purchase shares from time to time on the
Tel-Aviv Stock Exchange or off the floor, at the inclusive monetary volume of up to $7.5
million during a period of 12 months as of the date of the board resolution.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Till
September 29, 2008, pursuant to the said plan, the Company transacted a purchase of 717,381 ordinary
shares of the Company, constituting about 1.9% of the Companys issued share
capital (fully diluted), at the inclusive monetary volume of some $5.7 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B | Subsequent
to the consummation of the sale of PCH, and pursuant to the Companys intention of
investing the consideration in respect of the sale in New Israeli Shekel (NIS)
channels, the Company re-examined its functional currency. As a result of this
examination, the Company reached the conclusion that its functional currency is the NIS
and not the U.S. dollar, since, in light of that stated above, the Companys
economic environment is influenced by the NIS. On July 17, 2008, the Companys board
of directors approved the change of the Companys functional currency, in such
manner that, as of the Companys financial statements for the third quarter of 2008
(the quarter ending September 30, 2008), its financial statements shall be prepared and
measured in NIS instead of in U.S. dollars.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C | On
September 29, 2008, the Company purchased all of the assets of the Suny Telecom and
Dynamic businesses for the total sum of approximately $74.8 million. Suny Telecom is
engaged in the business of importing mobile cellular phones into Israel, and Dynamic is
engaged in the business of reselling mobile cellular phones and related parts and
services on behalf of Cellcom Israel Ltd., a major Israeli cellular network operator
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the purchase agreement entered into between the Company and Suny, the Company acquired
all assets and rights (tangible and intangible) of Suny Telecom and of Dynamic in the
cellular end equipment and retail market segment (excluding the shares of Suny
Electronics in the possession of Suny Telecom, cash, cash equivalents and other financial
assets), and all the liabilities of Suny Telecom and Dynamic in such area, including
liabilities arising from the agreements assigned to the Company as part of the
transferred assets or relating to these agreements, and excluding the debt of the
subsidiaries to Bank Leumi le-Israel Ltd.; short term credit, short term loans (on call)
and long term loans; valued added tax balances payable and provisions for Income Tax
(including Employees Income Tax and National Insurance) for the period up to the
execution date of this agreement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

SUNY TELECOM (1994) LTD.

CONDENSEDFINANCIAL STATEMENTS(UNAUDITED)FOR THESIX-MONTHPERIODENDEDJUNE30, 2008

---

---

SUNY TELECOM (1994) LTD.B A L A N C E S H E E T

As ofJune 30

As ofDecember 312 0 0 8

2 0 0 7N I S   , 0 0 0UnauditedA S S E T SCurrent assetsCash and cash equivalents





8,124


12,787Marketable securities





1,794


2,355Trade receivables





89,592


146,145Other receivables and debit balances





8,232


4,406Inventory





16,414


27,121Total current assets





124,156


192,814Non-current assetsInvestment in shares of the parent company





4,004


4,004Deferred taxes





206


175Funded liability in excess of accrued
  severance pay, net





706


2,290Deposits





444


252Fixed assets





1,001


647Other assets





120


21Total non-current assets





6,481


7,389130,637


200,203


As ofJune 30

As ofDecember 312 0  0 8

2 0 0 7N I S   , 0 0 0UnauditedLIABILITIES AND EQUITYCurrent LiabilitiesShort-term credit and current maturities of
  long-term loans





85,000


Suppliers and service-providers





37,283


79,495Payables and credit balances





8,794


22,496Total current liabilities





131,077


101,991Shareholders Equity (capital deficit)





(440
)

98,212130,637


200,203


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

|                                                              |  |                         |  |             
|------------------------------------------------------------- |  | ----------------------- |  | ------------
|                                                              |  |                         |  |             
|                                                              |  | Davidi Piamenta         |  | Ilan Ben-Dov
|Approval
  date of the financial statements: August 21, 2008. |  | Chief Executive Officer |  | Director    

3

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N T  O F  O P E R A T I O N S

|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|-------------------------------------------------- |  | ------------------------------------------- | ------- | --------------------------------------- |  | ---------------------------------- | - |  | ------- | -
|                                                   |  | For the six-
  month period
  ended June 30 |         | For the three-month periodended June 30 |  | For the year
  ended
  December 31 |  
|                                                   |  |                                             |         |                                         |  |                                    |  
|                                                   |  | 2 0 0 8                                     |         | 2 0 0 8                                 |  | 2 0 0 7                            |  
|                                                   |  |                                             |         |                                         |  |                                    |  
|                                                   |  | N I S   , 0 0 0                             |        
|                                                   |  |                                             |        
|                                                   |  | Unaudited                                   |         | Unaudited                               |  |                                    |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Revenue from sales and services                    |  |                                             | 205,917 |                                         |  | 90,993                             |   |  | 416,004 |  
|Cost of sales and services                         |  |                                             | 171,452 |                                         |  | 76,502                             |   |  | 343,007 |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Gross profit                                       |  |                                             | 34,465  |                                         |  | 14,491                             |   |  | 72,997  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Selling expenses                                   |  |                                             | 6,511   |                                         |  | 3,702                              |   |  | 15,582  |  
|General and administrative expenses                |  |                                             | 17,063  |                                         |  | 13,367                             |   |  | 25,985  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|                                                   |  |                                             | 23,574  |                                         |  | 17,069                             |   |  | 41,567  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Operating income (loss),
  before financing income |  |                                             | 10,891  |                                         |  | (2,578                             | ) |  | 31,430  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Financing income                                   |  |                                             | 6,077   |                                         |  | 2,992                              |   |  | 10,827  |  
|Financing expenses                                 |  |                                             | (1,045  | )                                       |  | (370                               | ) |  | (1,232  | )
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|                                                   |  |                                             | 5,032   |                                         |  | 2,622                              |   |  | 9,595   |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Income before other income
  (expenses), net       |  |                                             | 15,923  |                                         |  | 44                                 |   |  | 41,025  |  
|Other income (expenses), net                       |  |                                             | 809     |                                         |  | 9                                  |   |  | (1      | )
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Income before taxes on
  income                    |  |                                             | 16,732  |                                         |  | 53                                 |   |  | 41,024  |  
|Taxes on income                                    |  |                                             | 1,230   |                                         |  | (1,530                             | ) |  | 7,830   |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|Net income for the period                          |  |                                             | 15,502  |                                         |  | 1,583                              |   |  | 33,194  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  
|                                                  
|Attributed to:                                     |  |                                             |         |                                         |  |                                    |   |  |         |  
|Shareholders of the Company                        |  |                                             | 15,502  |                                         |  | 1,583                              |   |  | 33,194  |  
|                                                   |  |                                             |         |                                         |  |                                    |   |  |         |  

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

4

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N T  O F  C H A N G E S  I N  S H A R E H O L D E R S  E Q U I T Y

|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  
|-------------------------------------------------------------------- |  | ---------------------------------------------- | - | ----------------- |  | ----------------------------------------------------------------- | - | --------------------------------------------- | --- | ------------------- |  | ------------ | - |  | -------- | - |  | -------- | -
|                                                                     |  | Share capital                                  |   | Capital
  reserve |  | Capital
  reserve in
  respect of
  financial
  assets for
  sale |   | Capital
  reserve fromtranslation adjustments |     | Retained
  earnings |  | Total equity |  
|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |  
|                                                                     |  | N I S  , 0 0 0                                
|                                                                     |  |                                               
|                                                                     |  | For the six-month period ended
  June 30, 2008
|                                                                     |  |                                               
|                                                                     |  | Unaudited                                     
|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  
|Balance as of January 1, 2008                                        |  |                                                | 1 |                   |  | 737                                                               |   |                                               | 23  |                     |  | (10,323      | ) |  | 107,774  |   |  | 98,212   |  
|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  
|Changes during the period
  ended June 30, 2008:                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  
|Cost of share-based payment, net                                     |  |                                                |  |                   |  | (70                                                               | ) |                                               |    |                     |  |             |   |  |         |   |  | (70      | )
|Gains from financial assets available for
  sale                     |  |                                                |  |                   |  |                                                                  |   |                                               | (23 | )                   |  |             |   |  |         |   |  | (23      | )
|Adjustments deriving from translation of
  financial statements, net |  |                                                |  |                   |  |                                                                  |   |                                               |    |                     |  | (14,061      | ) |  |         |   |  | (14,061  | )
|Distribution of a cash dividend, net                                 |  |                                                |  |                   |  |                                                                  |   |                                               |    |                     |  |             |   |  | (100,000 | ) |  | (100,000 | )
|Income for the period                                                |  |                                                |  |                   |  |                                                                  |   |                                               |    |                     |  |             |   |  | 15,502   |   |  | 15,502   |  
|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  
|Balance as of June 30, 2008                                          |  |                                                | 1 |                   |  | 667                                                               |   |                                               |    |                     |  | (24,384      | ) |  | 23,276   |   |  | (440     | )
|                                                                     |  |                                                |   |                   |  |                                                                   |   |                                               |     |                     |  |              |   |  |          |   |  |          |  

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

5

---

---

SUNY TELECOM (1994) LTD.
S T A T E M E N T  O F  C H A N G E S  I N  S H A R E H O L D E R S  E Q U I T Y( c o n t i n u e d )

|                                                                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |   |  |          |   |  |          |  
|-------------------------------------------------------------------- |  | ------------------------------------------------ | - | ----------------- |  | ----------------------------------------------------------------- |  | ---------------------------------------------------- | ---- | ------------------- |  | ------------ | - |  | -------- | - |  | -------- | -
|                                                                     |  | Share capital                                    |   | Capital
  reserve |  | Capital
  reserve in
  respect of
  financial
  assets for
  sale |  | Capital
  reserve
  from
  translation
  adjustments |      | Retained
  earnings |  | Total equity |  
|                                                                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |  
|                                                                     |  | N I S   , 0 0 0                                  |  
|                                                                     |  |                                                  |  
|                                                                     |  | For the three-month period ended
  June 30, 2008 |  
|                                                                     |  |                                                  |  
|                                                                     |  | Unaudited                                        |  
|                                                                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |   |  |          |   |  |          |  
|Balance as of April 1, 2008                                          |  |                                                  | 1 |                   |  | 649                                                               |  |                                                      | (229 | )                   |  | (17,391      | ) |  | 121,693  |   |  | 104,723  |  
|                                                                    
|Changes during the period
  ended June 30, 2008:                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |   |  |          |   |  |          |  
|Cost of share-based payment                                          |  |                                                  |  |                   |  | 18                                                                |  |                                                      |     |                     |  |             |   |  |         |   |  | 18       |  
|Gains from financial assets available for
  sale                     |  |                                                  |  |                   |  |                                                                  |  |                                                      | 229  |                     |  |             |   |  |         |   |  | 229      |  
|Adjustments deriving from translation of
  financial statements, net |  |                                                  |  |                   |  |                                                                  |  |                                                      |     |                     |  | (6,993       | ) |  |         |   |  | (6,993   | )
|Distribution of a cash dividend, net                                 |  |                                                  |  |                   |  |                                                                  |  |                                                      |     |                     |  |             |   |  | (100,000 | ) |  | (100,000 | )
|Income for the period                                                |  |                                                  |  |                   |  |                                                                  |  |                                                      |     |                     |  |             |   |  | 1,583    |   |  | 1,583    |  
|                                                                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |   |  |          |   |  |          |  
|Balance as of June 30,
  2008                                        |  |                                                  | 1 |                   |  | 667                                                               |  |                                                      |     |                     |  | (24,384      | ) |  | 23,276   |   |  | (440     | )
|                                                                     |  |                                                  |   |                   |  |                                                                   |  |                                                      |      |                     |  |              |   |  |          |   |  |          |  

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

6

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N
T  O F  C H A N G E S  I N  S H A R E H
O L D E R S   E Q U I T Y( c o n t i n u e d
)

|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  
|-------------------------------------------------------------------- |  | ---------------------------- | - | ----------------- |  | ------------------------------------------------------------------ |  | ---------------------------------------------------- | ---- | ------------------- |  | ------------ | - |  | ------- | - |  | ------- | -
|                                                                     |  | Share capital                |   | Capital
  reserve |  | Capital 
  reserve in
  respect of
  financial
  assets for
  sale |  | Capital
  reserve
  from
  translation
  adjustments |      | Retained
  earnings |  | Total equity |  
|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |  
|                                                                     |  | N I S  , 0 0 0               |  
|                                                                     |  |                              |  
|                                                                     |  | Year ended December 31, 2007 |  
|                                                                     |  |                              |  
|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  
|Balance as of January 1,
  2007                                      |  |                              | 1 |                   |  | 478                                                                |  |                                                      | 129  |                     |  |             |   |  | 92,580  |   |  | 93,188  |  
|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  
|Changes during the year
  ended December 31, 2007:                   |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  
|Cost of share-based payments                                         |  |                              |  |                   |  | 259                                                                |  |                                                      |     |                     |  |             |   |  |        |   |  | 259     |  
|Gains from financial assets available for
  sale                     |  |                              |  |                   |  |                                                                   |  |                                                      | (106 | )                   |  |             |   |  |        |   |  | (106    | )
|Adjustments deriving from translation of
  financial statements, net |  |                              |  |                   |  |                                                                   |  |                                                      |     |                     |  | (10,323      | ) |  |        |   |  | (10,323 | )
|Distribution of a cash dividend, net                                 |  |                              |  |                   |  |                                                                   |  |                                                      |     |                     |  |              |   |  | (18,000 | ) |  | (18,000 | )
|Income for the year                                                  |  |                              |  |                   |  |                                                                   |  |                                                      |     |                     |  |             |   |  | 33,194  |   |  | 33,194  |  
|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  
|Balance as of December 31,
  2007                                    |  |                              | 1 |                   |  | 737                                                                |  |                                                      | 23   |                     |  | (10,323      | ) |  | 107,774 |   |  | 98,212  |  
|                                                                     |  |                              |   |                   |  |                                                                    |  |                                                      |      |                     |  |              |   |  |         |   |  |         |  

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

7

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N
T  O F  C A S H  F L O W S

|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|---------------------------------------------------------- |  | ------------------------------------------ | -------- | --------------------------------------------- |  | -------------------------------- | - |  | ------- | -
|                                                           |  | For the six-month
  period ended
  June 30 |          | For the three-
  month period
  ended June 30 |  | For the year ended
  December 31 |  
|                                                           |  |                                            |          |                                               |  |                                  |  
|                                                           |  | 2 0 0 8                                    |          | 2 0 0 8                                       |  | 2 0 0 7                          |  
|                                                           |  |                                            |          |                                               |  |                                  |  
|                                                           |  | N I S  , 0 0 0                             |         
|                                                           |  |                                            |         
|                                                           |  | Unaudited                                  |          | Unaudited                                     |  |                                  |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Cash flows - operating
activities (see Appendix A below)   |  |                                            | 12,204   |                                               |  | 9,437                            |   |  | 42,597  |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Cash flows - investing activities                          |  |                                            |          |                                               |  |                                  |   |  |         |  
|                                                          
|Sale of marketable securities, net                         |  |                                            |         |                                               |  |                                 |   |  | 2,493   |  
|Realization of (investment in) long-term
  deposits, net   |  |                                            | (192     | )                                             |  | (116                             | ) |  | 70      |  
|Purchase of fixed assets                                   |  |                                            | (42      | )                                             |  | (17                              | ) |  | (110    | )
|Proceeds from sale of fixed assets                         |  |                                            | 9        |                                               |  | 9                                |   |  |        |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Net cash provided by (used
  in) investing activities      |  |                                            | (225     | )                                             |  | (124                             | ) |  | 2,453   |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Cash flows - financing
activities                          |  |                                            |          |                                               |  |                                  |   |  |         |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Distribution of a cash
dividend                            |  |                                            | (100,000 | )                                             |  | (100,000                         | ) |  | (18,000 | )
|Receipt (repayment) of
short-term credit, net              |  |                                            | 85,000   |                                               |  | 85,000                           |   |  | (16,608 | )
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Net cash used in financing
  activities                    |  |                                            | (15,000  | )                                             |  | (15,000                          | ) |  | (34,608 | )
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Translation adjustments
  in respect of cash balances, net |  |                                            | (1,642   | )                                             |  | (668                             | ) |  | (231    | )
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Increase (decrease) in
  cash and cash equivalents         |  |                                            | (4,663   | )                                             |  | (6,355                           | ) |  | 10,211  |  
|Cash and cash equivalents
  balance - beginning of period  |  |                                            | 12,787   |                                               |  | 14,479                           |   |  | 2,576   |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  
|Cash and cash equivalents
  balance - end of period        |  |                                            | 8,124    |                                               |  | 8,124                            |   |  | 12,787  |  
|                                                           |  |                                            |          |                                               |  |                                  |   |  |         |  

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

8

---

---

SUNY TELECOM (1994) LTD.A P P E N D I C E
S  T O  T H E  S T A T E M E N T  O
F  C A S H  F L O W S

A. Adjustments required to present
the cash flows from operating activities

|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|------------------------------------------------------------- |  | ------------------------------------------ | ------- | --------------------------------------------- |  | -------------------------------- | - |  | ------- | -
|                                                              |  | For the six-month
  period ended
  June 30 |         | For the three-
  month period
  ended June 30 |  | For the year ended
  December 31 |  
|                                                              |  |                                            |         |                                               |  |                                  |  
|                                                              |  | 2 0 0 8                                    |         | 2 0 0 8                                       |  | 2 0 0 7                          |  
|                                                              |  |                                            |         |                                               |  |                                  |  
|                                                              |  | N I S  , 0 0 0                             |        
|                                                              |  |                                            |        
|                                                              |  | Unaudited                                  |         | Unaudited                                     |  |                                  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|Income during the
  period                                    |  |                                            | 15,502  |                                               |  | 1,583                            |   |  | 33,194  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|Expenses (revenues) not
  involving cash flows:               |  |                                            |         |                                               |  |                                  |   |  |         |  
|Depreciation and amortization                                 |  |                                            | 382     |                                               |  | 333                              |   |  | 321     |  
|Capital loss (gain), net                                      |  |                                            | (9      | )                                             |  | (9                               | ) |  | 1       |  
|Gain and revaluation of marketable
  securities, net          |  |                                            | 229     |                                               |  | 408                              |   |  | (275    | )
|Revaluation of long-term deposits                             |  |                                            | (33     | )                                             |  | (13                              | ) |  | (29     | )
|Revaluation of investment in shares of
  parent company       |  |                                            | (454    | )                                             |  | (184                             | ) |  | (348    | )
|Increase (decrease) in accrued severance
  pay, net           |  |                                            | 1,290   |                                               |  | 839                              |   |  | (629    | )
|Increase in deferred taxes                                    |  |                                            | (33     | )                                             |  | 18                               |   |  | (19     | )
|Cost of share-based payments in the
  Company, net            |  |                                            | (70     | )                                             |  | 18                               |   |  | 259     |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|                                                              |  |                                            | 16,804  |                                               |  | 2,993                            |   |  | 32,475  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|Changes in asset and
  liability items:                       |  |                                            |         |                                               |  |                                  |   |  |         |  
|Decrease (increase) in trade receivables                      |  |                                            | 36,538  |                                               |  | 4,412                            |   |  | (24,227 | )
|Decrease (increase) in other receivables
  and debit balances |  |                                            | (5,563  | )                                             |  | (5,091                           | ) |  | 3,148   |  
|Decrease (increase) in inventory                              |  |                                            | 7,223   |                                               |  | 18,440                           |   |  | (3,919  | )
|Increase (decrease) in trade payables                         |  |                                            | (31,985 | )                                             |  | (2,667                           | ) |  | 23,850  |  
|Increase (decrease) in other payables and
  credit balances   |  |                                            | (10,813 | )                                             |  | (8,650                           | ) |  | 11,270  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|                                                              |  |                                            | (4,600  | )                                             |  | 6,444                            |   |  | 10,122  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  
|Net cash provided by
  operating activities                   |  |                                            | 12,204  |                                               |  | 9,437                            |   |  | 42,597  |  
|                                                              |  |                                            |         |                                               |  |                                  |   |  |         |  

B. Non-cash transactions:

|   |                                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | During
  the report period, fixed assets and other assets were purchased with supplier
  credit totaling NIS 8 thousand (2007  NIS 24 thousand).                                          
|   |                                                                                                                                                                                            
|2. | During
  the report period, fixed assets and other assets were purchased from the
  parent company against a reduction of the balance of the parent companys
  debt of NIS 1,157 thousand.

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

9

---

---

SUNY TELECOM (1994) LTD.NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2008

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

|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | A.                                                                                                                                                                                                                                                                                                                                                                                                                                | Initial
  adoption of the International Financial Reporting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | These financial statements
  have been prepared for the first time in conformity with the International
  Financial Reporting Standards (IFRS) in a condensed format as of June 30,
  2008, and for the periods of six months and three months then ended (the
  Interim Statements). The comparative figures relating to the full year 2007
  are also presented in conformity with IFRS.                                                                                                                               
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | IFRS are standards and
  interpretations that have been adopted by the International Accounting
  Standards Board, and they include international financial reporting
  standards, international accounting standards (IAS), as well as
  interpretations prescribed by the International Financial Reporting
  Interpretations Committee (IFRIC) or by the committee that preceded it for
  interpretation of international accounting standards (SIC).                                                                     
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Company adopted IFRS
  for the first time as from January 1, 2008, and therefore, the transition
  date for reporting in conformity with IFRS is January 1, 2007. Prior to
  adopting the IFRS, the Company had prepared its financial statements in
  conformity with generally accepted accounting principles in Israel. The
  Companys last annual financial statements in conformity with generally
  accepted accounting principles in Israel were prepared as of December 31,
  2007, and for the year then ended.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | B.                                                                                                                                                                                                                                                                                                                                                                                                                                | Format for
  preparing the Interim Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Interim Statements have
  been prepared in conformity with generally accepted accounting principles for
  the preparation of financial statements for interim periods, as prescribed in
  IAS 34 (Financial Reporting for Interim Periods), as well as in conformity
  with the disclosure requirements of Section D of the Israeli Securities Regulations
  (Immediate and Periodic Reports), 1970.                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | These Interim Statements
  should be read in the context of the annual financial statements, the notes
  of which contain detailed information not included in the Interim Statements.

The Interim Financial Statements do
not include comparative figures relating to the period ended June 30, 2007, and earnings
per share data were not presented.                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | In accordance with the directives of
the Israeli Securities Authority from May 2008, these Interim Statements include
disclosure of the significant accounting principles applied in preparation of the Interim
Statements in conformity with IFRS, at the scope equivalent to that required in the annual
financial statements.                                                                                                 
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | Information is presented in Note 4
regarding the reconciliation between the reporting in previous periods according to the
generally accepted accounting principles in Israel (Israeli GAAP) and
reporting in the current Interim Statements according to IFRS.                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | IFRS, which shall be in
  effect or may be adopted early when preparing the financial statements for
  the full year 2008, are subject to changes and to pronouncements during the
  course of the year. Therefore, they cannot be prescribed now with certainty.
  Accordingly, changes are possible in the accounting principles applied, as
  will be described in this note during annual financial statements
  preparation.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | A.                                                                                                                                                                                                                                                                                                                                                                                                                                | Reporting
  basis in the financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Companys financial
  statements have been prepared on the basis of historic cost, with the
  exception of various assets and liabilities, which are presented according to
  their fair value, as specified below.                                                                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                   | Non-monetary assets in
  Israel (mainly fixed assets and other assets) and equity items were measured
  according to the historic cost adjusted for changes in the Consumer Price
  Index until December 31, 2003.                                                                                                                                                                                                                                                                                                           

10

---

---

|        |                                              
|------- | ---------------------------------------------
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | Functional
  and Presentation Currency
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 1.                                     | Functional Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                        | Items included in the
  Companys financial statements are measured on the basis of the currency that
  reflects the economic environment in which the Company operates, and which
  influences the majority of its operations (the Functional Currency).According to IFRS, the Companys Functional Currency is the U.S. dollar.                                                                                                                                    
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 2.                                     | Translation of transactions
  and balances                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                        | Transactions
in a currency other than the Functional Currency are translated into the Functional
Currency on the basis of the exchange rates prevailing as of the transaction execution
date. Exchange rate differentials deriving from settling these transactions and those
deriving from translations of financial assets and liabilities amounts denominated in
foreign currency on the basis of end-of-period rates, are recorded to the statements of
operations.
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 3.                                     | Presentation Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                        | The
Company presents its financial statements in New Israeli Shekels (the Presentation
Currency), in conformity with the provisions of the Israeli Securities Regulations
(Preparation of Annual Financial Statements), 1993. The Companys operating results
and financial position are translated into the Presentation Currency, as follows:                                                                                                                      

| |  |  |     |                                                                                                                                                                  
| |  |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | (1) | Assets and liabilities were
  translated according to the representative exchange rates promulgated by the
  Bank of Israel in effect on the balance-sheet date. 
| |  |  |     |                                                                                                                                                                  
| |  |  | (2) | Revenues and expenses
  included in the statements of operations are translated according to the
  actual rate of exchange on the transactions execution date.  
| |  |  |     |                                                                                                                                                                  
| |  |  | (3) | Translation differentials
  resulting from the said treatment are charged directly to equity under the
  item reserve from translation of financial statements.

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | C. | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Certain items included in
  the comparative figures for prior periods in the financial statements have
  been reclassified, in order to faithfully reflect the classification of those
  items in the current financial statements.                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | D. | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The preparation of the
  Financial Statements in conformity with generally accepted accounting
  principles requires the Management of the Company to make estimates,
  assessments and assumptions that affect the reported sums relating to assets
  and liabilities, and contingent assets and liabilities as of the date of the
  financial statements, as well as the revenue and expense data during the
  reported periods. The actual results could differ from those estimates and
  assessments.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | E. | Cash and
  cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Cash and cash equivalents
  include cash balances or demand deposits. Bank overdrafts, which must be
  covered upon demand and which constitute an integral part of the groups cash
  management, are included as a component of cash and cash equivalents for the
  purposes of reporting the cash flows only.                                                                                                                                                                                          

11

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---

|        |                                              
|------- | ---------------------------------------------
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | F. | Financial
  assets available for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Certain investments of the
  Company are classified as financial assets available for sale. After the
  initial recognition, these investments are measured according to fair value,
  when the changes therein, with the exception of impairment losses and gains
  or losses from changes in the exchange rates of items classified as available
  for sale, are charged directly to equity, net of the tax effect. When the
  investment is disposed of, the gains or losses that accrued in equity are
  recorded to operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | G. | Provision
  for doubtful debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The provision for doubtful
  debts is calculated specifically in respect of those debts whose collection,
  in the opinion of the Companys Management, is doubtful.                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | H. | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Inventory is valued at the
  lower of cost, on a first in  first out basis, or net realization value.
  Net realization value is the estimated selling price during the ordinary
  course of business, less an estimate of completion costs and the costs
  required to execute the sale.                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | I. | Fixed
  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |  |    |                                                                                                                                                                       
| |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | The assets are stated at
  cost. Improvements and renovations are capitalized to the cost of the assets,
  while current maintenance and repair expenses are expensed.
| |  |    |                                                                                                                                                                       
| |  | 2. | Depreciation is calculated
  according to the straight line method, over the estimated useful life of
  the assets. The annual depreciation rates are:              

|                                     |     
|------------------------------------ | ----
|                                     | %   
|                                     |     
|                                     |     
|Instruments and equipment            | 7-25
|Office furniture and
  equipment     | 7-15
|Computers and peripheral
  equipment | 33  
|Leasehold improvements               | 7   

| |  |    |                                                                                                                                                                                                                                                                               
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | The residual value and the
  useful life of each asset are examined, at the very least
  every year. The changes are accounted for prospectively, as a change in
  accounting estimate. The need for recording an impairment provision is also
  examined (see Par. K. below).

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | J. | Other
  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Computer software and
  licenses are stated at cost. The assets are amortized at the annual rate of
  33%, according to the expected period of economic benefit.                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | K. | Asset
  impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company periodically
  examines the need for recording an impairment provision, in order to ensure
  that its assets, including fair value adjustments of other fixed assets, are
  not stated at sums exceeding their recoverable amounts, which is the higher
  of the net selling price and the present value of the estimated future cash
  flows expected to derive from the use and realization of the assets. A
  recognized loss is reversed only when changes occur in the estimates used to
  determine the recoverable amount of the asset.

12

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---

|        |                                              
|------- | ---------------------------------------------
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | L. | Deferred
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Deferred taxes are computed
  on temporary differences between the timing of the inclusion of amounts in
  the financial statements and when taken into account for tax purposes. The
  deferred tax balances are computed according to the tax rate expected to
  apply when these taxes are transferred to the statement of operations, based
  on information known when the financial statements are prepared.Deferred tax
  assets are classified as non-current assets, even if their anticipated
  realization date is in the short-term.                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | M. | Share-based
  payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The cost of employee
  benefits that are settled with capital instruments, such as shares or options
  convertible into shares of the Company and/or of the parent company, are
  measured according to the fair value of the capital instruments on the grant
  date. An additional expense is recognized if a change occurs in the terms of
  the arrangement, which increases its overall fair value. The cost is charged
  to the Companys operating results concurrent with a corresponding increase
  in its equity, over the vesting period.                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | N. | Accrued
  severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Companys compensation
  plan falls under the scope of a defined benefit plan, as defined in the
  Standards. Therefore, the severance pay liability deriving from the plan is
  measured on an actuarial basis and takes into account, inter alia, estimates
  of future pay hikes and the employee turnover rate. The measurement is based
  on discounting the anticipated future cash flows according to the interest
  rates of high-rated NIS corporate bonds, when the payment date
  approximates the liability period associated with the severance benefits. In
  addition, the funded severance pay is measured at fair value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | O. | Revenue
  recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Revenues from product sales
  are included when the products are supplied, the date that the significant
  risks and rewards deriving from ownership are transferred to the buyer; the
  Company does not retain any ongoing managerial involvement that characterizes
  ownership and does not retain effective control of the goods sold; the amount
  of revenues and costs that were generated or could be generated by the
  transaction may be reliably measured and the economic benefits deriving from the
  transaction are expected to flow to the Company.                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Revenues from service fees
  are included over the service contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | P. | Product
  warranties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The estimated warranties,
  which are estimated on the basis of past experience, are expensed during the
  period in which the sales revenue from these products was recorded. The
  average warranty period in respect of the products is about 12 months.                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Q. | Presentation
  of transactions between a corporation and its controlling shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Assets and liabilities for
  which a transaction was executed with a controlling shareholder are measured
  at their fair value on the transaction date. The difference between the fair
  value and the actual consideration is recorded to equity.                                                                                                                                                                                                                                                                                                                                                                                           

13

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---

|        |                                               |                                                                        
|------- | --------------------------------------------- | -----------------------------------------------------------------------
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)
|        |                                               |                                                                        
|        | R.                                            | Disclosure
  related to new IFRS in the period prior to its application

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | IAS 23 (amended)  Credit
  Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | The amendment of this
  Standard eliminates the possibility of expensing credit costs and requires
  the reporting corporation to capitalize the associated credit costs directly
  to the acquisition and establishment or manufacturing costs of the asset.The
  Amended Standard will apply as from the financial statements for the year
  beginning January 1, 2009. Early adoption is possible.According to the
  Companys assessments, this Amendment has no impact on its financial
  position, results of operations and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 2. | IAS 1 (amended)  Financial
  Statement Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | Pursuant to the Amendment of IAS 1,
another, separate statement must also be presented  Statement of Comprehensive
Income, which presents, aside from total net income taken from the statement of
operations, all items charged directly to equity during the report period and not deriving
from certain transactions with the shareholders (other comprehensive income), such as
adjustments from the translation of financial statements; fair value adjustments to
financial assets classified as available for sale, adjustments to a reserve for
revaluation of fixed assets, etc., as well as the tax implications on these items, which
are also charged directly to equity. Alternatively, the other comprehensive income items
may be presented together with statement of operations items in a single statement called
statement of comprehensive income, which is to be presented in lieu of the
statement of operations. Only those items charged to equity, which derive from certain
transactions with the shareholders (such as capital raised, dividend distributions, etc.)
are to be presented in the statement of changes in shareholders equity, as well as
the total line that is transferred from the statement of comprehensive income.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | The Amendment also prescribes
  that in instances of a change in the comparative figures as a result of a
  change in an accounting principle that is being retroactively applied,
  restatement or reclassification, a balance sheet must also be presented for
  the beginning of the period of the comparative figures for which the change
  was made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | The Amendment of IAS 1 will
  apply to the annual financial statements for periods beginning January 1,
  2009, with the comparative figures being restated. Early adoption is
  possible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | The effect of the Amendment
  of IAS 1 will require the Company to provide the requisite disclosures in the
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 3. | IFRS 2 (Amended) 
  Share-based Payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | Pursuant to the Amendment
  of IFRS 2 (the Amended Standard), definition of vesting terms shall only
  include service conditions and performance conditions, while settlement of a
  grant that includes conditions other than vesting terms, whether by the
  Company or by the other party, is to be accounted for as an acceleration of vesting
  and not as forfeiture. The Amendment is to be retroactively applied to
  financial statements for periods beginning January 1, 2009. Early adoption is
  possible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | Vesting terms include
  service conditions, requiring the other party to complete a defined service
  period, while performance conditions require the meeting of specified
  performance targets. Conditions that are not within the scope of service or
  performance conditions shall be deemed conditions that are not vesting
  conditions, and therefore, must be taken into account in the fair value
  estimate of the instrument being granted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

14

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---

|        |                                              
|------- | ---------------------------------------------
|NOTE 2 | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                                                                         
| | -- | ----------------------------------------------------------------------------------------
| | R. | Disclosure
  regarding new IFRS in a period prior to the application thereof (continued)

| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| | -- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 3.                                                                           | IFRS 2 (amended) 
  Share-based Payments
  (continued)                                                                                                                                                                                                                                                                         
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | The company examines the
  impact of the Amended Standard on its financial statements, but cannot, at
  this stage, estimate its results.                                                                                                                                                                                       
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    | 4.                                                                           | IAS 32  Financial
  Instruments: Presentation, and IAS 1  Financial Statement Presentation                                                                                                                                                                                                                                    
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | The Amendment of IAS 32
  changes the definition of a financial liability, a financial asset and a
  capital instrument, and prescribes that certain financial instruments,
  realizable by its holder, are to be classified as capital instruments.                                                                            
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | The provisions of this
  Amendment shall apply for annual reporting periods beginning January 1, 2009.
  Early adoption is possible. At this stage, the Company Management cannot
  estimate the implication of application of the interpretation on its
  financial position and operating results.                            
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    | 5.                                                                           | Improvements in the 2008
  International Financial Reporting Standards                                                                                                                                                                                                                                                          
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | In May 2008, the IASB
  promulgated a series of improvements to the international financial reporting
  standards.                                                                                                                                                                                                              
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | Within the scope of the
  improvements, amendments were made to some of the standards, which revise the
  method of presentation, recognition and measurement of various items in the
  financial statements.                                                                                                                   
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | In addition, various
  corrections were made to terms, which have a negligible effect, if any, on
  the financial statements.                                                                                                                                                                                                   
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | Most of the amendments will
  come into effect as of the annual reporting period beginning on or after
  January 1, 2009, with early adoption possible. Most of the amendments will be
  applied retroactively, by adjusting the comparative figures.                                                                           
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                              | According to the Companys
  assessments, the impact of the amendments on the financial statements is not
  expected to be material.                                                                                                                                                                                            
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| | S. | Indexed
  balances and balances denominated in or linked to foreign currency
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    | 1.                                                                           | Balances denominated in or
  linked to foreign currency are included in the financial statements according
  to the representative exchange rates  published by the Bank of Israel. Balances linked to the consumer price
  index (CPI) are included on the basis of the appropriate index for each
  linked asset or liability.
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 
| |    | 2.                                                                           | Following are data
  regarding the consumer price index and the representative rate of exchange of
  the U.S. dollar:                                                                                                                                                                                                           
| |    |                                                                              |                                                                                                                                                                                                                                                                                                                                 

|                    |  |                        |       |                          |  |      | 
|------------------- |  | ---------------------- | ----- | ------------------------ |  | ---- | 
|End of the
  period |  | Consumer Price
  Index |       | Exchange rate
  of USD 1 | 
|                    |  |                        |       |                          | 
|                    |  | Points (*)             |       | NIS                      | 
|                    |  |                        |       |                          | 
|                    |  |                        |       |                          |  |      | 
|June 2008           |  |                        | 116.3 |                          |  | 3.35 | 
|December 2007       |  |                        | 113.6 |                          |  | 3.85 | 

|                                      |  |   |     |   |  |        | 
|------------------------------------- |  | - | --- | - |  | ------ | 
|Rate of
  change during the period of |  | % |     | %
|                                      |  |   |     |  
|                                      |  |   |     |   |  |        | 
|Six months ended June 30,
  2008      |  |   | 2.4 |   |  | (12.8) | 
|Year ended December 31,
  2007        |  |   | 3.4 |   |  | (9.0)  | 

| |  |  |                                                                                                                                 
| |  |  | --------------------------------------------------------------------------------------------------------------------------------
| |  |  | (*) According to the CPI
  published for the month ended on the balance-sheet date on the basis of: 2000
  average = 100 points.

15

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|        |                                                                                                                                                                                                                                                        
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3 | INVESTMENT
IN SHARES OF THE PARENT COMPANY                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                        
|        | Includes an investment in
  2,741,728 shares of the parent company. The investment is presented at cost.
  The market value of the investment as of the balance-sheet date was some NIS
  25,498 thousand (on December 31, 2007  NIS 32,928 thousand).
|        |                                                                                                                                                                                                                                                        
|NOTE 4 | ADJUSTMENT
  BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING                                                                                                                                                                      

| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | General                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | As described in Note 1.A.,
  these Interim Statements are the Companys first Interim Financial Statements prepared
  in conformity with IFRS. The Company initially adopted IFRS in 2008, and
  therefore, the transition date for reporting in conformity with IFRS is
  January 1, 2007. The Company prepared an opening balance sheet as of the
  transition date, after which IFRS reporting will begin.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Prior to adopting the IFRS,
  the Company prepared its financial statements according to generally accepted
  accounting principles in Israel (Israel GAAP). The first annual IFRS
  financial statements will be as of December 31, 2008 and for the year then
  ended.                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Accordingly, the Company is
  presenting the following adjustments between reporting in conformity with
  Israel GAAP and in conformity with IFRS as of January 1, 2007 (the transition
  date to IFRS reporting), as of December 31, 2007 and for the year then ended.                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In general, IFRS 1,
  regarding initial adoption of the IFRS, prescribes that application of IFRS
  in the opening balance sheet as of the transition date is to be performed
  retroactively.                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | B. | Details of
  the exceptions elected                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Following are details of
  the exceptions that the Company elected pursuant to IFRS 1, and for which the
  Company is not retroactively applying the transition to IFRS reporting:                                                                                                                                                                                                                           

| |  |     |                                                                                                                                                                                                                           
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | Employee benefits                                                                                                                                                                                                         
| |  |     |                                                                                                                                                                                                                           
| |  |     | The Company applies the
  "corridor" method to account for actuarial gains and losses, and invoked
  the exception whereby the balance of deferred actuarial gains and losses were
  recognized as of the transition date.
| |  |     |                                                                                                                                                                                                                           
| |  | (2) | Accumulated translation
  differentials                                                                                                                                                                                   
| |  |     |                                                                                                                                                                                                                           
| |  |     | The Company charged a
  capital reserve for accumulated translation differentials to the retained
  earnings balance as of January 1, 2007.                                                                               
| |  |     |                                                                                                                                                                                                                           
| |  | (3) | Share-based payment
  transactions                                                                                                                                                                                        
| |  |     |                                                                                                                                                                                                                           
| |  |     | Share-based payments
  granted prior to November 7, 2002 or which vested by January 1, 2007 are not
  accounted for retroactively in conformity with the provisions of IFRS 2.                                            

16

---

---

|        |                                                                                            
|------- | -------------------------------------------------------------------------------------------
|NOTE 4 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)

| |    |                                       
| | -- | --------------------------------------
| | C. | Impact of
  the transition to the IFRS

| |  |                              | 
| |  | ---------------------------- | 
| |  | 1. Balance-sheet adjustments

|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|-------------------------------------------------------- |  |  | ---- | ------------ | --------------- | -------------------------------- | ----------------- | ---------------- | ---- | ------------ |  | -------------------------------- |  | ---------------- | ------- |  |  | ---- | - |  | ------- | 
|                                                         |  |  |      |              | January 1, 2007 |                                  | December 31, 2007 |                 
|                                                         |  |  |      |              |                 |                                  |                   |                 
|                                                         |  |  |      | Israeli GAAP |                 | Effect of
  transition to
  IFRS |                   | IFRS
  standards |      | Israeli GAAP |  | Effect of
  transition to
  IFRS |  | IFRS
  standards |        
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |        
|                                                         |  |  | Note |              | N I S  , 0 0 0  |                                  | N I S  , 0 0 0    |                 
|                                                         |  |  |      |              |                 |                                  |                   |                 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Current assets                                           |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Cash and cash equivalents                                |  |  |      |              |                 | 2,576                            |                   |                  |     |              |  | 2,576                            |  |                  | 12,787  |  |  |     |   |  | 12,787  | 
|Marketable securities                                    |  |  |      |              |                 | 5,180                            |                   |                  |     |              |  | 5,180                            |  |                  | 2,355   |  |  |     |   |  | 2,355   | 
|Trade receivables                                        |  |  |      |              |                 | 134,491                          |                   |                  |     |              |  | 134,491                          |  |                  | 146,145 |  |  |     |   |  | 146,145 | 
|Other receivables and debit balances                     |  |  | 4    |              |                 | 8,422                            |                   |                  | (113 | )            |  | 8,309                            |  |                  | 4,580   |  |  | (174 | ) |  | 4,406   | 
|Inventory                                                |  |  | 6    |              |                 | 26,056                           |                   |                  | (567 | )            |  | 25,489                           |  |                  | 27,930  |  |  | (809 | ) |  | 27,121  | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Total current assets                                     |  |  |      |              |                 | 176,725                          |                   |                  | (680 | )            |  | 176,045                          |  |                  | 193,797 |  |  | (983 | ) |  | 192,814 | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Noncurrent assets                                        |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Investment in shares of the parent company               |  |  |      |              |                 | 4,004                            |                   |                  |     |              |  | 4,004                            |  |                  | 4,004   |  |  |     |   |  | 4,004   | 
|Deferred taxes                                           |  |  | 3,4  |              |                 |                                 |                   |                  | 120  |              |  | 120                              |  |                  |        |  |  | 175  |   |  | 175     | 
|Funded provision in excess of accrued severance pay, net |  |  | 2    |              |                 | 1,538                            |                   |                  | 261  |              |  | 1,799                            |  |                  | 1,857   |  |  | 433  |   |  | 2,290   | 
|Deposits                                                 |  |  |      |              |                 | 322                              |                   |                  |     |              |  | 322                              |  |                  | 252     |  |  |     |   |  | 252     | 
|Fixed assets                                             |  |  | 6    |              |                 | 1,012                            |                   |                  | (54  | )            |  | 958                              |  |                  | 745     |  |  | (98  | ) |  | 647     | 
|Other assets                                             |  |  | 6    |              |                 |                                 |                   |                  |     |              |  |                                 |  |                  | 22      |  |  | (1   | ) |  | 21      | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Total non-current assets                                 |  |  |      |              |                 | 6,876                            |                   |                  | 327  |              |  | 7,203                            |  |                  | 6,880   |  |  | 509  |   |  | 7,389   | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 
|Total assets                                             |  |  |      |              |                 | 183,601                          |                   |                  | (353 | )            |  | 183,248                          |  |                  | 200,677 |  |  | (474 | ) |  | 200,203 | 
|                                                         |  |  |      |              |                 |                                  |                   |                  |      |              |  |                                  |  |                  |         |  |  |      |   |  |         | 

17

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---

|        |                                                                                            
|------- | -------------------------------------------------------------------------------------------
|NOTE 4 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)

| |    |                                                   
| | -- | --------------------------------------------------
| | C. | Impact of
  the transition to the IFRS (continued)

| |  |                                            | 
| |  | ------------------------------------------ | 
| |  | 1. Balance-sheet
  adjustments (continued)

|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|----------------------------------------------------------------- |  | ---- | - | -------------- | --------------- | -------------- | ------------------------------------ |  | ---------------- | - | -------------- | ------- | ------------------------------------ |  | ---------------- |  |  | ------- | - |  | ------- | -
|                                                                  |  |      |   |                | January 1, 2007 |                | December 31, 2007                    | 
|                                                                  |  |      |   |                |                 |                |                                      | 
|                                                                  |  |      |   |                | Israeli
  GAAP  |                | Effect of
  transition to
  the IFRS |  | IFRS
  standards |   | Israeli
  GAAP |         | Effect of
  transition to
  the IFRS |  | IFRS
  standards | 
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  | 
|                                                                  |  | Note |   | N I S  , 0 0 0 |                 | N I S  , 0 0 0 |                                     
|                                                                  |  |      |   |                |                 |                |                                     
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Current liabilities                                               |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Short-term credit and current maturities of long-term loans       |  |      |   |                |                 | 16,608         |                                      |  |                 |   |                | 16,608  |                                      |  |                 |  |  |        |   |  |        |  
|Trade payables                                                    |  |      |   |                |                 | 61,120         |                                      |  |                 |   |                | 61,120  |                                      |  | 79,495           |  |  |        |   |  | 79,495  |  
|Other payables and credit balances                                |  |      |   |                |                 | 12,332         |                                      |  |                 |   |                | 12,332  |                                      |  | 22,496           |  |  |        |   |  | 22,496  |  
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Total current liabilities                                         |  |      |   |                |                 | 90,060         |                                      |  |                 |   |                | 90,060  |                                      |  | 101,991          |  |  |        |   |  | 101,991 |  
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Shareholder's Equity (capital deficit)                            |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Share capital                                                     |  |      |   |                |                 | 1              |                                      |  |                 |   |                | 1       |                                      |  | 1                |  |  |        |   |  | 1       |  
|Capital reserve                                                   |  |      | 1 |                |                 | 315            |                                      |  | 163              |   |                | 478     |                                      |  | 540              |  |  | 197     |   |  | 737     |  
|Capital reserve in respect of financial assets available for sale |  |      | 3 |                |                 |               |                                      |  | 129              |   |                | 129     |                                      |  |                 |  |  | 23      |   |  | 23      |  
|Capital reserve from translation of financial statements          |  |      | 6 |                |                 |               |                                      |  |                 |   |                |        |                                      |  |                 |  |  | (10,323 | ) |  | (10,323 | )
|Retained earnings                                                 |  |      |   |                |                 | 93,225         |                                      |  | (645             | ) |                | 92,580  |                                      |  | 98,145           |  |  | 9,629   |   |  | 107,774 |  
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Total equity                                                      |  |      |   |                |                 | 93,541         |                                      |  | (353             | ) |                | 93,188  |                                      |  | 98,686           |  |  | (474    | ) |  | 98,212  |  
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  
|Total liabilities and equity                                      |  |      |   |                |                 | 183,601        |                                      |  | (353             | ) |                | 183,248 |                                      |  | 200,677          |  |  | (474    | ) |  | 200,203 |  
|                                                                  |  |      |   |                |                 |                |                                      |  |                  |   |                |         |                                      |  |                  |  |  |         |   |  |         |  

18

---

---

|        |                                                                                            
|------- | -------------------------------------------------------------------------------------------
|NOTE 4 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)

| |    |                                                   
| | -- | --------------------------------------------------
| | C. | Impact of
  the transition to the IFRS (continued)

| |  |                                           | 
| |  | ----------------------------------------- | 
| |  | 2.   Statements of operations
adjustments

|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|----------------------------------- |  | ---- | ----- | ------------------------------------ |  | -------------------------------------------- | - | ---------------- | ------ | - |  | ------- | -
|                                    |  |      |       | For the year ended December 31, 2007 | 
|                                    |  |      |       |                                      | 
|                                    |  |      |       | Israeli GAAP                         |  | Effect of
  transition to
  IFRS
  standards |   | IFRS
  standards |       
|                                    |  |      |       |                                      |  |                                              |   |                  |       
|                                    |  | Note |       | N I S  , 0 0 0                       | 
|                                    |  |      |       |                                      | 
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Revenue from sales and services     |  |      | 6     |                                      |  | 409,890                                      |   |                  | 6,114  |   |  | 416,004 |  
|Cost of sales and services          |  |      | 1,6   |                                      |  | 339,260                                      |   |                  | 3,747  |   |  | 343,007 |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Gross profit                        |  |      |       |                                      |  | 70,630                                       |   |                  | 2,367  |   |  | 72,997  |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|                                   
|Selling expenses                    |  |      | 6     |                                      |  | 15,587                                       |   |                  | (5     | ) |  | 15,582  |  
|General and administrative expenses |  |      |       |                                      |  | 25,985                                       |   |                  |       |   |  | 25,985  |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|                                    |  |      |       |                                      |  | 41,572                                       |   |                  | (5     | ) |  | 41,567  |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Operating income before financing   |  |      |       |                                      |  | 29,058                                       |   |                  | 2,372  |   |  | 31,430  |  
|Financing income                    |  |      | 2,5,6 |                                      |  | 1,651                                        |   |                  | 9,176  |   |  | 10,827  |  
|Financing expenses                  |  |      | 5     |                                      |  |                                             |   |                  | (1,232 | ) |  | (1,232  | )
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Income before other expenses        |  |      |       |                                      |  | 30,709                                       |   |                  | 10,316 |   |  | 41,025  |  
|Capital gain (loss), net            |  |      |       |                                      |  | (1                                           | ) |                  |       |   |  | (1      | )
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Income before taxes on income       |  |      |       |                                      |  | 30,708                                       |   |                  | 10,316 |   |  | 41,024  |  
|Taxes on income                     |  |      | 3     |                                      |  | 7,788                                        |   |                  | 42     |   |  | 7,830   |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Net income                          |  |      |       |                                      |  | 22,920                                       |   |                  | 10,274 |   |  | 33,194  |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Attributed to:                      |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  
|Shareholders of the Company         |  |      |       |                                      |  | 22,920                                       |   |                  | 10,274 |   |  | 33,194  |  
|                                    |  |      |       |                                      |  |                                              |   |                  |        |   |  |         |  

19

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---

|        |                                                                                            
|------- | -------------------------------------------------------------------------------------------
|NOTE 4 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)

| |    |                                                                                    
| | -- | -----------------------------------------------------------------------------------
| | D. | Notes to
  balance sheet and statements of operations adjustments                  
| |    |                                                                                    
| |    | Material changes during the adoption of new accounting standards in Israel in 2007:

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | Share-based
  payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    | The Company has an option plan for
employees which, according to the provisions of Accounting Standard No. 24 of the Israel
Accounting Standard Board: share-based payment, falls within the scope of
share-based payments settled with capital instruments. Standard 24 was
applied, in accordance with its transitional provisions, for share-based payment
transactions settled with capital instruments, which were executed after March 15, 2005,
and which had not yet matured as of January 1, 2006.                                                                                                                                                                                                                                                                                                
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    | Upon the transition to
  reporting according to the international standard, as of January 1, 2007, and
  as specified in IFRS 1, the Company was also required to apply the provisions
  of IFRS 2  Share-based Payments for grants of capital instruments executed
  prior to March 15, 2005, but subsequent to November 7, 2002, and which had
  not yet vested as of January 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 2. | Accrued
  severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    | According
to Israeli GAAP, accrued severance pay was measured on the basis of the employees
number of years of employment multiplied by his last monthly salary (one monthly salary
for each year of employment) as of every balance-sheet date, and the funded severance pay
accumulated against it was measured according to its redemption value as of every
balance-sheet date, without taking into account discount rates, rates of salary hikes and
future employee turnover rates. In addition, the liabilities for vacation pay and sick pay
were calculated based on estimated utilization and redemption, respectively.                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    | All
the severance pay liabilities are calculated in conformity with the international
standard, according to the provisions of IAS 19 Employee Benefits (IAS
19). According to the provisions of IAS 19, the Companys compensation plan
falls within the scope of a Defined Benefit Plan. Therefore, the severance pay
liability deriving from the plan is measured on an actuarial basis and takes into account,
inter alia, estimates of future wage hikes and employee turnover rates. The measurement is
based on the discounting of expected future cash flows, according to the interest rates of
high-rated NIS corporate bonds, when the payment date approximates the liability period
associated with the severance benefits. In addition, the funded severance pay is measured
at fair value.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | 3. | Investments
  in financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |    | According
to Israeli GAAP, investments in securities were classified as long-term investments, which
are stated on the basis of cost, after deducting an impairment provision that is not
temporary in nature, or as current investments, which are presented according to their
fair value, while changes therein are charged to operations. According to the IFRS, these
investments are classified as financial assets available for sale and are measured
according to fair value. The changes in the fair value are recorded to equity, net of the
tax effect.                                                                                                                                                                                                                                            

20

---

---

|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|NOTE 4 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAEL GAAP AND IFRS REPORTING (continued)

| |    |                                                                   
| | -- | ------------------------------------------------------------------
| | D. | Notes to
  balance sheet and income or loss adjustments(continued)

| |  |    |                                                                                                                                                                                                                                                                                                                                
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4. | Deferred
  taxes                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                
| |  |    | According
to Israeli GAAP, deferred tax assets were classified as current assets or as non-current
assets, according to the classification of the assets that generated the tax. According to
the IFRS, deferred tax assets are classified as non-current assets, even if the
realization date is forecasted in the short-term.
| |  |    |                                                                                                                                                                                                                                                                                                                                
| |  | 5. | Financing
income and expenses                                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                
| |  |    | According
to Israel GAAP, financing income and expenses, net, were presented in the statement of
operations. According to the IFRS, these must be presented separately.                                                                                                                                                        
| |  |    |                                                                                                                                                                                                                                                                                                                                
| |  | 6. | Functional
  and Presentation Currency                                                                                                                                                                                                                                                                                         

| |  |  | a. | Functional currency                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |    | Items included in the
  Companys financial statements are measured on the basis of the currency
  reflecting the economic environment in which the Company operates, and the
  currency influencing the majority of its operations (the Functional
  Currency).                                                                                                                                                                                            
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |    | According to the IFRS, the
  Companys Functional Currency is the U.S. dollar (the Dollar).                                                                                                                                                                                                                                                                                                                                                                 
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | b. | Translation of transactions
  and balances                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |    | Transactions in currencies
  other than the Functional Currency are translated into the Functional
  Currency on the basis of the exchange rates prevailing as of the transaction
  execution date. Exchange rate differentials, which derive from settling such
  transactions, and from translating sums of monetary assets and liabilities
  quoted in foreign currency on the basis of the year-end rates, are recorded
  to the statements of operations.
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | c. | Presentation currency                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |    | The Company presents its
  financial statements, which are prepared in conformity with the IFRS, in new
  shekels (the Presentation Currency), in conformity with the provisions of
  the Securities Regulations (Preparation of Annual Financial Statements),
  1993. The Companys operating results and financial position are translated
  into the Presentation Currency, as follows:                                                                  

| |  |     |                                                                                                                                                                                           
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (1) | Assets and liabilities were
  translated according to the representative exchange rates promulgated by the
  Bank of Israel in effect on the balance-sheet date.                          
| |  |     |                                                                                                                                                                                           
| |  | (2) | Revenues and expenses included
  in the statements of operations are translated according to the actual rate
  of exchange on the transaction execution date.                             
| |  |     |                                                                                                                                                                                           
| |  | (3) | Translation differentials
  created as a result of such accounting treatment are charged directly to
  equity under the item capital reserve from translation of financial
  statements.

|        |                                                                                                                                                                                                                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5 | SUBSEQUENT
EVENTS                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                          
|        | On August 6,
  2008, the parent company announced that its Management was authorized to
  examine the possibility of selling the Companys operations to the public
  company, Scailex Corporation Ltd. (Scailex), whose controlling shareholder
  is the parent company, and to enter into negotiations with Scailex in this
  regard.

21

---

---

|            |                                        
|----------- | ---------------------------------------
|NOTE 6     | Differences between Israeli and US GAAP

| | The
Companys financial statements are prepared in accordance with IFRS standards, which
vary, in certain significant respects, from accounting principles generally accepted in
the United States of America (US GAAP). Information relating to the nature
and effect of such principal differences is presented below, together with explanations
of certain adjustments made.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                         
| | -- | ------------------------
| | A. | Balance sheet adjustment

|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|---------------------------------------------------------- |  | ---- | - | -------------- | ------------------- | -------------- | ------------------------------- |  | ------- | - | ---------------- | ------- | ------------------------------- |  | ------- |  |  | ------ | - |  | ------- | 
|                                                           |  |      |   |                | As of June 30, 2008 |                | As of December 31, 2007         | 
|                                                           |  |      |   |                |                     |                |                                 | 
|                                                           |  |      |   |                | IFRS
  Standards    |                | Effect of
  change to
  US GAAP |  | US GAAP |   | IFRS
  Standards |         | Effect of
  change to
  US GAAP |  | US GAAP | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         | 
|                                                           |  | Note |   | N I S  , 0 0 0 |                     | N I S  , 0 0 0 |                                
|                                                           |  |      |   |                |                     |                |                                
|                                                           |  |      |   | Unaudited      |                     |                |                                
|                                                           |  |      |   |                |                     |                |                                
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Current assets                                             |  |      |   |                |                     |                |                                 |  |        |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Cash and cash equivalents                                  |  |      |   |                |                     | 8,124          |                                 |  |        |   |                  | 8,124   |                                 |  | 12,787  |  |  |       |   |  | 12,787  | 
|Marketable securities                                      |  |      |   |                |                     | 1,794          |                                 |  |        |   |                  | 1,794   |                                 |  | 2,355   |  |  |       |   |  | 2,355   | 
|Trade receivables                                          |  |      |   |                |                     | 89,592         |                                 |  |        |   |                  | 89,592  |                                 |  | 146,145 |  |  |       |   |  | 146,145 | 
|Other receivables and debit                                |  |      | 1 |                |                     | 8,232          |                                 |  | 206     |   |                  | 8,438   |                                 |  | 4,406   |  |  | 175    |   |  | 4,581   | 
|Inventory                                                  |  |      |   |                |                     | 16,414         |                                 |  |        |   |                  | 16,414  |                                 |  | 27,121  |  |  |       |   |  | 27,121  | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Total current assets                                       |  |      |   |                |                     | 124,156        |                                 |  | 206     |   |                  | 124,362 |                                 |  | 192,814 |  |  | 175    |   |  | 192,989 | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Non-current assets                                         |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Investment in shares of the parent                         |  |      | 2 |                |                     | 4,004          |                                 |  | (4,004  | ) |                  | -       |                                 |  | 4,004   |  |  | (4,004 | ) |  | -       | 
|Deferred taxes                                             |  |      | 1 |                |                     | 206            |                                 |  | (206    | ) |                  |        |                                 |  | 175     |  |  | (175   | ) |  |        | 
|Funded liability in excess of accrued
  severance pay, net |  |      | 3 |                |                     | 706            |                                 |  | (394    | ) |                  | 312     |                                 |  | 2,290   |  |  | (433   | ) |  | 1,857   | 
|Deposits                                                   |  |      |   |                |                     | 444            |                                 |  |        |   |                  | 444     |                                 |  | 252     |  |  |       |   |  | 252     | 
|Fixed assets                                               |  |      |   |                |                     | 1,001          |                                 |  | 120     |   |                  | 1,121   |                                 |  | 647     |  |  | 21     |   |  | 668     | 
|Other assets                                               |  |      |   |                |                     | 120            |                                 |  | (120    | ) |                  |        |                                 |  | 21      |  |  | (21    | ) |  |        | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Total non-current assets                                   |  |      |   |                |                     | 6,481          |                                 |  | (4,604  | ) |                  | 1,877   |                                 |  | 7,389   |  |  | (4,612 | ) |  | 2,777   | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 
|Total assets                                               |  |      |   |                |                     | 130,637        |                                 |  | (4,398  | ) |                  | 126,239 |                                 |  | 200,203 |  |  | (4,437 | ) |  | 195,766 | 
|                                                           |  |      |   |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  |  |        |   |  |         | 

22

---

---

|            |                                                    
|----------- | ---------------------------------------------------
|NOTE 6     | Differences between Israeli and US GAAP (continued)

| |    |                                    
| | -- | -----------------------------------
| | A. | Balance sheet adjustment(continued)



|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------- |  | ---- | ----- | -------------- | ------------------- | -------------- | ------------------------------- |  | ------- | - | ---------------- | ------- | ------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                              |  |      |       |                | As of June 30, 2008 |                | As of December 31, 2007         | 
|                                                              |  |      |       |                |                     |                |                                 | 
|                                                              |  |      |       |                | IFRS
  Standards    |                | Effect of
  change to
  US GAAP |  | US GAAP |   | IFRS
  Standards |         | Effect of
  change to
  US GAAP |  | US GAAP |  
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |  
|                                                              |  | Note |       | N I S  , 0 0 0 |                     | N I S  , 0 0 0 |                                
|                                                              |  |      |       |                |                     |                |                                
|                                                              |  |      |       | Unaudited      |                     |                |                                
|                                                              |  |      |       |                |                     |                |                                
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Current Liabilities                                           |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Short-term credit and current maturities of
  long-term loans |  |      |       |                |                     | 85,000         |                                 |  |        |   |                  | 85,000  |                                 |  |        |   |  |        |   |  |        |  
|Suppliers and service-providers                               |  |      |       |                |                     | 37,283         |                                 |  |        |   |                  | 37,283  |                                 |  | 79,495  |   |  |        |   |  | 79,495  |  
|Payables and credit balances                                  |  |      |       |                |                     | 8,794          |                                 |  |        |   |                  | 8,794   |                                 |  | 22,496  |   |  |        |   |  | 22,496  |  
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Total current liabilities                                     |  |      |       |                |                     | 131,077        |                                 |  |        |   |                  | 131,077 |                                 |  | 101,991 |   |  |        |   |  | 101,991 |  
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|                                                             
|Shareholder's Equity (capital deficit)                        |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Share capital                                                 |  |      |       |                |                     | 1              |                                 |  |        |   |                  | 1       |                                 |  | 1       |   |  |        |   |  | 1       |  
|Capital reserve                                               |  |      | 4     |                |                     | 667            |                                 |  | 203     |   |                  | 870     |                                 |  | 737     |   |  | 203     |   |  | 940     |  
|Capital reserve for financial assets
  available for sale     |  |      |       |                |                     |               |                                 |  |        |   |                  |        |                                 |  | 23      |   |  | (23     | ) |  |        |  
|Capital reserve from translation of
  financial statements    |  |      | 5     |                |                     | (24,384        | )                               |  | (14,383 | ) |                  | (38,767 | )                               |  | (10,323 | ) |  | (13,929 | ) |  | (24,252 | )
|Retained earnings                                             |  |      | 3,4,5 |                |                     | 23,276         |                                 |  | 12,859  |   |                  | 36,135  |                                 |  | 107,774 |   |  | 12,843  |   |  | 120,617 |  
|Investment in shares of the parent company                    |  |      |       |                |                     | -              |                                 |  | (3,077  | ) |                  | (3,077  | )                               |  | -       |   |  | (3,531  | ) |  | (3,531  | )
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Total equity                                                  |  |      |       |                |                     | (440           | )                               |  | (4,398  | ) |                  | (4,838  | )                               |  | 98,212  |   |  | (4,437  | ) |  | 93,775  |  
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  
|Total liabilities and equity                                  |  |      |       |                |                     | 130,637        |                                 |  | (4,398  | ) |                  | 126,239 |                                 |  | 200,203 |   |  | (4,437  | ) |  | 195,766 |  
|                                                              |  |      |       |                |                     |                |                                 |  |         |   |                  |         |                                 |  |         |   |  |         |   |  |         |  

23

---

---

|            |                                                    
|----------- | ---------------------------------------------------
|NOTE 6     | Differences between Israeli and US GAAP (continued)

| |    |                                       
| | -- | --------------------------------------
| | B. | Statement of operations reconciliation

|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|------------------------------------------- |  | ---------------------------------------------- | ------ | ------------------------------------------------ |  | ---------------------------------- | - |  | ------ | -
|                                            |  | For the period
  of six months
  ended June 30 |        | For the period
  of three months
  ended June 30 |  | For the year
  ended
  December 31 |  
|                                            |  |                                                |        |                                                  |  |                                    |  
|                                            |  | 2 0 0 8                                        |        | 2 0 0 8                                          |  | 2 0 0 7                            |  
|                                            |  |                                                |        |                                                  |  |                                    |  
|                                            |  | N I S  , 0 0 0                                 |       
|                                            |  |                                                |       
|                                            |  | Unaudited                                      |        | Unaudited                                        |  |                                    |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Net income per statement of operations      |  |                                                | 15,502 |                                                  |  | 1,583                              |   |  | 33,194 |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Items that increase net income              |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Change in accrued severance pay, net        |  |                                                | 39     |                                                  |  | 42                                 |   |  |       |  
|Reversal of loss from marketable securities |  |                                                |       |                                                  |  | 305                                |   |  |       |  
|Change in taxes on income                   |  |                                                | 7      |                                                  |  |                                   |   |  | 42     |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|                                            |  |                                                | 46     |                                                  |  | 347                                |   |  | 42     |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Items that reduce net income                |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Change in accrued severance                 |  |                                                |       |                                                  |  |                                   |   |  | (172   | )
|Change in taxes on income                   |  |                                                |       |                                                  |  | (76                                | ) |  |       |  
|Reversal of loss from marketable securities |  |                                                | (30    | )                                                |  |                                   |   |  | (142   | )
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|                                            |  |                                                | (30    | )                                                |  | (76                                | ) |  | (314   | )
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  
|Net income according to US GAAP             |  |                                                | 15,518 |                                                  |  | 1,854                              |   |  | 32,922 |  
|                                            |  |                                                |        |                                                  |  |                                    |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Statement of cash flows adjustment                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                      
| |    | There are no
  material changes in the Companys statement of cash flows, for the periods of
  six months and three months ended June 30, 2008 and for the year ended
  December 31, 2007, as presented in the financial statements and between the
  statement of cash flows required under US GAAP.

24

---

---

|        |                                                    
|------- | ---------------------------------------------------
|NOTE 6 | Differences between Israeli and US GAAP (continued)

| |    |                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | D. | Items for adjustment of balance sheets as of December 31, 2007, 2006
  and 2005 or income or loss adjustments for the periods of six months and
  three months ended June 30, 2008 and for the year ended December 31, 2007:

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | Deferred taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | According to
  IFRS, deferred tax assets are classified as non-current assets, even if their
  realization date is expected to be within the short-term.According to
  US GAAP, deferred tax assets were classified as current assets or non-current
  assets, according to the classification of the asset for which they were
  created.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 2. | Investment in shares of parent company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | The investment was recorded initially
at cost in U.S. dollars. Translation differentials arising from translation to the
Presentation Currency are charged to the capital reserve from translation of financial
statements. This investment was classified, in accordance with US GAAP, and presented as a
contra-equity account in the Companys separate financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 3. | Accrued severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | All accrued
  severance pay liabilities are calculated, in conformity with the
  international standard, according to IAS 19 Employee Benefits (IAS 19).
  In conformity with IAS 19, the Companys severance pay plan meets the
  definition of a Defined Benefit Plan provided in IAS 19. Therefore, the
  accrued severance pay liability deriving from the plan is measured on an
  actuarial basis and takes into account, inter alia, estimates of future wage
  hikes and the rate of employee turnover. The measurement is done on the basis
  of discounted expected future cash flows, at the interest rates of high-rated
  shekel corporate bonds, with a maturity date approximating the liability
  period associated with severance pay. Likewise, the funded severance pay is
  measured at fair value.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | According to
  US GAAP, the accrued severance pay liability is charged, under similar
  circumstances, as accrued, when the terms that entitle the employee to
  receive payment upon termination (according to Israeli law  after one year
  of employment, at the latest), at whatever sum the employee will be entitled
  to receive upon severance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 4. | Share-based payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | The Company has employee option plans
which, in conformity with IFRS 2  Share-based Payment, meets the
definition of a share-based payment settled in capital instruments.In conformity with IFRS, the Company
applied the provisions of IFRS 2 also for capital instruments granted before March 15,
2007 but after November 7, 2002, which were not vested as of January 1, 2007. In conformity with US GAAP, the
Companys capital instruments that were not vested as of January 1, 2006, meet the
definition of a share-based payment settled in capital instruments.                                                                                                                                                                                                                                            
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 5. | Investments in financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | In
  conformity with IFRS, investments in marketable securities are classified as
  financial assets available for sale and are measured at fair value. Changes
  in fair value are recorded to equity, net of the tax effect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |    | In
  conformity with US GAAP, investments in marketable securities were classified
  as investments for trading purposes, according to a decision by Management,
  and are measured at fair value. Changes in value are recorded to the
  statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

25

---

---

Suny Telecom (1994) Ltd.

FINANCIAL STATEMENTSAS OF DECEMBER 31
2 0 0 7

---

---

|                                                                                                                                             |       
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------
|GOLDSTEIN SABO TEVET - Certified Public Accountants (Isr.)                                                                                   | (LOGO)
|                                                                                                                                             |       
|A l r o v  T o w e r ,  4 6  R o t h s c h i l d  B l v d . ,  T e l - A v i v ,  I S R A E L  6 6 8 8 3 .                                  
|P h o n e:  ( 9 7 2 ) ( 3 ) 5 6 6 5 0 0 6 .  F a c s i m i le :  ( 9 7 2 )  ( 3 ) 5 6 6 5 0 0 1 .  W e b  s i t e:
w w w . g s t . c o . i l

Auditors Report to the
Shareholders ofSuny Telecom (1994) Ltd.

We have audited the accompanying balance sheets of Suny Telecom
(1994) Ltd. (the
Company) as of December31, 2007, 2006 and 2005
and the statements of operations, statements of changes in shareholders equity
and statements of cash flows for each of the years then ended. These financial
statements are the responsibility of the board of directors and management of
the Company. Our responsibility is to express anopinion on these financial statements based
on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the companys board of directors and management, as
well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2007, 2006 and 2005 and the results of
operations, changes shareholders equity and cash flows for each of the years then
ended, in conformity with generally accepted accounting principles in Israel.

As explained in Note 2.A, the
financial statements are presented in reported amounts, in accordance with the Accounting
Standards of the Israel Accounting Standards Board.

Accounting standards accepted in
Israel vary in certain significant respects from accounting principles generally accepted
in the United States of America. Information relating to the nature and effect of such
principal differences is presented in Note 24 to the financial statements.

|                         |                                    
|------------------------ | -----------------------------------
|                         | GoldsteinSabo Tevet                
|Tel Aviv, March 25, 2008 | Certified Public Accountants (Isr.)

(LOGO)

---

---

SUNY TELECOM (1994) LTD.B A L A N C E  S H E E T

As of December 31Note

2 0 0 7

2 0 0 6

2 0 0 5R e p  o r t e d  N I S  , 0 0 0A S S E  T SCurrent assetsCash and cash equivalents


3


12,787


2,576


12,876Marketable securities


4


2,355


5,180


4,746Trade receivables


5


146,145


134,491


175,888Other receivables and debit balances


6


4,580


8,422


18,916Inventory





27,930


26,056


67,465193,797


176,725


279,891Long-term investments and
  receivablesInvestment in shares of parent company


7


4,004


4,004


4,004Deposits





252


322


521Funded liability in excess of accrued
  severance pay


8


1,857


1,538


8196,113


5,864


5,344Fixed assets


9


745


1,012


1,429Other assets


10


22





200,677


183,601


286,664


As of December 31Note

2 0 0 7

2 0 0 6

2 0 0 5R e p  o r t e d  N I S  , 0 0 0Liabilities and EquityCurrent liabilities


11





16,608


455Short-term credit


12


79,495


61,120


90,888Trade payables


13


22,496


12,332


107,915101,991


90,060


199,258Commitments, liens and
  guarantees


14, 23Shareholders equityShare capital


15


1


1


1Capital reserves





540


315


Retained earnings





98,145


93,225


87,40598,686


93,541


87,406200,677


183,601


286,664


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

| |                  |  |                  
| | ---------------- |  | -----------------
| | /s/ Ilan Ben-Dov |  | /s/ Shahar Landau
| |                  |  |                  
| | Ilan Ben-Dov     |  | Shahar Landau    
| | Director         |  | Director         

Approval
date of financial statements: March 25, 2008

3

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N T  O F  O P E R A T I O N S

|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|----------------------------------- |  |  | -- | ------------------------------- |  | ------- | - | ------- | ------- |  |  | ------- | 
|                                    |  |  |    | For the year ended December 31  | 
|                                    |  |  |    |                                 | 
|                                    |  |  |    | 2 0 0 7                         |  | 2 0 0 6 |   | 2 0 0 5 |        
|                                    |  |  |    |                                 |  |         |   |         |        
|                                    |  |  |    | R e p o r t e d  N I S  , 0 0 0 | 
|                                    |  |  |    |                                 | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Revenue from sales and services     |  |  | 16 |                                 |  | 409,890 |   |         | 463,397 |  |  | 637,078 | 
|Cost of sales and services          |  |  | 17 |                                 |  | 339,260 |   |         | 367,976 |  |  | 494,596 | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Gross profit                        |  |  |    |                                 |  | 70,630  |   |         | 95,421  |  |  | 142,482 | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Selling expenses                    |  |  | 18 |                                 |  | 15,587  |   |         | 20,563  |  |  | 24,101  | 
|General and administrative expenses |  |  | 19 |                                 |  | 25,985  |   |         | 30,008  |  |  | 37,365  | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|                                    |  |  |    |                                 |  | 41,572  |   |         | 50,571  |  |  | 61,466  | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Operating income before financing   |  |  |    |                                 |  | 29,058  |   |         | 44,850  |  |  | 81,016  | 
|Financing income, net               |  |  | 20 |                                 |  | 1,651   |   |         | 371     |  |  | 35,317  | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Income before other expenses        |  |  |    |                                 |  | 30,709  |   |         | 45,221  |  |  | 116,333 | 
|Capital gain (loss), net            |  |  |    |                                 |  | (1      | ) |         | 111     |  |  | 90      | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Income before taxes on income       |  |  |    |                                 |  | 30,708  |   |         | 45,332  |  |  | 116,423 | 
|Taxes on income                     |  |  | 21 |                                 |  | 7,788   |   |         | 14,512  |  |  | 27,076  | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 
|Net income                          |  |  |    |                                 |  | 22,920  |   |         | 30,820  |  |  | 89,347  | 
|                                    |  |  |    |                                 |  |         |   |         |         |  |  |         | 

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

4

---

---

SUNY TELECOM (1994) LTD.Statement of Changes in Shareholders Equity

|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|-------------------------------------------------- |  | ------------------------------- | - | --------------- |  | ----------------- |  | ----- | -------- | - |  | -------- | -
|                                                   |  | Share capital                   |   | Capital reserve |  | Retained earnings |  | Total |         
|                                                   |  |                                 |   |                 |  |                   |  |       |         
|                                                   |  | R e p o r t e d  N I S  , 0 0 0 |  
|                                                   |  |                                 |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of January 1,
  2005                    |  | (*)                             | 1 |                 |  |                  |  |       | 148,058  |   |  | 148,059  |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year
  ended December 31, 2005: |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Cash dividend distribution, net                    |  |                                 |  |                 |  |                  |  |       | (150,000 | ) |  | (150,000 | )
|Income for the year                                |  |                                 |  |                 |  |                  |  |       | 89,347   |   |  | 89,347   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December
  31, 2005                  |  | (*)                             | 1 |                 |  |                  |  |       | 87,405   |   |  | 87,406   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year ended December 31, 2006:   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Cost of share-based payment                        |  |                                 |  |                 |  | 315               |  |       |         |   |  | 315      |  
|Cash dividend distribution, net                    |  |                                 |  |                 |  |                  |  |       | (25,000  | ) |  | (25,000  | )
|Income for the year                                |  |                                 |  |                 |  |                  |  |       | 30,820   |   |  | 30,820   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December
  31, 2006                  |  | (*)                             | 1 |                 |  | 315               |  |       | 93,225   |   |  | 93,541   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year ended December 31, 2007:   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Cost of share-based payment                        |  |                                 |  |                 |  | 225               |  |       |         |   |  | 225      |  
|Cash dividend distribution, net                    |  |                                 |  |                 |  |                  |  |       | (18,000  | ) |  | (18,000  | )
|Income for the year                                |  |                                 |  |                 |  |                  |  |       | 22,920   |   |  | 22,920   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December
  31, 2007                  |  | (*)                             | 1 |                 |  | 540               |  |       | 98,145   |   |  | 98,686   |  
|                                                   |  |                                 |   |                 |  |                   |  |       |          |   |  |          |  

(*)
Rounded to the nearest NIS 1 thousands.

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

5

---

---

SUNY TELECOM (1994) LTD.S T A T E M E N T  O F  C A S H  F L O W S

|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------- |  | ------- | - |  | -------- | -
|                                                                                |  | For the year ended December 31  |        
|                                                                                |  |                                 |        
|                                                                                |  | 2 0 0 7                         |         | 2 0 0 6 |  | 2 0 0 5 |  
|                                                                                |  |                                 |         |         |  |         |  
|                                                                                |  | R e p o r t e d  N I S  , 0 0 0 |        
|                                                                                |  |                                 |        
|                                                                                |  |                                 |        
|Cash flows  operating activities                                               |  |                                 |         |         |  |         |   |  |          |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Income for the  year                                                            |  |                                 | 22,920  |         |  | 30,820  |   |  | 89,347   |  
|Adjustments to present cash flows from
  operating activities (see Appendix  A) |  |                                 | 19,446  |         |  | (31,752 | ) |  | 41,100   |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Net cash provided by (used in) operating
  activities                           |  |                                 | 42,366  |         |  | (932    | ) |  | 130,447  |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Cash flows  investing activities                                               |  |                                 |         |         |  |         |   |  |          |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Sale of marketable securities, net                                              |  |                                 | 2,493   |         |  |        |   |  | 13,624   |  
|Deposit in severance pay fund, net                                              |  |                                 |        |         |  | (719    | ) |  | (191     | )
|Realization of long-term deposits, net                                          |  |                                 | 70      |         |  | 199     |   |  | (111     | )
|Purchase of fixed assets                                                        |  |                                 | (94     | )       |  | (107    | ) |  | (531     | )
|Repayment of supplier credit for fixed
  assets                                 |  |                                 | (16     | )       |  | (5      | ) |  | (16      | )
|Proceeds from sale of fixed assets                                              |  |                                 |        |         |  | 111     |   |  | 101      |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Net cash provided by (used in) investing
  activities                           |  |                                 | 2,453   |         |  | (521    | ) |  | 12,876   |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Cash flows  financing activities                                               |  |                                 |         |         |  |         |   |  |          |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Receipt (repayment) of short-term credit,
  net                                 |  |                                 | (16,608 | )       |  | 16,153  |   |  | 386      |  
|Cash dividend distribution                                                      |  |                                 | (18,000 | )       |  | (25,000 | ) |  | (150,000 | )
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Net cash provided by (used in) financing
  activities                           |  |                                 | (34,608 | )       |  | (8,847  | ) |  | (149,614 | )
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Increase (decrease) in cash and cash
  equivalents                              |  |                                 | 10,211  |         |  | (10,300 | ) |  | (6,291   | )
|Cash and cash equivalents balance 
  beginning of year                         |  |                                 | 2,576   |         |  | 12,876  |   |  | 19,167   |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  
|Cash and cash equivalents balance  end of
  year                               |  |                                 | 12,787  |         |  | 2,576   |   |  | 12,876   |  
|                                                                                |  |                                 |         |         |  |         |   |  |          |  

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

6

---

---

SUNY TELECOM (1994) LTD.A P P E N D I C E S  T O  T H E  S T A T E M E N T  OF  C A S H  F L O W S

A. Adjustments required to present the cash flows from
operating activities

|                                                            |  |                                 |         |         |  |         |   |  |         |  
|----------------------------------------------------------- |  | ------------------------------- | ------- | ------- |  | ------- | - |  | ------- | -
|                                                            |  | For the year ended December 31  |        
|                                                            |  |                                 |        
|                                                            |  | 2 0 0 7                         |         | 2 0 0 6 |  | 2 0 0 5 |  
|                                                            |  |                                 |         |         |  |         |  
|                                                            |  | R e p o r t e d  N I S  , 0 0 0 |        
|                                                            |  |                                 |        
|                                                            |  |                                 |         |         |  |         |   |  |         |  
|Expenses (revenues) not
  involving cash flows:             |  |                                 |         |         |  |         |   |  |         |  
|Depreciation and amortization                               |  |                                 | 362     |         |  | 540     |   |  | 773     |  
|Loss (gain)
from revaluation of marketable securities, net  |  |                                 | 332     |         |  | (434    | ) |  | (993    | )
|Decrease in accrued severance pay, net                      |  |                                 | (319    | )       |  |        |   |  |        |  
|Increase in deferred taxes                                  |  |                                 | (61     | )       |  | (42     | ) |  | 52      |  
|Capital loss (gain), net                                    |  |                                 | 1       |         |  | (111    | ) |  | (90     | )
|Cost of share-based payment                                 |  |                                 | 225     |         |  | 315     |   |  |        |  
|                                                            |  |                                 |         |         |  |         |   |  |         |  
|Changes in asset and
  liability items:                     |  |                                 |         |         |  |         |   |  |         |  
|Decrease (increase) in trade receivables                    |  |                                 | (11,654 | )       |  | 41,397  |   |  | (31,486 | )
|Decrease in other receivables and debit
  balances          |  |                                 | 3,903   |         |  | 10,536  |   |  | (8,359  | )
|Decrease (increase) in inventory                            |  |                                 | (1,874  | )       |  | 41,409  |   |  | (47,558 | )
|Increase (decrease) in trade payables                       |  |                                 | 18,367  |         |  | (29,779 | ) |  | 37,832  |  
|Increase (decrease) in other payables and
  credit balances |  |                                 | 10,164  |         |  | (95,583 | ) |  | 90,929  |  
|                                                            |  |                                 |         |         |  |         |   |  |         |  
|                                                            |  |                                 | 19,446  |         |  | (31,752 | ) |  | 41,100  |  
|                                                            |  |                                 |         |         |  |         |   |  |         |  

B. Non-cash transactions:

During the report year,
other assets were purchased with supplier credit totaling
NIS 24 thousand (2006  fixed assets with credit of NIS 16 thousand; 2005  fixed assets with credit of NIS
5 thousand).

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

7

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---

SUNY TELECOM (1994) LTD.NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007

|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                          | 
|------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Note 1 | General                                                                                                                                     
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                          | 
|        | A.                                                                                                                                           | The Company-                        | Suny
  Telecom (1994) Ltd., wholly-owned and controlled by Suny Electronics Ltd., a
  company whose shares are traded on the Tel Aviv Stock Exchange (the parent
  company), is engaged in the importing and marketing of cellular telephone
  handsets and cellular telephone accessories manufactured by Samsung
  Electronics Co. Ltd. (Samsung), and in providing service for these instruments.
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        | B.                                                                                                                                           | Related party -                     | As
  defined in Opinion No. 29 of the Institute of Certified Public Accountants in
  Israel, including a related party as defined in the Israeli Securities Regulations
  (Preparation of Annual Financial Statements), 1993.                                                                                                                                                                           
|        |                                                                                                                                             
|Note 2 | Significant accounting policies                                                                                                             
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                          | 
|        | The
  significant accounting policies applied in preparation of the financial
  statements, in a manner consistent with the prior year, are:
|        |                                                                                                                                              |                                    
|        | A.                                                                                                                                           | Financial statement reporting basis
|        |                                                                                                                                              |                                    
|        |                                                                                                                                              | 1.                                  | Until
  December 31, 2003. the Company prepared its financial statements on the basis
  of nominal cost adjusted for changes in the Consumer Price Index  in Israel. The
  adjusted amounts that were included in the Companys financial statements as
  of December 31, 2003 (the transition date) served as the starting point for
  financial reporting from this date henceforth.                
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              |                                     | Condensed
  nominal financial statements of the Company, for tax purposes, are included
  in Note 22.                                                                                                                                                                                                                                                                                                   
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              | 2.                                  | Financial statements in reported amounts                                                                                                                                                                                                                                                                                                                                                                
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              |                                     | The
  reported amounts, which relate to periods after the transition date, are
  comprised as follows:                                                                                                                                                                                                                                                                                                  
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              |                                     | All
  amounts originating in the period after the transition date are included in
  the financial statements at nominal values.                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              |                                     | All
  amounts originating in the period before the transition date, including
  depreciation and amortization and changes in non-monetary items, are
  comprised of amounts adjusted only to the transition date, plus (or minus, as
  applicable) amounts in nominal values originating in changes after the
  transition date.                                                                        
|        |                                                                                                                                              |                                     |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                              | 3.                                  | The
  amounts according to which the non-monetary assets and liabilities are stated
  in these financial statements do not necessarily represent realization value
  or updated economic value, but rather the reported amounts (or adjusted
  amounts, as applicable) of those assets, on the relevant dates.                                                                                          

8

---

---

|        |                                         |                                                                                                                                                                                                                                                                                                |                                                                                                                                                             
|------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 | Significant accounting policies (cont.)
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | B.                                      | Cash and cash equivalents                                                                                                                                                                                                                                                                     
|        |                                         |                                                                                                                                                                                                                                                                                               
|        |                                         | Includes
  bank deposits with an original term to maturity of not more than three
  months.                                                                                                                                                                                                   
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | C.                                      | Marketable securities                                                                                                                                                                                                                                                                         
|        |                                         |                                                                                                                                                                                                                                                                                               
|        |                                         | Marketable
  securities that constitute a current investment are stated at their market
  value. Changes in the value of these securities are included in the statement
  of operations, in the financing item.                                                                               
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | D.                                      | Provision for doubtful debts                                                                                                                                                                                                                                                                  
|        |                                         |                                                                                                                                                                                                                                                                                               
|        |                                         | The
  provision for doubtful debts is calculated specifically for debts, the
  collection of which is doubtful in the opinion of the Companys management.                                                                                                                                    
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | E.                                      | Inventory                                                                                                                                                                                                                                                                                     
|        |                                         |                                                                                                                                                                                                                                                                                               
|        |                                         | Inventory
  is valued at the lower of cost, on the basis of first in  first out, or
  market value.                                                                                                                                                                                        
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | F.                                      | Investment in shares of parent company                                                                                                                                                                                                                                                        
|        |                                         |                                                                                                                                                                                                                                                                                               
|        |                                         | In
  accordance with the provisions of Opinion 57 of the Institute of Certified
  Public Accountants in Israel, the Companys investment in the shares of a
  related party (the parent company) is deemed a reciprocal holding of
  securities. Therefore, this investment is stated at cost.
|        |                                         |                                                                                                                                                                                                                                                                                               
|        | G.                                      | Fixed assets                                                                                                                                                                                                                                                                                  
|        |                                         |                                                                                                                                                                                                                                                                                                |                                                                                                                                                             
|        |                                         | 1.                                                                                                                                                                                                                                                                                             | Assets
  are stated at cost. Improvements and renovations are capitalized to the cost
  of the assets, whereas current maintenance and repairs are expensed.
|        |                                         |                                                                                                                                                                                                                                                                                                |                                                                                                                                                             
|        |                                         | 2.                                                                                                                                                                                                                                                                                             | Depreciation
  is calculated by the straight-line method, over the estimated useful life of
  the assets.                                                   
|        |                                         |                                                                                                                                                                                                                                                                                                |                                                                                                                                                             
|        |                                         |                                                                                                                                                                                                                                                                                                | The
  annual depreciation rates are:                                                                                                                        

|                                     |  |  |      | 
|------------------------------------ |  |  | ---- | 
|                                     |  |  | %    | 
|                                     |  |  |      | 
|Instruments
  and equipment          |  |  | 7-25 | 
|Office
  furniture and equipment     |  |  | 7-15 | 
|Computers
  and peripheral equipment |  |  | 33   | 
|Vehicles                             |  |  | 15   | 
|Leasehold
  improvements             |  |  | 7    | 

| |  |    |                                                                                                                                                                                                                                                                                                          
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | The residual value and the useful life of each asset are examined, at least at
          the end of every year. The changes are accounted for prospectively, as a change
          in accounting estimate. The need for recording an impairment provision is also
          examined (see Par. O. below).

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | H. | Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Computer
  software and licenses are stated at cost. The assets are amortized at an
  annual rate of 33%, according to the expected period of economic benefit.                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | I. | Deferred taxes                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Deferred
  taxes are calculated for temporary differences between the timing of amounts
  included in the adjusted financial statements and the amounts taken into
  account for tax purposes. Deferred tax balances are calculated according to
  the tax rate expected to be in effect when these taxes flow through to the
  statement of operations, based on information available at the time the
  financial statements are prepared.

9

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---

|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Note 2 | Significant accounting policies (cont.)
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|        | J.                                      | Share-based payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | The
cost of employee benefits settled in capital instruments, such as shares or options for
shares of the Company and/or the parent company, is measured according to the fair value
of the financial instruments on the grant date. Additional expense will be charged if a
change will be made to the terms of the arrangement, which increases its total fair value.
The cost is charged to the Companys statement of operations concurrent with a
corresponding increase in its shareholders equity, over the period in which the
conditions of the service are fulfilled, a period ending on the date the employees are
eligible for compensation (vesting period).
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | K.                                      | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Revenues
from product sales are included when the products are supplied, the date that the
significant risks and rewards deriving from ownership are transferred to the buyer; the
Company does not retain any ongoing managerial involvement that characterizes ownership
and does not retain effective control of the goods sold; the amount of revenues and costs
that were generated or could be generated by the transaction may be reliably measured, and
the economic benefits deriving from the transaction are expected to flow to the Company.                                                                                                                  
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Revenues
from service fees are included over the service contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | L.                                      | Product warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | The
  estimated warranty expenses are expensed during the period in which the sales
  revenue from these products was recorded. The average warranty period in
  respect of the products is about 12 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | M.                                      | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Within
  the framework of financial statement preparation, in conformity with
  generally accepted accounting principles, the Companys management is
  required to use estimates and to make assessments and assumptions that impact
  the reported data relating to the assets and liabilities and to contingent
  assets and liabilities as of the date of the financial statements, and on the
  revenue and expense data during the reported periods. The actual results
  could differ from these estimates and assessments.                                                                                                                                        
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | N.                                      | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | The
  Companys financial instruments are comprised of non-derivative assets and
  liabilities, which mainly include working capital items.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Due
  to their nature, the fair value of the financial instruments included in
  working capital is generally the same or approximate their carrying value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | O.                                      | Impairment of assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Periodically, the Company evaluates
the need to record an impairment provision, in order to assure that its fixed assets and
other assets. are not stated at an amount exceeding their recoverable amount,
which is the higher of the net sales price and the present value of the estimated future
cash flows expected to derive from the use and realization of the asset. A recognized
impairment loss will be reversed only when changes have occurred in the estimates used to
determine the assets recoverable amount.                                                                                                                                           
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | P.                                      | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                         | Certain
  items included in the comparative figures for prior periods in the financial
  statements were reclassified, in order to faithfully reflect the
  classification of those items in the current financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                            

10

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---

|        |                                         |                                               |                                                                                                                                                                                                                                                                                   
|------- | --------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 | Significant accounting policies (cont.)
|        |                                        
|        | Q.                                      | Linked balances and foreign currency balances
|        |                                         |                                              
|        |                                         | 1.                                            | Balances
  denominated in or linked to foreign currency are included in the financial
  statements at the representative exchange rates. Balances linked to the
  Consumer Price Index (CPI) are included on the basis of the relevant CPI
  for each linked asset or liability.
|        |                                         |                                               |                                                                                                                                                                                                                                                                                   
|        |                                         | 2.                                            | Presented
  below are data on the CPI and representative exchange rate of the U.S.
  dollar:                                                                                                                                                                                      

|                               |  |                                 |   |                         |      |   | 
|------------------------------ |  | ------------------------------- | - | ----------------------- | ---- | - | 
|                               |  | Consumer Price Index (*) Points |   | Exchange rate of $1 NIS |     
|                               |  |                                 |   |                         |     
|                               |  |                                 |   |                         |      |   | 
|In month at end of period      |  |                                 |   |                         |      |   | 
|December 2007                  |  | 113.6                           |   |                         | 3.85 |   | 
|December 2006                  |  | 109.9                           |   |                         | 4.23 |   | 
|December 2005                  |  | 110.0                           |   |                         | 4.60 |   | 
|                               |  |                                 |   |                         |      |   | 
|                               |  | %                               |   | %                       |     
|                               |  |                                 |   |                         |     
|                              
|Rate of change during the
year |  |                                 |   |                         |     
|Year ended December 31, 2007   |  | 3.4                             |   |                         | (9.0 | ) | 
|Year ended December 31, 2006   |  | (0.1                            | ) |                         | (8.1 | ) | 
|Year ended December 31, 2005   |  | 2.4                             |   |                         | 6.8  |   | 

| |     |                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------
| | (*) | According
  to CPI for month ended on balance sheet date, at the average basis of
  2000=100 points.

| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | R. | Initial application of Accounting Standards
| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 1.                                          | Beginning January 1, 2007, the Company has applied Accounting Standard No. 26
           Inventory (the Standard), of the Israel Accounting Standards
          Board (ASB), which provides the financial statement accounting
          treatment and measurement of inventory.                                                                                                                                                                                                                      
| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                             | The
initial application of the Standard did not have a material effect on the financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 2.                                          | Beginning
  January 1, 2007, the Company has applied Accounting Standard No.
  27 of the ASB  Fixed Assets, and No. 28  Amendment of Transitional
  Provisions of Accounting Standard 27 (the Standards), which provide the
  accounting treatment of fixed assets required in the financial statements.                                                                                                                                                                                               
| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                             | In
  view of the Companys decision to apply the cost model, the initial
  application of the Standard did not have a material effect on the financial
  statements.                                                                                                                                                                                                                                                                                                                                       
| |    |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | 3.                                          | Beginning
  January 1, 2007, the Company has applied Accounting Standard  No.
  30 of ASB  Intangible Assets, which was published in March 2007 (the
  Standard). The Standard is based on International Accounting Standard No.
  38, which provides the accounting treatment, recognition and measurement and
  disclosure requirements related to intangible assets that are not dealt with
  in another Standard. With its publication, Accounting Standard No. 20
  (Amended) of ASB was cancelled.

11

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---

|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | --------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 | Significant accounting policies (cont.)
|        |                                        
|        | S.                                      | Disclosure of the effect of new Accounting Standard in the
  period before application                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         | In
  July 2006, Accounting Standard No. 29 of the ASB (the Standard) was
  published regarding the adoption of International Financial Reporting
  Standards (IFRS Standards) in Israel.                                                                                                                                                                                                                                                                                                                                    
|       
|        |                                        
|        |                                         | IFRS
  Standards are standards and interpretations that were adopted by the
  International Accounting Standards Board, and they include international
  financial reporting standards  (IFRS), international accounting standards (IAS), and
  interpretations prescribed by the International Financial Reporting
  Interpretations Committee (IFRIC) or the committee that preceded it for interpretation
  of international accounting standards (SIC).                                                                     
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         | The
  Standard allows the Company to adopt the said provisions in its financial
  statements. If the Company elects to apply IFRS Standards, it will have to
  provide financial statement disclosure, inter alia, of the adjustments to
  shareholders equity or income or losses that were reported in the past for
  reporting periods for which their comparative periods are included in the
  financial statements, as a result of the transition from the existing standards
  to reporting according to IFRS Standards.
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         | The
  application of IFRS Standards could have a material effect on the Companys
  assets and liabilities, and hence, also on the Companys financial position
  and operating results, as they will be reflected in its financial statements.
  Adoption of the Standards requires the Company to evaluate the differences
  between the IFRS Standards and the accounting standards now practiced in
  Israel  which requires considerable time and resources.                                                              
|        |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |                                         | The
  Company intends to change to reporting according to IFRS Standards during
  2008. The initial adoption of the IFRS Standards will be carried out while
  applying IFRS Standard 1  Initial Adoption of IFRS Standards.                                                                                                                                                                                                                                                                                                   

12

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---

|           |                          
|---------- | -------------------------
|Note 3    | Cash and cash equivalents

|                          |  |                                  |        |         |  |         |  |  |        | 
|------------------------- |  | -------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                          |  | As of December 31                |       
|                          |  |                                  |       
|                          |  | 2 0 0 7                          |        | 2 0 0 6 |  | 2 0 0 5 | 
|                          |  |                                  |        |         |  |         | 
|                          |  | R e p o r  t e d  N I S  , 0 0 0 |       
|                          |  |                                  |       
|                          |  |                                  |        |         |  |         |  |  |        | 
|Composition:              |  |                                  |        |         |  |         |  |  |        | 
|In Israeli currency       |  |                                  | 3,031  |         |  | 545     |  |  | 3,956  | 
|Linked to the U.S. dollar |  |                                  | 9,756  |         |  | 2,031   |  |  | 8,920  | 
|                          |  |                                  |        |         |  |         |  |  |        | 
|                          |  |                                  | 12,787 |         |  | 2,576   |  |  | 12,876 | 
|                          |  |                                  |        |         |  |         |  |  |        | 

|        |                      
|------- | ---------------------
|Note 4 | Marketable securities

|                                                |  |                                 |       |         |  |         |  |  |       | 
|----------------------------------------------- |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ----- | 
|                                                |  | As of December 31               |      
|                                                |  |                                 |      
|                                                |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|                                                |  |                                 |       |         |  |         | 
|                                                |  | R e p o r t e d  N I S  , 0 0 0 |      
|                                                |  |                                 |      
|                                                |  |                                 |      
|Composition:                                    |  |                                 |       |         |  |         |  |  |       | 
|Certificates
  of participation in mutual funds |  |                                 | 2,355 |         |  | 2,504   |  |  | 2,279 | 
|Non-marketable
  bonds                          |  |                                 |      |         |  | 2,676   |  |  | 2,467 | 
|                                                |  |                                 |       |         |  |         |  |  |       | 
|                                                |  |                                 | 2,355 |         |  | 5,180   |  |  | 4,746 | 
|                                                |  |                                 |       |         |  |         |  |  |       | 

|        |                  
|------- | -----------------
|Note 5 | Trade receivables

|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|----------------------------------------------------------------- |  | ------------------------------- | ------- | ------- |  | ------- |  |  | ------- | 
|                                                                  |  | As of December 31               |        
|                                                                  |  |                                 |        
|                                                                  |  | 2 0 0 7                         |         | 2 0 0 6 |  | 2 0 0 5 | 
|                                                                  |  |                                 |         |         |  |         | 
|                                                                  |  | R e p o r t e d  N I S  , 0 0 0 |        
|                                                                  |  |                                 |        
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Composition:                                                      |  |                                 |         |         |  |         |  |  |         | 
|Open accounts                                                     |  |                                 | 146,016 |         |  | 133,440 |  |  | 175,121 | 
|Post-dated checks and
  credit card vouchers receivable           |  |                                 | 129     |         |  | 1,051   |  |  | 767     | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|                                                                  |  |                                 | 146,145 |         |  | 134,491 |  |  | 175,888 | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Includes major customers 
  partially linked to foreign currency |  |                                 |         |         |  |         |  |  |         | 
|Customer A                                                        |  |                                 | 109,612 |         |  | 82,714  |  |  | 64,853  | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Customer B                                                        |  |                                 | 17,074  |         |  | 36,073  |  |  | 41,080  | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Customer C                                                        |  |                                 | 19,037  |         |  | 14,309  |  |  | 50,844  | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Net of provision for
  doubtful debts of                          |  |                                 | 6       |         |  | 39      |  |  | 35      | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 
|Includes related parties                                          |  |                                 |        |         |  |        |  |  | 18,364  | 
|                                                                  |  |                                 |         |         |  |         |  |  |         | 

13

---

---

|        |                                     
|------- | ------------------------------------
|Note 6 | Other receivables and debit balances

|                        |  |                                 |       |         |  |         |  |  |        | 
|----------------------- |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ------ | 
|                        |  | As of December 31               |      
|                        |  |                                 |      
|                        |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|                        |  |                                 |       |         |  |         | 
|                        |  | R e p o r t e d  N I S  , 0 0 0 |      
|                        |  |                                 |      
|                        |  |                                 |       |         |  |         |  |  |        | 
|Composition:            |  |                                 |       |         |  |         |  |  |        | 
|Employees               |  |                                 | 689   |         |  | 566     |  |  | 752    | 
|Related parties         |  |                                 |      |         |  | 6,536   |  |  | 2,387  | 
|Government institutions |  |                                 | 3,385 |         |  | 927     |  |  | 15,620 | 
|Prepaid expenses        |  |                                 | 93    |         |  | 87      |  |  | 33     | 
|Income receivable       |  |                                 |      |         |  | 84      |  |  |       | 
|Advances to suppliers   |  |                                 | 239   |         |  | 109     |  |  | 53     | 
|Deferred taxes          |  |                                 | 174   |         |  | 113     |  |  | 71     | 
|                        |  |                                 |       |         |  |         |  |  |        | 
|                        |  |                                 | 4,580 |         |  | 8,422   |  |  | 18,916 | 
|                        |  |                                 |       |         |  |         |  |  |        | 

|        |                                       
|------- | --------------------------------------
|Note 7 | Investment in shares of parent company

|                                          |  |                                 |           |         |  |           |   |  |           |  
|----------------------------------------- |  | ------------------------------- | --------- | ------- |  | --------- | - |  | --------- | -
|                                          |  | As of December 31               |          
|                                          |  |                                 |          
|                                          |  | 2 0 0 7                         |           | 2 0 0 6 |  | 2 0 0 5   |  
|                                          |  |                                 |           |         |  |           |  
|                                          |  | R e p o r t e d  N I S  , 0 0 0 |          
|                                          |  |                                 |          
|                                          |  |                                 |          
|Composition:                              |  |                                 |           |         |  |           |   |  |           |  
|Cost                                      |  |                                 | 4,004     |         |  | 4,004     |   |  | 4,004     |  
|                                          |  |                                 |           |         |  |           |   |  |           |  
|Market value                              |  |                                 | 32,928    |         |  | 46,801    |   |  | 48,529    |  
|                                          |  |                                 |           |         |  |           |   |  |           |  
|Number of shares, NIS 0.25 par value each |  |                                 | 2,741,728 |         |  | 2,741,728 |   |  | 2,741,728 |  
|                                          |  |                                 |           |         |  |           |   |  |           |  
|Percentage of issued capital              |  |                                 | 8.39      | %       |  | 8.42      | % |  | 8.42      | %
|                                          |  |                                 |           |         |  |           |   |  |           |  

|        |                                                    
|------- | ---------------------------------------------------
|Note 8 | Funded liability in excess of accrued severance pay

|   |                                |  |                                 |       |         |  |         |  |  |       | 
|-- | ------------------------------ |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ----- | 
|   |                                |  | As of December 31               |      
|   |                                |  |                                 |      
|   |                                |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|   |                                |  |                                 |       |         |  |         | 
|   |                                |  | R e p o r t e d  N I S  , 0 0 0 |      
|   |                                |  |                                 |      
|   |                                |  |                                 |      
|A. | Composition:                   |  |                                 |       |         |  |         |  |  |       | 
|   | Funded liability               |  |                                 | 6,190 |         |  | 5,789   |  |  | 5,295 | 
|   | Net of  accrued severance pay |  |                                 | 4,333 |         |  | 4,251   |  |  | 4,476 | 
|   |                                |  |                                 |       |         |  |         |  |  |       | 
|   |                                |  |                                 | 1,857 |         |  | 1,538   |  |  | 819   | 
|   |                                |  |                                 |       |         |  |         |  |  |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | The
  Companys liabilities for the payment of accrued severance pay and retirement
  to its employees, calculated on the basis of their salary and their period of
  employment, are covered by premium payments for managers insurance and by
  the funded severance pay. The amounts accrued for the insurance policies were
  not included in the financial statements, since they are not under the
  Companys control and management.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | C. | The balance in the severance pay fund includes accrued earnings. A withdrawal
          from the severance pay fund is contingent on compliance with the provisions of
          the Severance Pay Law in Israel.                                                                                                                                                                                                                            

14

---

---

|        |             
|------- | ------------
|Note 9 | Fixed assets

Composition:

|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|-------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ |  | ---------------------------------- | ------- | -------- | ------- | ---------------------- | ------- | ----------------------- |  |  | -- | ----- |  | ----- | ----- |  | ----- | ----- |  | ----- | 
|                                                   |  | Instruments and equipment       |       | Furniture and office equipment |  | Computers and peripheral equipment |         | Vehicles |         | Leasehold Improvements |         | Total as of December 31 | 
|                                                   |  |                                 |       |                                |  |                                    |         |         
|                                                   |  |                                 |       |                                |  |                                    | 2 0 0 7 |          | 2 0 0 6 |                        | 2 0 0 5 |                        
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       | 
|                                                   |  | R e p o r t e d  N I S  , 0 0 0 |      
|                                                   |  |                                 |      
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|Cost (*)                                           |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|Balance  beginning of
  year                      |  |                                 | 6,110 |                                |  | 768                                |         |          | 2,000   |                        |         | 18                      |  |  | 13 |       |  | 8,909 |       |  | 9,194 |       |  | 9,367 | 
|Additions for year                                 |  |                                 | 28    |                                |  | 7                                  |         |          | 59      |                        |         |                        |  |  |   |       |  | 94    |       |  | 123   |       |  | 536   | 
|Disposals for year                                 |  |                                 | 2,069 |                                |  | 77                                 |         |          | 1,361   |                        |         | 18                      |  |  |   |       |  | 3,525 |       |  | 408   |       |  | 709   | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|                                                   |  |                                 | 4,069 |                                |  | 698                                |         |          | 698     |                        |         |                        |  |  | 13 |       |  | 5,478 |       |  | 8,909 |       |  | 9,194 | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|Accumulated depreciation                           |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|Balance  beginning of
  year                      |  |                                 | 5,526 |                                |  | 361                                |         |          | 1,990   |                        |         | 16                      |  |  | 4  |       |  | 7,897 |       |  | 7,765 |       |  | 7,690 | 
|Additions for year                                 |  |                                 | 294   |                                |  | 49                                 |         |          | 15      |                        |         | 1                       |  |  | 1  |       |  | 360   |       |  | 540   |       |  | 773   | 
|Disposals for year                                 |  |                                 | 2,069 |                                |  | 77                                 |         |          | 1,361   |                        |         | 17                      |  |  |   |       |  | 3,524 |       |  | 408   |       |  | 698   | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|                                                   |  |                                 | 3,751 |                                |  | 333                                |         |          | 644     |                        |         |                        |  |  | 5  |       |  | 4,733 |       |  | 7,897 |       |  | 7,765 | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|Net book value                                     |  |                                 | 318   |                                |  | 365                                |         |          | 54      |                        |         |                        |  |  | 8  |       |  | 745   |       |  | 1,012 |       |  | 1,429 | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 
|(*)
  Includes cost of fully depreciated assets of |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    | 3,747 |  |       | 6,300 |  |       | 6,371 | 
|                                                   |  |                                 |       |                                |  |                                    |         |          |         |                        |         |                         |  |  |    |       |  |       |       |  |       |       |  |       | 

|         |             
|-------- | ------------
|Note 10 | Other assets

|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|-- | --------------------------------- |  | ------------------------------- | -- | ------- |  | ------- |  |  | - | 
|   |                                   |  | As of December 31               |   
|   |                                   |  |                                 |   
|   |                                   |  | 2 0 0 7                         |    | 2 0 0 6 |  | 2 0 0 5 | 
|   |                                   |  |                                 |    |         |  |         | 
|   |                                   |  | R e p o r t e d  N I S  , 0 0 0 |   
|   |                                   |  |                                 |   
|A. | Composition:                      |  |                                 |    |         |  |         |  |  |   | 
|   | Cost
  of intangible assets       |  |                                 | 24 |         |  |        |  |  |  | 
|   | Disposals                         |  |                                 |   |         |  |        |  |  |  | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|   |                                   |  |                                 | 24 |         |  |        |  |  |  | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|   | Less
   accumulated amortization |  |                                 | 2  |         |  |        |  |  |  | 
|   | Disposals                         |  |                                 |   |         |  |        |  |  |  | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|   |                                   |  |                                 | 2  |         |  |        |  |  |  | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 
|   |                                   |  |                                 | 22 |         |  |        |  |  |  | 
|   |                                   |  |                                 |    |         |  |         |  |  |   | 

15

---

---

|         |                                                                                         
|-------- | ----------------------------------------------------------------------------------------
|Note 11 | Short-term credit                                                                       
|         |                                                                                         
|         | 2006
  - includes short-term bank credit bearing annual interest at the rate of
  5.75%.
|         |                                                                                         
|Note 12 | Trade payables                                                                          

|                                   |  |                                 |        |         |  |         |  |  |        | 
|---------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                                   |  | As of December 31               |       
|                                   |  |                                 |       
|                                   |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                   |  |                                 |        |         |  |         | 
|                                   |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                   |  |                                 |       
|                                   |  |                                 |        |         |  |         |  |  |        | 
|Composition:                       |  |                                 |        |         |  |         |  |  |        | 
|Open
  debts                       |  |                                 | 79,045 |         |  | 60,426  |  |  | 89,938 | 
|Post-dated
  checks payable        |  |                                 | 450    |         |  | 694     |  |  | 950    | 
|                                   |  |                                 |        |         |  |         |  |  |        | 
|                                   |  |                                 | 79,495 |         |  | 61,120  |  |  | 90,888 | 
|                                   |  |                                 |        |         |  |         |  |  |        | 
|Includes
  major supplier overseas |  |                                 | 75,800 |         |  | 55,615  |  |  | 87,873 | 
|                                   |  |                                 |        |         |  |         |  |  |        | 

|         |                                   
|-------- | ----------------------------------
|Note 13 | Other payables and credit balances

|                                 |  |                                 |        |         |  |         |  |  |         | 
|-------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------- | 
|                                 |  | As of December 31               |       
|                                 |  |                                 |       
|                                 |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                 |  |                                 |        |         |  |         | 
|                                 |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                 |  |                                 |       
|Composition:                     |  |                                 |        |         |  |         | 
|Employees
  and salary-related   |  |                                 | 2,604  |         |  | 2,852   |  |  | 3,162   | 
|Government
  institutions        |  |                                 | 4,840  |         |  | 2,552   |  |  | 7,808   | 
|Related
  parties                |  |                                 | 10,894 |         |  |        |  |  | 90,318  | 
|Provision
  for product warranty |  |                                 | 2,862  |         |  | 3,267   |  |  | 3,240   | 
|Accrued
  expenses and sundry    |  |                                 | 1,296  |         |  | 3,661   |  |  | 3,387   | 
|                                 |  |                                 |        |         |  |         |  |  |         | 
|                                 |  |                                 | 22,496 |         |  | 12,332  |  |  | 107,915 | 
|                                 |  |                                 |        |         |  |         |  |  |         | 

|         |                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Note 14 | Commitments                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                   
|A.       | Agreements with related parties                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | Agreements
  were signed between the Company and related parties which arrange the
  business relations between them, the way transactions are effected and their
  financing. Company management believes that the allocation of expenses
  between the related parties, pursuant to these agreements, is proper.
|         |                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|B.       | Exclusive distribution agreement for marketing Samsung products:                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         | 1.                                                                                                                                                                                                                                                                                                                 | In
  July 1998, the Company entered into an agreement with Samsung (the Samsung
  Agreement), under which it was appointed the exclusive distributor in Israel
  and areas covered by Israeli operators, of cellular telephones using the CDMA
  technology manufactured by Samsung, intended for customers of Pelephone
  Communications Ltd. (Pelephone). The Samsung agreement is extended from
  time to time, for additional periods.
|         |                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
|         |                                                                                                                                                                                                                                                                                                                    | In
  December 2007, the Samsung Agreement was extended for an additional two
  years, beginning January 2008.                                                                                                                                                                                                                                                                                                                                 

16

---

---

|         |                         |                                                                                                                                                                                                                                                                                                 
|-------- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 14 | Commitments (continued)
|         |                         |                                                                                                                                                                                                                                                                                                 
|         | 2.                      | In
  February 2001, the Company entered into additional agreements with Samsung
  (the Additional Samsung Agreements), under which it was appointed the
  exclusive distributor in Israel of cellular telephones using the GSM and TDMA
  technologies manufactured by Samsung.               
|         |                         |                                                                                                                                                                                                                                                                                                 
|         |                         | In
  October 2002, an agreement was signed extending the Companys appointment as
  exclusive distributor of the cellular communication products using the GSM
  and TDMA technologies for a period of two years, until September 2004,
  subject to the conditions stipulated in the agreement.
|         |                         |                                                                                                                                                                                                                                                                                                 
|         |                         | In
  September 2004, an agreement was signed extending the Companys appointment
  as exclusive distributor of cellular communication products using the GSM
  technology for a two-year period, until September 2006, subject to the
  conditions stipulated in the agreement.                 
|         |                         |                                                                                                                                                                                                                                                                                                 
|         |                         | In
  October 2006, the effective period of the agreement was extended for an
  additional year, commencing September 1, 2006.                                                                                                                                                                   
|         |                         |                                                                                                                                                                                                                                                                                                 
|         |                         | In
  October 2007, the effective period of the agreement was extended for an
  additional year, commencing September 1, 2007.                                                                                                                                                                   
|         |                         |                                                                                                                                                                                                                                                                                                 
|         | 3.                      | The
  Company markets the cellular telephones using different technologies for
  Pelephone, Cellcom Israel Ltd. and Partner Communications Ltd., which operate
  cellular communication networks in Israel.                                                                                     
|         |                         |                                                                                                                                                                                                                                                                                                 
|         | 4.                      | Pursuant
  to the Samsung Agreement and the Additional Samsung Agreements, the Company
  has committed to provide repair services for Samsung-manufactured handsets
  that it sells, and to be responsible for making such repairs.                                                             
|        
|Note 15 | Share capital          

|                                                                                            |  |                                          |        |                            |     |     | 
|------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | -------------------------- | --- | --- | 
|                                                                                            |  | As of December 31, 2007, 2006
  and 2005 |       
|                                                                                            |  |                                          |       
|                                                                                            |  | Authorized capital                       |        | Issued and paid-up capital |    
|                                                                                            |  |                                          |        |                            |    
|                                                                                            |  | Number of shares                         |        | N I S                      |    
|                                                                                            |  |                                          |        |                            |    
|                                                                                           
|Ordinary
  shares, NIS 1 par value each                                                     |  |                                          | 23,800 |                            | (*) | 100 | 
|                                                                                            |  |                                          |        |                            |     |     | 
|(*)
  Share capital is stated in the balance sheet rounded to the nearest NIS 1
  thousand. |  |                                          |        |                            |     |     | 

|         |                                 
|-------- | --------------------------------
|Note 16 | Revenues from sales and services

|                               |  |                                 |         |         |  |         |  |  |         | 
|------------------------------ |  | ------------------------------- | ------- | ------- |  | ------- |  |  | ------- | 
|                               |  | For the year ended December 31  |        
|                               |  |                                 |        
|                               |  | 2 0 0 7                         |         | 2 0 0 6 |  | 2 0 0 5 | 
|                               |  |                                 |         |         |  |         | 
|                               |  | R e p o r t e d  N I S  , 0 0 0 |        
|                               |  |                                 |        
|                               |  |                                 |         |         |  |         |  |  |         | 
|Includes:                      |  |                                 |         |         |  |         |  |  |         | 
|Revenues from major customers: |  |                                 |         |         |  |         |  |  |         | 
|Customer A                     |  |                                 | 211,475 |         |  | 258,083 |  |  | 249,880 | 
|                               |  |                                 |         |         |  |         |  |  |         | 
|Customer B                     |  |                                 | 102,963 |         |  | 104,118 |  |  | 172,461 | 
|                               |  |                                 |         |         |  |         |  |  |         | 
|Customer C                     |  |                                 | 67,847  |         |  | 69,444  |  |  | 160,016 | 
|                               |  |                                 |         |         |  |         |  |  |         | 
|Revenues from related company  |  |                                 | 23,257  |         |  | 24,924  |  |  | 36,505  | 
|                               |  |                                 |         |         |  |         |  |  |         | 

17

---

---

|         |              
|-------- | -------------
|Note 17 | Cost of sales

|                                                  |  |                                 |         |         |  |         |  |  |         |  
|------------------------------------------------- |  | ------------------------------- | ------- | ------- |  | ------- |  |  | ------- | -
|                                                  |  | For the year ended December 31  |        
|                                                  |  |                                 |        
|                                                  |  | 2 0 0 7                         |         | 2 0 0 6 |  | 2 0 0 5 | 
|                                                  |  |                                 |         |         |  |         | 
|                                                  |  | R e p o r t e d  N I S  , 0 0 0 |        
|                                                  |  |                                 |        
|                                                 
|Composition:                                      |  |                                 |         |         |  |         |  |  |         |  
|Purchases (1)                                     |  |                                 | 322,231 |         |  | 308,867 |  |  | 523,985 |  
|Salaries and related expenses                     |  |                                 | 14,085  |         |  | 14,617  |  |  | 15,471  |  
|Increase (decrease) in warranty provision         |  |                                 | (404    | )       |  | 26      |  |  | (1,203  | )
|Other expenses (2)                                |  |                                 | 4,910   |         |  | 2,560   |  |  | 3,193   |  
|Add (deduct)  decrease (increase) in
  inventory |  |                                 | (1,874  | )       |  | 41,409  |  |  | (47,558 | )
|                                                  |  |                                 |         |         |  |         |  |  |         |  
|                                                  |  |                                 | 338,948 |         |  | 367,479 |  |  | 493,888 |  
|Depreciation, amortization and disposals          |  |                                 | 312     |         |  | 497     |  |  | 708     |  
|                                                  |  |                                 |         |         |  |         |  |  |         |  
|                                                  |  |                                 | 339,260 |         |  | 367,976 |  |  | 494,596 |  
|                                                  |  |                                 |         |         |  |         |  |  |         |  
|(1)
  Includes purchases from major supplier      |  |                                 | 283,247 |         |  | 268,057 |  |  | 457,486 |  
|                                                  |  |                                 |         |         |  |         |  |  |         |  
|(2)
  Includes rental fees to related party       |  |                                 | 1,620   |         |  | 1,620   |  |  | 1,627   |  
|                                                  |  |                                 |         |         |  |         |  |  |         |  

|         |                 
|-------- | ----------------
|Note 18 | Selling expenses

|                                              |  |                                 |        |         |  |         |  |  |        | 
|--------------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                                              |  | For the year ended December 31  |       
|                                              |  |                                 |       
|                                              |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                              |  |                                 |        |         |  |         | 
|                                              |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                              |  |                                 |       
|                                              |  |                                 |        |         |  |         |  |  |        | 
|Composition:                                  |  |                                 |        |         |  |         |  |  |        | 
|Salaries and related  expenses                |  |                                 | 5,185  |         |  | 5,953   |  |  | 6,302  | 
|Advertising, marketing and commissions,
  net |  |                                 | 7,848  |         |  | 11,295  |  |  | 14,889 | 
|Professional fees                             |  |                                 | 1,145  |         |  | 1,334   |  |  | 1,131  | 
|Depreciation, amortization and disposals      |  |                                 | 50     |         |  | 45      |  |  | 64     | 
|Other                                         |  |                                 | 1,359  |         |  | 1,936   |  |  | 1,715  | 
|                                              |  |                                 |        |         |  |         |  |  |        | 
|                                              |  |                                 | 15,587 |         |  | 20,563  |  |  | 24,101 | 
|                                              |  |                                 |        |         |  |         |  |  |        | 

|         |                                    
|-------- | -----------------------------------
|Note 19 | General and administrative expenses

|                                   |  |                                 |        |         |  |         |  |  |        | 
|---------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                                   |  | For the year ended December 31  |       
|                                   |  |                                 |       
|                                   |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                   |  |                                 |        |         |  |         | 
|                                   |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                   |  |                                 |       
|                                   |  |                                 |       
|Composition:                       |  |                                 |        |         |  |         |  |  |        | 
|Salaries
  and related  expenses   |  |                                 | 641    |         |  | 901     |  |  | 2,169  | 
|Office
  maintenance               |  |                                 | 416    |         |  | 433     |  |  | 495    | 
|Management
  fees to related party |  |                                 | 22,545 |         |  | 25,487  |  |  | 31,823 | 
|Other                              |  |                                 | 2,383  |         |  | 3,187   |  |  | 2,878  | 
|                                   |  |                                 |        |         |  |         |  |  |        | 
|                                   |  |                                 | 25,985 |         |  | 30,008  |  |  | 37,365 | 
|                                   |  |                                 |        |         |  |         |  |  |        | 

18

---

---

|         |                                                                                                                                      
|-------- | -------------------------------------------------------------------------------------------------------------------------------------
|Note 20 | Financing income, net                                                                                                                
|         |                                                                                                                                      
|         | Includes
  dividend received from the parent company of NIS 1,705 thousand (2006  NIS
  1,883 thousand, 2005  NIS 32,556 thousand).

|           |                
|---------- | ---------------
|Note 21   | Taxes on income

|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|-- | ------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------- |  | ------- | - |  | ------- | -
|   |                                                                                 |  | For the year ended December 31   |       
|   |                                                                                 |  |                                  |       
|   |                                                                                 |  | 2 0 0 7                          |        | 2 0 0 6 |  | 2 0 0 5 |  
|   |                                                                                 |  |                                  |        |         |  |         |  
|   |                                                                                 |  | R e p o r t e d  N I S  , 0 0 0  |       
|   |                                                                                 |  |                                  |       
|   |                                                                                 |  |                                  |       
|A. | Composition:                                                                    |  |                                  |        |         |  |         |   |  |         |  
|   | Current
  taxes  provision                                                     |  |                                  | 7,849  |         |  | 14,554  |   |  | 27,024  |  
|   | Less
   deferred taxes                                                         |  |                                  | (61    | )       |  | (42     | ) |  | 52      |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  |                                  | 7,788  |         |  | 14,512  |   |  | 27,076  |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|B. | Reconciliation of theoretical tax to actual tax expenses:                       |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  | For the year ended December 31   |       
|   |                                                                                 |  |                                  |       
|   |                                                                                 |  | 2 0 0 7                          |        | 2 0 0 6 |  | 2 0 0 5 |  
|   |                                                                                 |  |                                  |        |         |  |         |  
|   |                                                                                 |  | R e p o r t  e d  N I S  , 0 0 0 |       
|   |                                                                                 |  |                                  |       
|   |                                                                                 |  |                                  |       
|   | Composition:                                                                    |  |                                  |        |         |  |         |   |  |         |  
|   | Income before taxes on
income, as in Statement of Operations                    |  |                                  | 30,708 |         |  | 45,332  |   |  | 116,423 |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   | Tax rate applicable to the Company                                              |  |                                  | 29     | %       |  | 31      | % |  | 34      | %
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   | Theoretical tax calculated according to
  tax rate applicable to the Company    |  |                                  | 8,905  |         |  | 14,053  |   |  | 39,584  |  
|   | Income for which deferred taxes were not created                                |  |                                  |       |         |  | (135    | ) |  |        |  
|   | Adjustment for expenses that are not yet deductible/(currently deductible), net |  |                                  | 310    |         |  | 977     |   |  | (5      | )
|   | Adjustments for prior years                                                     |  |                                  | (326   | )       |  | 510     |   |  | (241    | )
|   | Adjustment for capital gains, net                                               |  |                                  |       |         |  |        |   |  | (31     | )
|   | Adjustment for tax-exempt
income                                                |  |                                  | (494   | )       |  | (584    | ) |  | (11,069 | )
|   | Adjustment for change in tax rate                                               |  |                                  | (26    | )       |  | 8       |   |  |        |  
|   | Adjustment for inflationary effect in
  Israel                                  |  |                                  | (581   | )       |  | (317    | ) |  | (1,162  | )
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  
|   | Tax expenses, in Statement of Operations                                        |  |                                  | 7,788  |         |  | 14,512  |   |  | 27,076  |  
|   |                                                                                 |  |                                  |        |         |  |         |   |  |         |  

19

---

---

|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- | --------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 21   | Taxes on income (continued)
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | C.                          | The
  Company has been issued final tax assessments for the tax years through 2000.
  The tax assessment for year 2002 became final at the end of 2006. For the
  year 2003, an objection was filed to an assessment issued to the Company, in
  which it was found liable for tax in the principal amount of NIS 486 thousand.
  The Company assesses that the prospects for its acceptance  are good.                                                                                        
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | D.                          | Taxes under inflationary conditions                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                             | According
to Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes in Israel
were measured on a real basis, adjusted to the changes in the CPI in Israel.
The applicability of this law was limited, subsequent to the balance sheet date, in an
Amendment to the Law, which was passed by the Knesset in February 2008.                                                                                                                                                  
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                             | Accordingly,
beginning from January 1, 2008, the results for tax purposes will be measured on a nominal
basis, with certain adjustment deriving from the transitional provisions stipulated in the
Amendment.                                                                                                                                                                                                                                                                                   
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | E.                          | Change in corporate tax rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                             | On
July 25, 2005, the Knesset passed an Amendment to the Income Tax Ordinance (No. 147)
(Temporary Provision), 2005 (the Amendment). The Amendment provides a gradual
reduction in the corporate tax rate in Israel, as follows: In 2008, a tax rate of 27% will
apply (compared with a rate of 29% in 2007), in 2009  26% and from 2010 henceforth,
a rate of 25% will apply. Moreover, it was provided that as from year 2010, a real capital
gain will be subject to tax at a rate of 25%.
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                             | The
  Company assesses that the Amendment does not have a material effect on the
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                        

20

---

---

|           |                                                                               |                                                                                                                                                                                                                                                                                                                                  
|---------- | ----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 22   | Condensed Company financial statements, in nominal values,
  for tax purposes
|           |                                                                              
|           | A.                                                                            | The
  Company includes historical nominal data for income tax purposes alone. These
  statements were prepared in accordance with generally accepted accounting
  principles on the basis of the historical cost convention, without taking
  into account the changes in the general purchasing power of the Israeli
  currency.
|           |                                                                               |                                                                                                                                                                                                                                                                                                                                  
|           | B.                                                                            | Balance sheet                                                                                                                                                                                                                                                                                                                    

As of December 312 0 0 7

2 0 0 6

2 0 0 5N I S  , 0 0 0AssetsCurrent assetsCash and cash equivalents


12,787


2,576


12,876Marketable securities


2,355


5,180


4,746Trade receivables


146,145


134,491


175,888Other receivables and debit balances


4,580


8,422


18,916Inventory


27,930


26,056


67,465193,797


176,725


279,891Long-term investments and
  receivablesInvestment in parent companys shares


3,630


3,630


3,630Deposits


252


322


521Funded liability in excess of accrued
  severance pay


1,857


1,538


8195,739


5,490


4,970Fixed assets


731


995


1,412Other assets


22





200,289


183,210


286,273


As of December 312 0 0 7

2 0 0 6

2 0 0 5N I S  , 0 0 0Liabilities and EquityCurrent liabilitiesShort-term credit





16,608


455Trade payables


79,495


61,120


90,888Other payables and credit balances


22,496


12,332


107,915101,991


90,060


199,258Shareholders equityShare capital


1


1


1Capital reserves


540


315


Retained earnings


97,757


92,834


87,01498,298


93,150


87,015200,289


183,210


286,273


21

---

---

|           |                                                                                           |                        
|---------- | ----------------------------------------------------------------------------------------- | -----------------------
|Note 22   | Condensed Company financial statements, in nominal values,
  for tax purposes (continued)
|           |                                                                                          
|           | C.                                                                                        | Statement of operations

|                                         |  |                                |         |         |  |         |  |  |         | 
|---------------------------------------- |  | ------------------------------ | ------- | ------- |  | ------- |  |  | ------- | 
|                                         |  | For the year ended December 31 |        
|                                         |  |                                |        
|                                         |  | 2 0 0 7                        |         | 2 0 0 6 |  | 2 0 0 5 | 
|                                         |  |                                |         |         |  |         | 
|                                         |  | N I S  , 0 0 0                 |        
|                                         |  |                                |        
|                                         |  |                                |         |         |  |         |  |  |         | 
|Revenues from sales and services         |  |                                | 409,890 |         |  | 463,397 |  |  | 637,078 | 
|Cost of sales and services               |  |                                | 339,260 |         |  | 367,976 |  |  | 494,595 | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Gross profit                             |  |                                | 70,630  |         |  | 95,421  |  |  | 142,483 | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Selling expenses                         |  |                                | 15,584  |         |  | 20,563  |  |  | 24,098  | 
|General and administrative expenses      |  |                                | 25,985  |         |  | 30,008  |  |  | 37,365  | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|                                         |  |                                | 41,569  |         |  | 50,571  |  |  | 61,463  | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Operating income before financing income |  |                                | 29,061  |         |  | 44,850  |  |  | 81,020  | 
|Financing income, net                    |  |                                | 1,651   |         |  | 371     |  |  | 35,317  | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Income before other income               |  |                                | 30,712  |         |  | 45,221  |  |  | 116,337 | 
|Capital gain (loss), net                 |  |                                | (1      | )       |  | 111     |  |  | 90      | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Income before taxes on income            |  |                                | 30,711  |         |  | 45,332  |  |  | 116,427 | 
|Taxes on income                          |  |                                | 7,788   |         |  | 14,512  |  |  | 27,076  | 
|                                         |  |                                |         |         |  |         |  |  |         | 
|Income for the year                      |  |                                | 22,923  |         |  | 30,820  |  |  | 89,351  | 
|                                         |  |                                |         |         |  |         |  |  |         | 

| |    |                                             
| | -- | --------------------------------------------
| | D. | Statement of changes in shareholders equity

|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|-------------------------------------------------- |  | -------------- | - | --------------- |  | ----------------- |  | ----- | -------- | - |  | -------- | -
|                                                   |  | Share capital  |   | Capital reserve |  | Retained earnings |  | Total |         
|                                                   |  |                |   |                 |  |                   |  |       |         
|                                                   |  | N I S  , 0 0 0 |  
|                                                   |  |                |  
|                                                   |  |                |  
|Balance as of January 1,
  2005                    |  | (*)            | 1 |                 |  |                  |  |       | 147,663  |   |  | 147,664  |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year
  endedDecember 31, 2005:  |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Cash dividend distribution, net                    |  |                |  |                 |  |                  |  |       | (150,000 | ) |  | (150,000 | )
|Income for the year                                |  |                |  |                 |  |                  |  |       | 89,351   |   |  | 89,351   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December 31,
  2005                  |  | (*)            | 1 |                 |  |                  |  |       | 87,014   |   |  | 87,015   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year
  ended December 31, 2007: |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Cost of share-based payment                        |  |                |  |                 |  | 315               |  |       |         |   |  | 315      |  
|Cash dividend distribution, net                    |  |                |  |                 |  |                  |  |       | (25,000  | ) |  | (25,000  | )
|Income for the year                                |  |                |  |                 |  |                  |  |       | 30,820   |   |  | 30,820   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December 31,
  2007                  |  | (*)            | 1 |                 |  | 315               |  |       | 92,834   |   |  | 93,150   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Changes during the year
  ended December 31, 2006: |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Cost of share-based payment                        |  |                |  |                 |  | 225               |  |       |         |   |  | 225      |  
|Cash dividend distribution, net                    |  |                |  |                 |  |                  |  |       | (18,000  | ) |  | (18,000  | )
|Income for the year                                |  |                |  |                 |  |                  |  |       | 22,923   |   |  | 22,923   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  
|Balance as of December 31,
  2006                  |  | (*)            | 1 |                 |  | 540               |  |       | 97,757   |   |  | 98,298   |  
|                                                   |  |                |   |                 |  |                   |  |       |          |   |  |          |  

(*) Rounded to the
nearest NIS 1 thousand.

22

---

---

|           |                      |                                                                                                                                                                     
|---------- | -------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 23   | Liens and guarantees
|           |                     
|           | A.                   | To secure the Companys liabilities to banks, including letters of credit
          issued by the banks, the parent company registered liens on securities it holds.
|           |                      |                                                                                                                                                                     
|           | B.                   | To secure contingent charges, the Company issued an Israeli CPI-linked bank
          guarantee totaling NIS 476 thousand in favor of the customs collector.        
|           |                      |                                                                                                                                                                     
|           | C.                   | The
  balance of the Companys liabilities secured by the above liens, as of the
  date of the financial statements, totals NIS 75,800 thousand.                    

23

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---

|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                         
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------
|Note 24 | Differences between Israeli and US GAAP

The
Companys financial statements are prepared in accordance with accounting standards
generally accepted in Israel (Israeli GAAP), which vary, in certain
significant respects, from accounting principles generally accepted in the United States
of America (US GAAP). Information relating to the nature and effect of such
principal differences is presented below, together with explanations of certain
adjustments made.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                         
|         | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Balance sheet adjustment

|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|----------------------------------------------------- |  | ---- | --- | ------------------------------- |  | ------------------------------- |  | ------- | ------ | ------------ |  | --------------------------- |  | ------- | ------- |  |  | ------ | - |  | ------- | 
|                                                      |  |      |     | As of December 31, 2007         |  | As of December 31, 2006         | 
|                                                      |  |      |     |                                 |  |                                 | 
|                                                      |  |      |     | Israeli GAAP                    |  | Effect of change to US GAAP     |  | US GAAP |        | Israeli GAAP |  | Effect of change to US GAAP |  | US GAAP |        
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |        
|                                                      |  | Note |     | R e p o r t e d  N I S  , 0 0 0 |  | R e p o r t e d  N I S  , 0 0 0 | 
|                                                      |  |      |     |                                 |  |                                 | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Current assets                                        |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Cash and cash equivalents                             |  |      |     |                                 |  | 12,787                          |  |         |       |              |  | 12,787                      |  |         | 2,576   |  |  |       |   |  | 2,576   | 
|Marketable securities                                 |  |      |     |                                 |  | 2,355                           |  |         |       |              |  | 2,355                       |  |         | 5,180   |  |  |       |   |  | 5,180   | 
|Trade receivables                                     |  |      |     |                                 |  | 146,145                         |  |         |       |              |  | 146,145                     |  |         | 134,491 |  |  |       |   |  | 134,491 | 
|Other receivables and debit balances                  |  |      |     |                                 |  | 4,580                           |  |         | 1      |              |  | 4,581                       |  |         | 8,422   |  |  |       |   |  | 8,422   | 
|Inventory                                             |  |      | 1   |                                 |  | 27,930                          |  |         | (809   | )            |  | 27,121                      |  |         | 26,056  |  |  | (567   | ) |  | 25,489  | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|                                                      |  |      |     |                                 |  | 193,797                         |  |         | (808   | )            |  | 192,989                     |  |         | 176,725 |  |  | (567   | ) |  | 176,158 | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Long-term investments and receivables                 |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Investment in shares of parent company                |  |      | 1,3 |                                 |  | 4,004                           |  |         | (4,004 | )            |  | -                           |  |         | 4,004   |  |  | (4,004 | ) |  | -       | 
|Funded liability in excess of accrued
  severance pay |  |      |     |                                 |  | 252                             |  |         |       |              |  | 252                         |  |         | 322     |  |  |       |   |  | 322     | 
|Deposits                                              |  |      |     |                                 |  | 1,857                           |  |         |       |              |  | 1,857                       |  |         | 1,538   |  |  |       |   |  | 1,538   | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|                                                      |  |      |     |                                 |  | 6,113                           |  |         | (4,004 | )            |  | 2,109                       |  |         | 5,864   |  |  | (4,004 | ) |  | 1,860   | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Fixed assets                                          |  |      | 1   |                                 |  | 745                             |  |         | (77    | )            |  | 668                         |  |         | 1,012   |  |  | (54    | ) |  | 958     | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Other assets                                          |  |      |     |                                 |  | 22                              |  |         | (22    | )            |  |                            |  |         |        |  |  |       |   |  |        | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 
|Total assets                                          |  |      |     |                                 |  | 200,677                         |  |         | (4,911 | )            |  | 195,766                     |  |         | 183,601 |  |  | (4,625 | ) |  | 178,976 | 
|                                                      |  |      |     |                                 |  |                                 |  |         |        |              |  |                             |  |         |         |  |  |        |   |  |         | 

24

---

---

|         |                                                    |                                     
|-------- | -------------------------------------------------- | ------------------------------------
|Note 24 | Differences between Israeli and US GAAP(continued)
|         |                                                    |                                     
|         | A.                                                 | Balance sheet adjustment (continued)

|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|------------------------------------------------------------- |  | ---- | - | ------------------------------- |  | ------------------------------- |  | ------- | ------- | ------------ |  | --------------------------- | - | ------- | ------- |  |  | ------- | - |  | ------- | -
|                                                              |  |      |   | As of December 31, 2007         |  | As of December 31, 2006         | 
|                                                              |  |      |   |                                 |  |                                 | 
|                                                              |  |      |   | Israeli GAAP                    |  | Effect of change to US GAAP     |  | US GAAP |         | Israeli GAAP |  | Effect of change to US GAAP |   | US GAAP |        
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |        
|                                                              |  | Note |   | R e p o r t e d  N I S  , 0 0 0 |  | R e p o r t e d  N I S  , 0 0 0 | 
|                                                              |  |      |   |                                 |  |                                 | 
|Current liabilities                                           |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Short-term credit and current maturities of
  long-term loans |  |      |   |                                 |  |                                |  |         |        |              |  |                            |   |         | 16,608  |  |  |        |   |  | 16,608  |  
|Trade payables                                                |  |      |   |                                 |  | 79,495                          |  |         |        |              |  | 79,495                      |   |         | 61,120  |  |  |        |   |  | 61,120  |  
|Other payables and credit balances                            |  |      |   |                                 |  | 22,496                          |  |         |        |              |  | 22,496                      |   |         | 12,332  |  |  |        |   |  | 12,332  |  
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|                                                              |  |      |   |                                 |  | 101,991                         |  |         |        |              |  | 101,991                     |   |         | 90,060  |  |  |        |   |  | 90,060  |  
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Shareholders equity                                          |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Share capital                                                 |  |      |   |                                 |  | 1                               |  |         |        |              |  | 1                           |   |         | 1       |  |  |        |   |  | 1       |  
|Capital reserves                                              |  |      | 2 |                                 |  | 540                             |  |         | 400     |              |  | 940                         |   |         | 315     |  |  | 366     |   |  | 681     |  
|Capital reserve from translation of
  financial statements    |  |      | 1 |                                 |  |                                |  |         | (24,252 | )            |  | (24,252                     | ) |         |        |  |  | (13,582 | ) |  | (13,582 | )
|Retained earnings                                             |  |      | 1 |                                 |  | 98,145                          |  |         | 22,472  |              |  | 120,617                     |   |         | 93,225  |  |  | 12,470  |   |  | 105,695 |  
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Investment in shares of parent company                        |  |      |   |                                 |  | -                               |  |         | (3,531  | )            |  | (3,531                      | ) |         | -       |  |  | (3,879  | ) |  | (3,879  | )
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Shareholders equity                                          |  |      |   |                                 |  | 98,686                          |  |         | (4,911  | )            |  | 93,775                      |   |         | 93,541  |  |  | (4,625  | ) |  | 88,916  |  
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  
|Total liabilities and
  equity                                |  |      |   |                                 |  | 200,677                         |  |         | (4,911  | )            |  | 195,766                     |   |         | 183,601 |  |  | (4,625  | ) |  | 178,976 |  
|                                                              |  |      |   |                                 |  |                                 |  |         |         |              |  |                             |   |         |         |  |  |         |   |  |         |  

25

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---

|         |                                                    |                             
|-------- | -------------------------------------------------- | ----------------------------
|Note 24 | Differences between Israeli and US GAAP(continued)
|         |                                                    |                             
|         | B.                                                 | Adjustment of income or loss

|                                       |  |                                           |        |         |  |        |  
|-------------------------------------- |  | ----------------------------------------- | ------ | ------- |  | ------ | -
|                                       |  | For the year ended December 31            |       
|                                       |  |                                           |       
|                                       |  | 2 0 0 7                                   |        | 2 0 0 6 | 
|                                       |  |                                           |        |         | 
|                                       |  | R e p o r t e d  N I S  t h o u s a n d s |       
|                                       |  |                                           |       
|                                       |  |                                           |       
|Net income per statement of operations |  |                                           | 22,920 |         |  | 30,820 |  
|                                       |  |                                           |        |         |  |        |  
|                                       |  |                                           |        |         |  |        |  
|Items
  increasing net income          |  |                                           |        |         |  |        |  
|Effect of functional currency          |  |                                           | 10,036 |         |  | 12,568 |  
|                                       |  |                                           |        |         |  |        |  
|                                       |  |                                           | 10,036 |         |  | 12,568 |  
|                                       |  |                                           |        |         |  |        |  
|                                       |  |                                           |        |         |  |        |  
|Items
reducing net income              |  |                                           |        |         |  |        |  
|Cost of share-based payment            |  |                                           | (34    | )       |  | (84    | )
|                                       |  |                                           |        |         |  |        |  
|                                       |  |                                           | (34    | )       |  | (84    | )
|                                       |  |                                           |        |         |  |        |  
|                                       |  |                                           |        |         |  |        |  
|Net income according to US GAAP        |  |                                           | 32,922 |         |  | 43,304 |  
|                                       |  |                                           |        |         |  |        |  

| |    |                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Cash flow adjustments                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                    
| |    | There
  are no material changes in the Companys statement of cash flows for the
  years ended December 31, 2007 and 2006, between that presented in the
  financial statements and in the statement of cash flows required according to
  US GAAP.

26

---

---

|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                 
|-------- | --------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 24 | Differences between Israeli and US GAAP (continued)
|         |                                                    
|         | D.                                                  | Items for adjustment of balance sheet as of December 31,
  2007 and 2006 or income or loss for the years then ended:
|         |                                                     |                                                                                                                     
|         |                                                     | 1.                                                                                                                   | Functional
  and presentation currency
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      | a.                                     | Functional Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      |                                        | According to Israeli GAAP,
  the Companys financial statements are denominated in the Israeli currency,
  and financial statement items are included on the basis of the Israeli shekel.
  According to US GAAP, items included in the Companys financial statements are
  measured on the basis of the currency that reflects the economic environment
  in which the Company operates, and which influences the majority of its
  operations (the Functional Currency).
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      |                                        | According to these rules,
  the Companys Functional Currency is the U.S. dollar (the Dollar).                                                                                                                                                                                                                                                                                                                                                                             
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      | b.                                     | Translation of
  transactions and balances                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      |                                        | Transactions in a currency
  other than the Functional Currency are translated into the Functional
  Currency on the basis of the exchange rates prevailing as of the transaction
  execution date. Exchange rate differentials deriving from settling these
  transactions and deriving from translations of financial asset and liability
  amounts denominated in foreign currency on the basis of end-of-period rates
  are recorded to the statements of operations.    
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      | c.                                     | Presentation Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                     |                                                                                                                      |                                        | The Company presents its
  financial statements, even those in conformity with US GAAP, in New Israeli
  Shekels (the Presentation Currency). Operating results and financial
  position of the Company are translated into the Presentation Currency as
  follows:                                                                                                                                                                                                        
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                 
|         |                                                     |                                                                                                                      |                                        | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Assets and liabilities
  were translated according to the representative exchange rates promulgated by
  the Bank of Israel in effect on the balance-sheet date.                
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                 
|         |                                                     |                                                                                                                      |                                        | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Revenues and expenses
  included in the statements of operations are translated according to the
  actual representative exchange rate on the execution date of the transaction.
|         |                                                     |                                                                                                                      |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                 
|         |                                                     |                                                                                                                      |                                        | (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Translation differentials
  resulting from this accounting treatment is recorded directly to
  shareholders equity in reserve from translation differentials.                
|        
|         |                                                     | 2.                                                                                                                   | Share-based payments                  

| | According
to Israeli GAAP, employee option plans which granted after March 15, 2005, meet the
definition of a share-based payment settled in capital instruments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
conformity with US GAAP, the Companys capital instruments that were not vested as
of January 1, 2006, meet the definition of a share-based payment settled in capital
instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

---

|         |                                                     |                                                                                                                                  |                                                |  | 
|-------- | --------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- |  | 
|Note 24 | Differences between Israeli and US GAAP (continued)
|         |                                                    
|         | D.                                                  | Items for adjustment of balance sheet as of December 31,
  2007 and 2006 or income or loss for the years then ended (continued):
|         |                                                     |                                                                                                                                 
|         |                                                     | 3.                                                                                                                               | Investment in the shares of the parent company
|         |                                                     |                                                                                                                                  |                                                | 

| | The
Companys investment in the parents company shares was presented, according to
Israeli GAAP, as a long term investment, based on the cost of the shares acquired.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
investment should be reclassified, in accordance with US GAAP, and presented as a
contra-equity account in the Companys separate financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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---

DINDYNAMICLTD.

CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 2008

---

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DIN
DYNAMIC LTD.BALANCE SHEET

As ofJune 30

As ofDecember 312 0 0 8

2 0 0 7N I S  , 0 0 0UnauditedASSETSCurrent AssetsCash and cash equivalents


489


486Trade receivables


14,867


18,232Other receivables and debit balances


4,840


5,461Inventory


9,498


10,445Total current assets


29,694


34,624Non-current AssetsDeferred taxes


210


159Funded liability in excess of accrued
  severance pay, net


392


1,476Deposits


338


278Fixed assets


4,623


4,528Other assets


4,623


4,423Total non-current assets


10,186


10,86439,880


45,488


As ofJune 30

As ofDecember 312 0 0 8

2 0 0 7N I S  , 0 0 0UnauditedLIABILITIES AND EQUITYCurrent LiabilitiesShort-term credit


25,000


Trade payables


3,029


4,027Payables and credit balances


6,384


6,802Total current liabilities


34,413


10,829Shareholders'  Equity


5,467


34,65939,880


45,488


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

|                                                              |                  |  |                 
|------------------------------------------------------------- | ---------------- |  | ----------------
|                                                              | /s/ Ilan Ben-Dov |  | /s/ Anat Shfecht
|                                                              |                  |  |                 
|                                                              | Ilan Ben-Dov     |  | Anat Shfecht    
|                                                              | Director         |  | C.E.O.          
|                                                             
|Approval
  date of the financial statements: August 21, 2008.

3

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DIN DYNAMIC LTD.STATEMENT OF OPERATIONS

|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|-------------------------------------------------- |  | ------------------------------------- | ------ | --------------------------------------- |  | ----------------------------- | - |  | ------- | -
|                                                   |  | For the six-monthperiod ended June 30 |        | For the three-monthperiod ended June 30 |  | For the year endedDecember 31 |  
|                                                   |  |                                       |        |                                         |  |                               |  
|                                                   |  | 2 0 0 8                               |        | 2 0 0 8                                 |  | 2 0 0 7                       |  
|                                                   |  |                                       |        |                                         |  |                               |  
|                                                   |  | N I S  , 0 0 0                        |       
|                                                   |  |                                       |       
|                                                   |  | Unaudited                             |        | Unaudited                               |  |                               |  
|                                                   |  |                                       |        |                                         |  |                               |  
|Revenue from sales and services                    |  |                                       | 68,077 |                                         |  | 34,436                        |   |  | 138,180 |  
|Cost of sales and services                         |  |                                       | 44,421 |                                         |  | 22,364                        |   |  | 88,703  |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Gross profit                                       |  |                                       | 23,656 |                                         |  | 12,072                        |   |  | 49,477  |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Selling expenses                                   |  |                                       | 15,706 |                                         |  | 8,336                         |   |  | 30,406  |  
|General and administrative expenses                |  |                                       | 6,542  |                                         |  | 4,094                         |   |  | 10,061  |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|                                                   |  |                                       | 22,248 |                                         |  | 12,430                        |   |  | 40,467  |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Operating income (loss), before financing
  income |  |                                       | 1,408  |                                         |  | (358                          | ) |  | 9,010   |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Financing income                                   |  |                                       | 76     |                                         |  | 61                            |   |  | 574     |  
|Financing expenses                                 |  |                                       | (377   | )                                       |  | 34                            |   |  | (90     | )
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|                                                   |  |                                       | (301   | )                                       |  | 95                            |   |  | 484     |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Income (loss) before taxes on income               |  |                                       | 1,107  |                                         |  | (263                          | ) |  | 9,494   |  
|Taxes on income                                    |  |                                       | 277    |                                         |  | (79                           | ) |  | 2,420   |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Net income (loss) for the period                   |  |                                       | 830    |                                         |  | (184                          | ) |  | 7,074   |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  
|Attributed to:                                     |  |                                       |        |                                         |  |                               |   |  |         |  
|Shareholders of the Company                        |  |                                       | 830    |                                         |  | (184                          | ) |  | 7,074   |  
|                                                   |  |                                       |        |                                         |  |                               |   |  |         |  

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

4

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DIN DYNAMIC
LTD.STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY

|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|-------------------------------------------------- |  | ---------------------------------------------- | - | --------------- |  | ------------------- | - | ------------ | ------- | - |  | ------- | -
|                                                   |  | Share capital                                  |   | Capital reserve |  | Retained
  earnings |   | Total equity |        
|                                                   |  |                                                |   |                 |  |                     |   |              |        
|                                                   |  | N I S  , 0 0 0                                 |  
|                                                   |  |                                                |  
|                                                   |  | For the six-month period ended June 30, 2008   |  
|                                                   |  |                                                |  
|                                                   |  | Unaudited                                      |  
|                                                   |  |                                                |  
|Balance as of January 1,
  2008                    |  |                                                | 1 |                 |  | 175                 |   |              | 34,483  |   |  | 34,659  |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Changes during the period
  ended June 30, 2008:   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Cost of share-based payments                       |  |                                                |  |                 |  | (22                 | ) |              |        |   |  | (22     | )
|Dividend distribution                              |  |                                                |  |                 |  |                    |   |              | (30,000 | ) |  | (30,000 | )
|Income for the period                              |  |                                                |  |                 |  |                    |   |              | 830     |   |  | 830     |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Balance as of June 30,
  2008                      |  |                                                | 1 |                 |  | 153                 |   |              | 5,313   |   |  | 5,467   |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|                                                   |  | Share capital                                  |   | Capital reserve |  | Retained
  earnings |   | Total equity |        
|                                                   |  |                                                |   |                 |  |                     |   |              |        
|                                                   |  | N I S  , 0 0 0                                 |  
|                                                   |  |                                                |  
|                                                   |  | For the three-month period ended June 30, 2008 |  
|                                                   |  |                                                |  
|                                                   |  | Unaudited                                      |  
|                                                   |  |                                                |  
|Balance as of April 1,
  2008                      |  |                                                | 1 |                 |  | 151                 |   |              | 35,497  |   |  | 35,649  |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Changes during the period
  ended June 30, 2008:   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Cost of share-based payments                       |  |                                                |  |                 |  | 2                   |   |              |        |   |  | 2       |  
|Dividend distribution                              |  |                                                |  |                 |  |                    |   |              | (30,000 | ) |  | (30,000 | )
|Loss for the period                                |  |                                                |  |                 |  |                    |   |              | (184    | ) |  | (184    | )
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Balance as of June 30,
  2008                      |  |                                                | 1 |                 |  | 153                 |   |              | 5,313   |   |  | 5,467   |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|                                                   |  | Share capital                                  |   | Capital reserve |  | Retained
  earnings |   | Total equity |        
|                                                   |  |                                                |   |                 |  |                     |   |              |        
|                                                   |  | N I S  , 0 0 0                                 |  
|                                                   |  |                                                |  
|                                                   |  | For the year ended December 31, 2007           |  
|                                                   |  |                                                |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Balance as of January 1,
  2007                    |  |                                                | 1 |                 |  | 144                 |   |              | 27,409  |   |  | 27,554  |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Changes during the year
  ended December 31, 2007: |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Cost of share-based payments                       |  |                                                |  |                 |  | 31                  |   |              |        |   |  | 31      |  
|Income for the year                                |  |                                                |  |                 |  |                    |   |              | 7,074   |   |  | 7,074   |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|Balance as of December
  31, 2007                  |  |                                                | 1 |                 |  | 175                 |   |              | 34,483  |   |  | 34,659  |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  
|                                                   |  |                                                |   |                 |  |                     |   |              |         |   |  |         |  

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

5

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DIN
DYNAMIC LTD.STATEMENT OF CASH FLOWS

|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|--------------------------------------------------------- |  | -------------------------------------- | ------- | ---------------------------------------- |  | ------------------------------ | - |  | ------ | -
|                                                          |  | For the six-month period ended June 30 |         | For the three-month period ended June 30 |  | For the year ended December 31 |  
|                                                          |  |                                        |         |                                          |  |                                |  
|                                                          |  | 2 0 0 8                                |         | 2 0 0 8                                  |  | 2 0 0 7                        |  
|                                                          |  |                                        |         |                                          |  |                                |  
|                                                          |  | N I S  , 0 0 0                         |        
|                                                          |  |                                        |        
|                                                          |  | Unaudited                              |         | Unaudited                                |  |                                |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Cash flows - operating activities (see Appendix A below)  |  |                                        | 5,888   |                                          |  | 5,376                          |   |  | 6,867  |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Cash flows - investing activities                         |  |                                        |         |                                          |  |                                |   |  |        |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Realization of (investment in) long-term deposits, net    |  |                                        | (60     | )                                        |  | (50                            | ) |  | 9      |  
|Purchase of fixed assets                                  |  |                                        | (825    | )                                        |  | (241                           | ) |  | (283   | )
|Investment and purchase of other assets                   |  |                                        |        |                                          |  |                               |   |  | (65    | )
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Net cash used in investing activities                     |  |                                        | (885    | )                                        |  | (291                           | ) |  | (339   | )
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Cash flows - financing activities                         |  |                                        |         |                                          |  |                                |   |  |        |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Receipt (repayment) of short-term credit, net             |  |                                        | 25,000  |                                          |  | 25,000                         |   |  | (6,526 | )
|Dividend distribution                                     |  |                                        | (30,000 | )                                        |  | (30,000                        | ) |  |       |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Net cash used in financing activities                     |  |                                        | (5,000  | )                                        |  | (5,000                         | ) |  | (6,526 | )
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Increase in cash and cash equivalents                     |  |                                        | 3       |                                          |  | 85                             |   |  | 2      |  
|Cash and cash equivalents balance - beginning of
  period |  |                                        | 486     |                                          |  | 404                            |   |  | 484    |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  
|Cash and cash equivalents balance - end of period         |  |                                        | 489     |                                          |  | 489                            |   |  | 486    |  
|                                                          |  |                                        |         |                                          |  |                                |   |  |        |  

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

6

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DIN
DYNAMIC LTD.APPENDICES TO THE STATEMENT OF CASH FLOWS

A. Adjustments required in order to present the cash flows in
the current operations

|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|----------------------------------------------------------- |  | -------------------------------------- | ----- | ---------------------------------------- |  | ------------------------------ | - |  | ------ | -
|                                                            |  | For the six-month period ended June 30 |       | For the three-month period ended June 30 |  | For the year ended December 31 |  
|                                                            |  |                                        |       |                                          |  |                                |  
|                                                            |  | 2 0 0 8                                |       | 2 0 0 8                                  |  | 2 0 0 7                        |  
|                                                            |  |                                        |       |                                          |  |                                |  
|                                                            |  | N I S  , 0 0 0                         |      
|                                                            |  |                                        |      
|                                                            |  | Unaudited                              |       | Unaudited                                |  |                                |  
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|Income (loss) during the period                             |  |                                        | 830   |                                          |  | (184                           | ) |  | 7,074  |  
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|Expenses (revenues) not involving cash flows:               |  |                                        |       |                                          |  |                                |   |  |        |  
|Depreciation and amortization                               |  |                                        | 762   |                                          |  | 516                            |   |  | 957    |  
|Increase (decrease) in accrued severance pay, net           |  |                                        | 1,084 |                                          |  | 764                            |   |  | (864   | )
|Increase in deferred taxes                                  |  |                                        | (51   | )                                        |  | (6                             | ) |  | (3     | )
|Cost of share-based payment in the Company, net             |  |                                        | (22   | )                                        |  | 2                              |   |  | 31     |  
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|                                                            |  |                                        | 2,603 |                                          |  | 1,092                          |   |  | 7,195  |  
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|Changes in asset and liability items:                       |  |                                        |       |                                          |  |                                |   |  |        |  
|Decrease in trade receivables                               |  |                                        | 3,365 |                                          |  | 1,256                          |   |  | 3,167  |  
|Decrease (increase) in other receivables and debit balances |  |                                        | (33   | )                                        |  | 3,079                          |   |  | (4,358 | )
|Decrease (increase) in inventory                            |  |                                        | 947   |                                          |  | (742                           | ) |  | 488    |  
|Increase (decrease) in trade payables                       |  |                                        | (576  | )                                        |  | 599                            |   |  | 1,386  |  
|Increase (decrease) in other payables and credit balances   |  |                                        | (418  | )                                        |  | 92                             |   |  | (1,011 | )
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|                                                            |  |                                        | 3,285 |                                          |  | 4,284                          |   |  | (328   | )
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  
|Net cash provided by operating activities                   |  |                                        | 5,888 |                                          |  | 5,376                          |   |  | 6,867  |  
|                                                            |  |                                        |       |                                          |  |                                |   |  |        |  

B. Non-cash transactions:

|   |                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | During the report period, fixed
  assets and other assets were purchased with supplier credit totalling NIS 162
  thousand (2007  NIS 584 thousand).                                  
|   |                                                                                                                                                                                        
|2. | During the report period,
  fixed assets and other assets were purchased from the parent company against
  a reduction of the balance of the parent companys debt of NIS 654 thousand.

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

7

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DIN
DYNAMIC LTD.NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS 
AS OF JUNE 30, 2008

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

| |    |                                                                      
| | -- | ---------------------------------------------------------------------
| | A. | Initial
  adoption of the International Financial Reporting Standards

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | These financial statements
  have been prepared for the first time in conformity with the International
  Financial Reporting Standards (IFRS) in a condensed format as of June 30,
  2008, and for the periods of six months and three months then ended (the
  Interim Statements). The comparative figures relating to the full year 2007
  are also presented in conformity with IFRS.                                                                                                                               
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | IFRS are standards and
  interpretations that have been adopted by the International Accounting
  Standards Board, and they include international financial reporting
  standards, international accounting standards (IAS), as well as
  interpretations prescribed by the International Financial Reporting
  Interpretations Committee (IFRIC) or by the committee that preceded it for
  interpretation of international accounting standards (SIC).                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Company
  adopted IFRS for the first time as from January 1, 2008, and therefore, the
  transition date for reporting in conformity with IFRS is January 1, 2007.
  Prior to adopting the IFRS, the Company had prepared its financial statements
  in conformity with generally accepted accounting principles in Israel. The
  Companys last annual financial statements in conformity with generally
  accepted accounting principles in Israel were prepared as of December 31,
  2007, and for the year then ended.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          | B.                                                                                                                                                                                                                                                                                                                                                                                                                                | Format for
  preparing the Interim Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Interim Statements have
  been prepared in conformity with generally accepted accounting principles for
  the preparation of financial statements for interim periods, as prescribed in
  IAS 34 (Financial Reporting for Interim Periods), as well as in conformity
  with the disclosure requirements of Section D of the Israeli Securities Regulations
  (Immediate and Periodic Reports), 1970.                                                                                                                   
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | These Interim Statements should be
  read in the context of the annual financial statements, the notes of which
  contain detailed information not included in the Interim Statements.

The Interim Financial Statements do
not include comparative figures relating to the period ended June 30, 2007, and earnings
per share data were not presented.                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          | In accordance with the directives of
the Israeli Securities Authority from May 2008, these Interim Statements include
disclosure of the significant accounting principles applied in preparation of the Interim
Statements in conformity with IFRS, at the scope equivalent to that required in the annual
financial statements.                                                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          | Information is presented in Note 3
regarding the reconciliation between the reporting in previous periods according to the
generally accepted accounting principles in Israel (Israeli GAAP) and
reporting in the current Interim Statements according to IFRS.                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          | IFRS, which shall be in
  effect or may be adopted early when preparing the financial statements for
  the full year 2008, are subject to changes and to pronouncements during the
  course of the year. Therefore, they cannot be prescribed now with certainty.
  Accordingly, changes are possible in the accounting principles applied, as
  will be described in this note during annual financial statements
  preparation.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          | A.                                                                                                                                                                                                                                                                                                                                                                                                                                | Reporting
  basis in the financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | The Companys financial
  statements have been prepared on the basis of historic cost, with the
  exception of various assets and liabilities, which are presented according to
  their fair value, as specified below.                                                                                                                                                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                   | Non-monetary assets in
  Israel (mainly fixed assets and other assets) and equity items were measured
  according to the historic cost adjusted for changes in the Consumer Price
  Index until December 31, 2003.                                                                                                                                                                                                                                                                                                           

8

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|          |                                              
|--------- | ---------------------------------------------
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                           
| | -- | ------------------------------------------
| | B. | The
  Functional and Presentation Currency

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Functional Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Items
included in the Companys financial statements are measured on the basis of the
currency that reflects the economic environment in which the Company operates, and which
influences the majority of its operations (the Functional Currency).                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | According
to IFRS, the Companys Functional Currency is the New Israeli Shekel (NIS).                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 2. | Translation of transactions
  and balances                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Transactions
in a currency other than the Functional Currency are translated into the Functional
Currency on the basis of the exchange rates prevailing as of the transaction execution
date. Exchange rate differentials deriving from settling these transactions, and those
deriving from translations of financial assets and liabilities amounts denominated in
foreign currency on the basis of end-of-period rates, are recorded to the statements of
operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 3. | Presentation Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
Company presents its financial statements in New Israeli Shekels (the Presentation
Currency), in conformity with the provisions of the Israeli Securities Regulations
(Preparation of Annual Financial Statements), 1993.                                                                                                                                                                                                                                         

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Certain items included in
  the comparative figures for prior periods in the financial statements have
  been reclassified, in order to faithfully reflect the classification of those
  items in the current financial statements.                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | D. | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The preparation of the
  Financial Statements in conformity with generally accepted accounting
  principles requires the Management of the Company to make estimates,
  assessments and assumptions that affect the reported sums relating to assets
  and liabilities, and contingent assets and liabilities as of the date of the
  financial statements, as well as the revenue and expense data during the
  reported periods. The actual results could differ from those estimates and
  assessments.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | E. | Cash and
  cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Cash and cash equivalents
  include cash balances or demand deposits. Bank overdrafts, which must be
  covered upon demand and which constitute an integral part of the groups cash
  management, are included as a component of cash and cash equivalents for the
  purposes of reporting the cash flows only.                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | F. | Provision
  for doubtful debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The provision for doubtful
  debts is calculated specifically in respect of those debts whose collection,
  in the opinion of the Companys Management, is doubtful.                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | G. | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Inventory is valued at the
  lower of cost, on a first in  first out basis, or net realization value.
  Net realization value is the estimated selling price during the ordinary
  course of business, less an estimate of completion costs and the costs
  required to execute the sale.                                                                                                                                                                                                              

9

---

---

|          |                                              
|--------- | ---------------------------------------------
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |               
| | -- | --------------
| | H. | Fixed
  assets

| |    |                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The assets are stated at
  cost. Improvements and renovations are capitalized to the cost of the assets,
  while current maintenance and repair expenses are expensed.
| |    |                                                                                                                                                                       
| | 2. | Depreciation is calculated
  according to the straight line method, over the estimated useful life of
  the assets.                                                 
| |    |                                                                                                                                                                       
| |    | The annual depreciation
  rates are:                                                                                                                                  

|                                     |     
|------------------------------------ | ----
|                                     | %   
|                                     |     
|                                     |     
|Instruments and equipment            | 7-25
|Office furniture and
  equipment     | 7-15
|Computers and peripheral
  equipment | 33  
|Leasehold improvements               | 7-10

| |    |                                                                                                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | The residual value and the
  useful life of each asset are examined, at the very least
  every year. The changes are accounted for prospectively, as a change in
  accounting estimate. The need for recording an impairment provision is also
  examined (see Par. J. below).

| |    |               
| | -- | --------------
| | I. | Other
  assets

| |    |                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Rental rights in stores as
  well as goodwill from the acquisition of operations are presented at cost.
  The rental rights are amortized at annual rates of 10%-12.5% per annum,
  according to the expected period of economic benefit.
| |    |                                                                                                                                                                                                                                          
| | 2. | Computer software and
  licenses are stated at cost. The assets are amortized at the annual rate of
  33%, according to the expected period of economic benefit.                                                                         

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | J. | Asset
  impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company periodically
  examines the need for recording an impairment provision, in order to ensure
  that its assets, including fair value adjustments of other fixed assets, are
  not stated at sums exceeding their recoverable amounts, which is the higher
  of the net selling price and the present value of the estimated future cash
  flows expected to derive from the use and realization of the assets. A
  recognized loss is reversed only when changes occur in the estimates used to
  determine the recoverable amount of the asset.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | K. | Deferred
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Deferred taxes are computed
  on temporary differences between the timing of the inclusion of amounts in
  the financial statements and when taken into account for tax purposes. The
  deferred tax balances are computed according to the tax rate expected to
  apply when these taxes are transferred to the statement of operations, based
  on information known when the financial statements are prepared.                                                                                                                                        

10

---

---

|          |                                              
|--------- | ---------------------------------------------
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | L. | Share-based
  payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The cost of employee
  benefits that are settled with capital instruments, such as shares or options
  convertible into shares of the Company and/or of the parent company, are
  measured according to the fair value of the capital instruments on the grant
  date. An additional expense is recognized if a change occurs in the terms of
  the arrangement, which increases its overall fair value. The cost is charged
  to the Companys operating results concurrent with a corresponding increase
  in its equity, over the vesting period.                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | M. | Accrued
  severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The Companys compensation
  plan falls under the scope of a defined benefit plan, as defined in the
  Standards. Therefore, the severance pay liability deriving from the plan is
  measured on an actuarial basis and takes into account, inter alia, estimates
  of future pay hikes and the employee turnover rate. The measurement is based
  on discounting the anticipated future cash flows according to the interest
  rates of high-rated NIS corporate bonds, when the payment date
  approximates the liability period associated with the severance benefits. In
  addition, the funded severance pay is measured at fair value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | N. | Revenue
  recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Revenues from product sales
  are included when the products are supplied, the date that the significant
  risks and rewards deriving from ownership are transferred to the buyer; the
  Company does not retain any ongoing managerial involvement that characterizes
  ownership and does not retain effective control of the goods sold; the amount
  of revenues and costs that were generated or could be generated by the
  transaction may be reliably measured, and the economic benefits deriving from the
  transaction are expected to flow to the Company.                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Revenues from service fees
  are included over the service contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | O. | Presentation
  of transactions between a corporation and its controlling shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Assets and liabilities for
  which a transaction was executed with a controlling shareholder are measured
  at their fair value on the transaction date. The difference between the fair
  value and the actual consideration is recorded to equity.                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | P. | Disclosure
  related to new IFRS in the period prior to its application                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |    |                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | IAS 23 (amended)  Credit
  Costs                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                              
| |    | The amendment of this
  Standard eliminates the possibility of expensing credit costs and requires
  the reporting corporation to capitalize the associated credit costs directly
  to the acquisition and establishment or manufacturing costs of the asset.
| |    |                                                                                                                                                                                                                                                              
| |    | The Amended Standard will
  apply as from the financial statements for the year beginning January 1,
  2009. Early adoption is possible.                                                                                                                     
| |    |                                                                                                                                                                                                                                                              
| |    | According to the Companys
  assessments, this Amendment has no impact on its financial position, results
  of operations and cash flows.                                                                                                                    

11

---

---

|          |                                              
|--------- | ---------------------------------------------
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES (continued)

| |    |                                                                                         
| | -- | ----------------------------------------------------------------------------------------
| | P. | Disclosure
  regarding new IFRS in a period prior to the application thereof (continued)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | IAS 1 (amended)  Financial
  Statement Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Pursuant to the Amendment of IAS 1,
another, separate statement must also be presented  Statement of Comprehensive
Income, which presents, aside from total net income taken from the statement of
operations, all items charged directly to equity during the report period and not deriving
from certain transactions with the shareholders (other comprehensive income), such as
adjustments from the translation of financial statements; fair value adjustments to
financial assets classified as available for sale; adjustments to a reserve for
revaluation of fixed assets, etc., as well as the tax implications on these items, which
are also charged directly to equity. Alternatively, the other comprehensive income items
may be presented together with statement of operations items in a single statement called
statement of comprehensive income, which is to be presented in lieu of the
statement of operations. Only those items charged to equity, which derive from certain
transactions with the shareholders (such as capitalraised, dividend distributions, etc.)
are to be presented in the statement of changes in shareholders equity, as well as
the total line that is transferred from the statement of comprehensive income.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Amendment also
  prescribes that in instances of a change in the comparative figures as a
  result of a change in an accounting principle that is being retroactively
  applied, restatement or reclassification, a balance sheet must also be
  presented for the beginning of the period of the comparative figures for
  which the change was made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Amendment of IAS 1 will
  apply to the annual financial statements for periods beginning January 1,
  2009, with the comparative figures being restated. Early adoption is
  possible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The effect of the Amendment of IAS 1 will require the Company to
  provide the requisite disclosures in the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 3. | IFRS 2 (amended) 
  share-based payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Pursuant to the Amendment
  of IFRS 2 (the Amended Standard), definition of vesting terms shall only
  include service conditions and performance conditions, while settlement of a
  grant that includes conditions other than vesting terms, whether by the
  Company or by the other party, is to be accounted for as an acceleration of
  vesting and not as forfeiture. The Amendment is to be retroactively applied
  to financial statements for periods beginning January 1, 2009. Early adoption
  is possible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Vesting terms include
  service conditions, requiring the other party to complete a defined service
  period, while performance conditions require the meeting of specified
  performance targets. Conditions that are not within the scope of service or
  performance conditions shall be deemed conditions that are not vesting
  conditions, and therefore, must be taken into account in the fair value
  estimate of the instrument being granted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The company examines the
  impact of the Amended Standard on its financial statements, but cannot, at
  this stage, assets its effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

12

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---

|          |                                             
|--------- | --------------------------------------------
|NOTE 2   | SIGNIFICANT
ACCOUNTING PRINCIPLES(continued)

| |    |                                                                                         
| | -- | ----------------------------------------------------------------------------------------
| | P. | Disclosure
  regarding new IFRS in a period prior to the application thereof (continued)

| |    |                                                                                                                                                                                                                                                                                                     
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. | IAS 32  financial
  instruments: presentation, and IAS 1  presentation of financial statements                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                     
| |    | The Amendment of IAS 32
  changes the definition of a financial liability, a financial asset and a
  capital instrument, and prescribes that certain financial instruments,
  realizable by its holder, are to be classified as capital instruments.                                                
| |    |                                                                                                                                                                                                                                                                                                     
| |    | The provisions of this
  Amendment shall apply for annual reporting periods beginning January 1, 2009.
  Early adoption is possible. At this stage, the Company Management cannot
  estimate the implication of application of the interpretation on its
  financial position and operating results.
| |    |                                                                                                                                                                                                                                                                                                     
| | 5. | Improvements in the 2008
  International Financial Reporting Standards                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                     
| |    | In May 2008, the IASB
  promulgated a series of improvements to the international financial reporting
  standards.                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                     
| |    | Within the scope of the
  improvements, amendments were made to some of the standards, which revise the
  method of presentation, recognition and measurement of various items in the
  financial statements.                                                                                       
| |    |                                                                                                                                                                                                                                                                                                     
| |    | In addition, various
  corrections were made to terms, which have a negligible effect, if any, on
  the financial statements.                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                     
| |    | Most of the amendments will
  come into effect as of the annual reporting period beginning on or after
  January 1, 2009, with early adoption possible. Most of the amendments will be
  applied retroactively, by adjusting the comparative figures.                                               
| |    |                                                                                                                                                                                                                                                                                                     
| |    | According to the Companys
  assessments, the impact of the amendments on the financial statements is not
  expected to be material.                                                                                                                                                                

| |    |                                                                             
| | -- | ----------------------------------------------------------------------------
| | Q. | Indexed
  balances and balances denominated in or linked to foreign currency

| |    |                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Balances denominated in or
  linked to foreign currency are included in the financial statements according
  to the representative exchange rates  published by the Bank of Israel. Balances linked to the consumer price
  index (CPI) are included on the basis of the appropriate index for each
  linked asset or liability.
| |    |                                                                                                                                                                                                                                                                                                                                 
| | 2. | Following are data
  regarding the consumer price index and the representative rate of exchange of
  the U.S. dollar:                                                                                                                                                                                                           

|                    |  |                        |       |                          |  |      | 
|------------------- |  | ---------------------- | ----- | ------------------------ |  | ---- | 
|                    |  | Consumer Price
  Index |       | Exchange rate
  of USD 1 | 
|                    |  |                        |       |                          | 
|End of the
  period |  | Points (*)             |       | NIS                      | 
|                    |  |                        |       |                          | 
|                    |  |                        |       |                          |  |      | 
|June 2008           |  |                        | 116.3 |                          |  | 3.35 | 
|December 2007       |  |                        | 113.6 |                          |  | 3.85 | 

|                                      |  |   |     |   |  |       |  
|------------------------------------- |  | - | --- | - |  | ----- | -
|Rate of
  change during the period of |  | % |     | %
|                                      |  |   |     |  
|                                      |  |   |     |   |  |       |  
|six months ended June 30,
  2008      |  |   | 2.4 |   |  | (12.8 | )
|year ended December 31,
  2007        |  |   | 3.4 |   |  | (9.0  | )

| |  |                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------
| |  | (*) According to the CPI
  published for the month ended on the balance-sheet date on the basis of: 2000
  average = 100 points.

13

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---

|          |                                                                                  
|--------- | ---------------------------------------------------------------------------------
|NOTE 3   | ADJUSTMENT
  BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING

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

| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | As described in Note 1.A.,
  these Interim Statements are the Companys first Interim Financial Statements prepared
  in conformity with IFRS. The Company initially adopted IFRS in 2008, and
  therefore, the transition date for reporting in conformity with IFRS is
  January 1, 2007. The Company prepared an opening balance sheet as of the
  transition date, after which IFRS reporting will begin.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Prior to adopting the IFRS,
  the Company prepared its financial statements according to generally accepted
  accounting principles in Israel (Israeli GAAP). The first annual IFRS
  financial statements will be as of December 31, 2008 and for the year then
  ended.                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Accordingly, the Company is
  presenting the following adjustments between reporting in conformity with
  Israeli GAAP and in conformity with IFRS as of January 1, 2007 (the transition
  date to IFRS reporting), as of December 31, 2007 and for the year then ended.                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In general, IFRS 1,
  regarding initial adoption of the IFRS, prescribes that application of IFRS
  in the opening balance sheet as of the transition date is to be performed
  retroactively.                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | B. | Details of
  the exceptions elected                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Following are details of
  the exceptions that the Company elected pursuant to IFRS 1, and for which the
  Company is not retroactively applying the transition to IFRS reporting:                                                                                                                                                                                                                           

| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Business combinations                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| |     | The Company is applying the
  provisions of IFRS 3 only for business combinations occurring after January
  1, 2007.                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Therefore, goodwill and excess cost created in businesse
  combinations (including business combinations under joint control) occurring
  prior to this date with respect to the acquisition of subsidiaries and
  investee companies and the acquisition of a minority interest, were not accounted
  for under IFRS 3, but rather were accounted for in conformity with Israeli
  GAAP.
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| | (2) | Employee benefits                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| |     | The Company applies the
  "corridor" method to account for actuarial gains and losses, and invoked
  the exception whereby the balance of deferred actuarial gains and losses were
  recognized as of the transition date.                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| | (3) | Share-based payment
  transactions                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Share-based payments
  granted prior to November 7, 2002 or which vested by January 1, 2007 are not
  accounted for retroactively in conformity with the provisions of IFRS 2.                                                                                                                                                                                                           

14

---

---

|          |                                                                                            
|--------- | -------------------------------------------------------------------------------------------
|NOTE 3   | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)

| |    |                                       
| | -- | --------------------------------------
| | C. | Impact of
  the transition to the IFRS
| |    |                                       
| |    | 1. Balance-sheet
  adjustments        

|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|-------------------------------------------------------- |  | ---- | - | -------------- | --------------- | ------------------------------------ | ----------------- | ---------------- | ---- | ------------ |  | ------------------------------------ |  | ---------------- | ------ |  |  | ---- | - |  | ------ | 
|                                                         |  |      |   |                | January 1, 2007 |                                      | December 31, 2007 |                 
|                                                         |  |      |   |                |                 |                                      |                   |                 
|                                                         |  |      |   | Israeli GAAP   |                 | Effect of
  transition to
  the IFRS |                   | IFRS
  standards |      | Israeli GAAP |  | Effect of
  transition to
  the IFRS |  | IFRS
  standards |       
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |       
|                                                         |  | Note |   | N I S  , 0 0 0 |                 | N I S  , 0 0 0                       |                  
|                                                         |  |      |   |                |                 |                                      |                  
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Current assets                                           |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Cash and cash equivalents                                |  |      |   |                |                 | 484                                  |                   |                  |     |              |  | 484                                  |  |                  | 486    |  |  |     |   |  | 486    | 
|Trade receivables                                        |  |      |   |                |                 | 21,399                               |                   |                  |     |              |  | 21,399                               |  |                  | 18,232 |  |  |     |   |  | 18,232 | 
|Other receivables and debit balances                     |  |      | 2 |                |                 | 1,259                                |                   |                  | (156 | )            |  | 1,103                                |  |                  | 5,620  |  |  | (159 | ) |  | 5,461  | 
|Inventory                                                |  |      |   |                |                 | 10,933                               |                   |                  |     |              |  | 10,933                               |  |                  | 10,445 |  |  |     |   |  | 10,445 | 
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Total current assets                                     |  |      |   |                |                 | 34,075                               |                   |                  | (156 | )            |  | 33,919                               |  |                  | 34,783 |  |  | (159 | ) |  | 34,624 | 
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Non-current assets                                       |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Deferred taxes                                           |  |      | 2 |                |                 |                                     |                   |                  | 156  |              |  | 156                                  |  |                  |       |  |  | 159  |   |  | 159    | 
|Funded provision in excess of accrued severance pay, net |  |      | 1 |                |                 | 67                                   |                   |                  | 545  |              |  | 612                                  |  |                  | 850    |  |  | 626  |   |  | 1,476  | 
|Deposits                                                 |  |      |   |                |                 | 287                                  |                   |                  |     |              |  | 287                                  |  |                  | 278    |  |  |     |   |  | 278    | 
|Fixed assets                                             |  |      |   |                |                 | 4,761                                |                   |                  |     |              |  | 4,761                                |  |                  | 4,528  |  |  |     |   |  | 4,528  | 
|Other assets                                             |  |      |   |                |                 | 4,445                                |                   |                  |     |              |  | 4,445                                |  |                  | 4,423  |  |  |     |   |  | 4,423  | 
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Total non-current assets                                 |  |      |   |                |                 | 9,560                                |                   |                  | 701  |              |  | 10,261                               |  |                  | 10,079 |  |  | 785  |   |  | 10,864 | 
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 
|Total assets                                             |  |      |   |                |                 | 43,635                               |                   |                  | 545  |              |  | 44,180                               |  |                  | 44,862 |  |  | 626  |   |  | 45,488 | 
|                                                         |  |      |   |                |                 |                                      |                   |                  |      |              |  |                                      |  |                  |        |  |  |      |   |  |        | 

15

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---

|        |                                                                                               |                                                   
|------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------
|NOTE 3 | ADJUSTMENT
  BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)
|        |                                                                                               |                                                   
|        | C.                                                                                            | Impact of
  the transition to the IFRS (continued)
|        |                                                                                               |                                                   
|        |                                                                                               | 1. Balance-sheet
  adjustments
  (continued)      

|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|----------------------------------------------------------- | ---- | --------------- | ------ | -------------------------------- |  | --------- |  | -------------------- | ------ | ------------------------------------ |  | ----------------- |  |  | --- |  |  | ------ | 
|                                                            |      | January 1, 2007 |        | December 31, 2007                | 
|                                                            |      |                 |        |                                  | 
|                                                            |      | IsraeliGAAP     |        | Effect of transition to the IFRS |  | IFRS GAAP |  | Israeli 
  standards |        | Effect of
  transition to
  the IFRS |  | IFRS 
  standards | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   | 
|                                                            | Note | N I S   , 0 0 0 |        | N I S  , 0 0 0                   | 
|                                                            |      |                 |        |                                  | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Current liabilities                                         |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Short-term credit and current maturities of long-term
loans |      |                 | 6,526  |                                  |  |          |  |                      | 6,526  |                                      |  |                  |  |  |    |  |  |       | 
|Trade payables                                              |      |                 | 2,287  |                                  |  |          |  |                      | 2,287  |                                      |  | 4,027             |  |  |    |  |  | 4,027  | 
|Other payables and credit balances                          |      |                 | 7,813  |                                  |  |          |  |                      | 7,813  |                                      |  | 6,802             |  |  |    |  |  | 6,802  | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Total current liabilities                                   |      |                 | 16,626 |                                  |  |          |  |                      | 16,626 |                                      |  | 10,829            |  |  |    |  |  | 10,829 | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Equity                                                      |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Share capital                                               |      |                 | 1      |                                  |  |          |  |                      | 1      |                                      |  | 1                 |  |  |    |  |  | 1      | 
|Capital reserve                                             |      |                 | 144    |                                  |  |          |  |                      | 144    |                                      |  | 175               |  |  |    |  |  | 175    | 
|Retained earnings                                           |      |                 | 26,864 |                                  |  | 545       |  |                      | 27,409 |                                      |  | 33,857            |  |  | 626 |  |  | 34,483 | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Total equity                                                |      |                 | 27,009 |                                  |  | 545       |  |                      | 27,554 |                                      |  | 34,033            |  |  | 626 |  |  | 34,659 | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 
|Total liabilities and capital                               |      |                 | 43,635 |                                  |  | 545       |  |                      | 44,180 |                                      |  | 44,862            |  |  | 626 |  |  | 45,488 | 
|                                                            |      |                 |        |                                  |  |           |  |                      |        |                                      |  |                   |  |  |     |  |  |        | 

16

---

---

|        |                                                                                             |                                                  
|------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------
|NOTE 3 | ADJUSTMENT
BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)
|        |                                                                                             |                                                  
|        | C.                                                                                          | Impact of
  the transition to the IFRS(continued)
|        |                                                                                             |                                                  
|        |                                                                                             | 2. Statements of Operations                      

|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|----------------------------------- | ------ | ------------------------------------ | ------- | --------------------------------------------- |  | ---------------- | - |  | ------- | -
|                                    |        | For the year ended December 31, 2007 |        
|                                    |        |                                      |        
|                                    |        | IsraeliGAAP                          |         | Effect of
  transition to
  IFRS 
  standards |  | IFRS
  standards |  
|                                    |        |                                      |         |                                               |  |                  |  
|                                    | Note   | N I S  , 0 0 0                       |        
|                                    |        |                                      |        
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Revenue from sales and services     |        |                                      | 138,180 |                                               |  |                 |   |  | 138,180 |  
|Cost of sales and services          |        |                                      | 88,703  |                                               |  |                 |   |  | 88,703  |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Gross profit                        |        |                                      | 49,477  |                                               |  |                 |   |  | 49,477  |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Selling expenses                    |        |                                      | 30,406  |                                               |  |                 |   |  | 30,406  |  
|General and administrative expenses |        |                                      | 10,061  |                                               |  |                 |   |  | 10,061  |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|                                    |        |                                      | 40,467  |                                               |  |                 |   |  | 40,467  |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Operating income before financing   |        |                                      | 9,010   |                                               |  |                 |   |  | 9,010   |  
|Financing income                    | 1,
  3 |                                      | 403     |                                               |  | 171              |   |  | 574     |  
|Financing expenses                  | 3      |                                      |        |                                               |  | (90              | ) |  | (90     | )
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Income before taxes on income       |        |                                      | 9,413   |                                               |  | 81               |   |  | 9,494   |  
|Taxes on income                     |        |                                      | 2,420   |                                               |  |                 |   |  | 2,420   |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Net income                          |        |                                      | 6,993   |                                               |  | 81               |   |  | 7,074   |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  
|Attributed to:                      |        |                                      |         |                                               |  |                  |   |  |         |  
|Shareholders of the Company         |        |                                      | 6,993   |                                               |  | 81               |   |  | 7,074   |  
|                                    |        |                                      |         |                                               |  |                  |   |  |         |  

17

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---

|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3   | ADJUSTMENT
  BETWEEN REPORTING IN CONFORMITY WITH ISRAELI GAAP AND IFRS REPORTING (continued)
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          | D.                                                                                            | Notes to balance sheet and statement of operations adjustments                     
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               | Material changes during the adoption of new accounting standards in Israel in 2007:
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               | 1.                                                                                  | Accrued
  severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     | According to Israeli GAAP, accrued
severance pay was measured on the basis of the employees number of years of
employment multiplied by his last monthly salary (one monthly salary for each year of
employment) as of every balance-sheet date, and the funded severance pay accumulated
against it was measured according to its redemption value as of every balance-sheet date,
without taking into account discount rates, rates of salary hikes and future employee
turnover rates. In addition, the liabilities for vacation pay and sick pay were calculated
based on estimated utilization and redemption, respectively.                                                                                                                                                                            
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     | All the severance pay liabilities are
calculated in conformity with the international standard, according to the provisions of
IAS 19 Employee Benefits (IAS 19). According to the provisions of
IAS 19, the Companys compensation plan falls within the scope of a Defined
Benefit Plan. Therefore, the severance pay liability deriving from the plan is
measured on an actuarial basis and takes into account, inter alia, estimates of future
wage hikes and employee turnover rates. The measurement is based on the discounting of
expected future cash flows, according to the interest rates of high-rated NIS corporate
bonds, when the payment date approximates the liability period associated with the
severance benefits. In addition, the funded severance pay is measured at fair value
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               | 2.                                                                                  | Deferred
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     | According to Israeli GAAP,
  deferred tax assets were classified as current assets or as noncurrent
  assets, according to the classification of the assets that generated the tax.
  According to the IFRS, deferred tax assets are classified as non-current
  assets, even if the realization date is forecasted in the short-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               | 3.                                                                                  | Financing
  income and expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     | According to Israeli GAAP,
  financing income and expenses, net, were presented in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          |                                                                                               |                                                                                     | According to the IFRS, these
  must be presented separately.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|          |                                                                                                                                                                                                                                                                                                                                        
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4   | SUBSEQUENT
  EVENTS                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                        
|          | On August 6, 2008, the
  parent company announced that its Management was authorized to examine the
  possibility of selling the Companys operations to the public company,
  Scailex Corporation Ltd. (Scailex), whose controlling shareholder is the
  parent company, and to enter into negotiations with Scailex in this regard.

18

---

---

|          |                                                                                                                                                                                                                                                                                                                                                                                                                             |                           
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------
|NOTE 5   | Differences between Israeli and US GAAP

The Companys financial
statements are prepared in accordance with IFRS standards, which vary, in certain
significant respects, from accounting principles generally accepted in the United States
of America (US GAAP). Information relating to the nature and effect of such
principal differences is presented below, together with explanations of certain
adjustments made.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                             |                           
|          | A.                                                                                                                                                                                                                                                                                                                                                                                                                          | Balance
  sheet adjustment

|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|-------------------------------------------------------- |  |  | ---- |  | ------------------- | ------ | ------------------------------- |  | ------- | - | ---------------- | ------ | ------------------------------- |  | ------- |  |  | ---- | - |  | ------ | 
|                                                         |  |  |      |  | As of June 30, 2008 |        | As of December 31, 2007         | 
|                                                         |  |  |      |  |                     |        |                                 | 
|                                                         |  |  |      |  | IFRS
  Standards    |        | Effect of
  change to
  US GAAP |  | US GAAP |   | IFRS
  Standards |        | Effect of
  change to
  US GAAP |  | US GAAP | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         | 
|                                                         |  |  | Note |  | N I S  , 0 0 0      |        | N I S  , 0 0 0                  | 
|                                                         |  |  |      |  |                     |        |                                 | 
|                                                         |  |  |      |  | Unaudited           |        |                                 | 
|                                                         |  |  |      |  |                     |        |                                 | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Current assets                                           |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Cash and cash equivalents                                |  |  |      |  |                     | 489    |                                 |  |        |   |                  | 489    |                                 |  | 486     |  |  |     |   |  | 486    | 
|Trade receivables                                        |  |  |      |  |                     | 14,867 |                                 |  |        |   |                  | 14,867 |                                 |  | 18,232  |  |  |     |   |  | 18,232 | 
|Other receivables and debit balances                     |  |  | 1    |  |                     | 4,840  |                                 |  | 210     |   |                  | 5,050  |                                 |  | 5,461   |  |  | 159  |   |  | 5,620  | 
|Inventory                                                |  |  |      |  |                     | 9,498  |                                 |  |        |   |                  | 9,498  |                                 |  | 10,445  |  |  |     |   |  | 10,445 | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total current assets                                     |  |  |      |  |                     | 29,694 |                                 |  | 210     |   |                  | 29,904 |                                 |  | 34,624  |  |  | 159  |   |  | 34,783 | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|                                                        
|Non-current assets                                       |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Deferred taxes                                           |  |  | 1    |  |                     | 210    |                                 |  | (210    | ) |                  |       |                                 |  | 159     |  |  | (159 | ) |  |       | 
|Funded liability in excess of accrued severance pay, net |  |  | 2    |  |                     | 392    |                                 |  | (326    | ) |                  | 66     |                                 |  | 1,476   |  |  | (626 | ) |  | 850    | 
|Deposits                                                 |  |  |      |  |                     | 338    |                                 |  |        |   |                  | 338    |                                 |  | 278     |  |  |     |   |  | 278    | 
|Fixed assets                                             |  |  |      |  |                     | 4,623  |                                 |  | 355     |   |                  | 4,978  |                                 |  | 4,528   |  |  | 151  |   |  | 4,679  | 
|Other assets                                             |  |  |      |  |                     | 4,623  |                                 |  | (181    | ) |                  | 4,442  |                                 |  | 4,423   |  |  | 23   |   |  | 4,446  | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total non-current assets                                 |  |  |      |  |                     | 10,186 |                                 |  | (362    | ) |                  | 9,824  |                                 |  | 10,864  |  |  | (611 | ) |  | 10,253 | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total assets                                             |  |  |      |  |                     | 39,880 |                                 |  | (152    | ) |                  | 39,728 |                                 |  | 45,488  |  |  | (452 | ) |  | 45,036 | 
|                                                         |  |  |      |  |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 

19

---

---

|          |                                                     |                                       
|--------- | --------------------------------------------------- | --------------------------------------
|NOTE 5   | Differences between Israeli and US GAAP (continued)
|          |                                                     |                                       
|          | A.                                                  | Balance
  sheet adjustment (continued)

|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|---------------------------------- | ---- | ------------------- | ------ | ------------------------------- |  | ------- | - | ---------------- | ------ | ------------------------------- |  | ------- |  |  | ---- | - |  | ------ | 
|                                   |      | As of June 30, 2008 |        | As of December 31, 2007         | 
|                                   |      |                     |        |                                 | 
|                                   |      | IFRS
  Standards    |        | Effect of
  change to
  US GAAP |  | US GAAP |   | IFRS
  Standards |        | Effect of
  change to
  US GAAP |  | US GAAP | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         | 
|                                   | Note | N I S  , 0 0 0      |        | N I S  , 0 0 0                  | 
|                                   |      |                     |        |                                 | 
|                                   |      | Unaudited           |        |                                 | 
|                                   |      |                     |        |                                 | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Current Liabilities                |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Short-term credit                  |      |                     | 25,000 |                                 |  |        |   |                  | 25,000 |                                 |  |        |  |  |     |   |  |       | 
|Trade payables                     |      |                     | 3,029  |                                 |  |        |   |                  | 3,029  |                                 |  | 4,027   |  |  |     |   |  | 4,027  | 
|Other payables and credit balances |      |                     | 6,384  |                                 |  |        |   |                  | 6,384  |                                 |  | 6,802   |  |  |     |   |  | 6,802  | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total current liabilities          |      |                     | 34,413 |                                 |  |        |   |                  | 34,413 |                                 |  | 10,829  |  |  |     |   |  | 10,829 | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Equity                             |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Share capital                      |      |                     | 1      |                                 |  |        |   |                  | 1      |                                 |  | 1       |  |  |     |   |  | 1      | 
|Capital reserve                    |      |                     | 153    |                                 |  |        |   |                  | 153    |                                 |  | 175     |  |  |     |   |  | 175    | 
|Retained earnings                  |      |                     | 5,313  |                                 |  | (152    | ) |                  | 5,161  |                                 |  | 34,483  |  |  | (452 | ) |  | 34,031 | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total equity                       |      |                     | 5,467  |                                 |  | (152    | ) |                  | 5,315  |                                 |  | 34,659  |  |  | (452 | ) |  | 34,207 | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 
|Total liabilities and equity       |      |                     | 39,880 |                                 |  | (152    | ) |                  | 39,728 |                                 |  | 45,488  |  |  | (452 | ) |  | 45,036 | 
|                                   |      |                     |        |                                 |  |         |   |                  |        |                                 |  |         |  |  |      |   |  |        | 

20

---

---

|          |                                                     |                                   
|--------- | --------------------------------------------------- | ----------------------------------
|NOTE 5   | Differences between Israeli and US GAAP (continued)
|          |                                                     |                                   
|          | B.                                                  | Statement
of operations adjustment

|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|-------------------------------------- |  | ------------------------------------------ | ----- | -------------------------------------------- |  | ------------------------------ | - |  | ----- | 
|                                       |  | For the period of six months ended June 30 |       | For the period of three months ended June 30 |  | For the year ended December 31 |  
|                                       |  |                                            |       |                                              |  |                                |  
|                                       |  | 2 0 0 8                                    |       | 2 0 0 8                                      |  | 2 0 0 7                        |  
|                                       |  |                                            |       |                                              |  |                                |  
|                                       |  | N I S  , 0 0 0                             |      
|                                       |  |                                            |      
|                                       |  | Unaudited                                  |       | Unaudited                                    |  |                                |  
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|Net income per statement of operations |  |                                            | 830   |                                              |  | (184                           | ) |  | 6,993 | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|                                      
|Items that increase net income         |  |                                            |       |                                              |  |                                |   |  |       | 
|Change in accrued severance pay, net   |  |                                            | 300   |                                              |  | 527                            |   |  |      | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|                                       |  |                                            | 300   |                                              |  | 527                            |   |  |      | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|                                      
|Items that reduce net income           |  |                                            |      |                                              |  |                               |   |  |      | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|                                       |  |                                            |      |                                              |  |                               |   |  |      | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 
|Net income according to US GAAP        |  |                                            | 1,130 |                                              |  | 343                            |   |  | 6,993 | 
|                                       |  |                                            |       |                                              |  |                                |   |  |       | 

| |    |                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Statement
  of cash flows adjustment                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                      
| |    | There are no material
  changes in the Companys statement of cash flows, for the periods of six
  months and three months ended June 30, 2008 and for the year ended December
  31, 2007, as presented in the financial statements and between the statement
  of cash flows required under US GAAP.

21

---

---

|           |                                                     |                                                                                                                                                                                                                                           
|---------- | --------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5  
 | Differences between Israeli and US GAAP (continued)
|           |                                                     |                                                                                                                                                                                                                                           
|           | D.                                                  | Items for
  adjustment of balance sheets as of June 30, 2008 and December 31, 2007 or
  statement of operations adjustments for the periods of six months and three months
  ended June 30, 2008 and for the year ended December 31, 2007:

| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1. | Deferred
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  |    | According to IFRS, deferred
  tax assets are classified as non-current assets, even if their realization
  date is expected to be within the short-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  |    | According to US GAAP, deferred
  tax assets were classified as current assets or non-current assets, according
  to the classification of the asset for which they were created.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | 2. | Accrued
  severance pay, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  |    | All accrued severance pay
  liabilities are calculated, in conformity with the international standard,
  according to IAS 19 Employee Benefits (IAS 19). In conformity with IAS
  19, the Companys severance pay plan meets the definition of a Defined
  Benefit Plan provided in IAS 19. Therefore, the accrued severance pay
  liability deriving from the plan is measured on an actuarial basis and takes
  into account, inter alia, estimates of future wage hikes and the rate of
  employee turnover. The measurement is done on the basis of discounted
  expected future cash flows, at the interest rates of high-rated shekel
  corporate bonds, with a maturity date approximating the liability period
  associated with severance pay. Likewise, the funded severance pay is measured
  at fair value.
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  |    | According to US GAAP, the
  accrued severance pay liability is charged, under similar circumstances, as
  accrued, when the terms that entitle the employee to receive payment upon
  termination (according to Israeli law  after one year of employment, at the
  latest), at whatever sum the employee will be entitled to receive upon
  severance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

22

---

---

DIN DYNAMIC Ltd.

Financial Statements
as of december 31
2 0 0 7

---

---

|                                                                                                                                                                                                                                                                 |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|GOLDSTEIN SABO TEVET - Certified Public Accountants (Isr.)                                                                                                                                                                                                       | (LOGO)
|                                                                                                                                                                                                                                                                
|A
  l r o v  T o w e r ,  4 6  R o t h s c h i l
  d  B l v d . ,  T e l  -  A v i v ,  I S R A E L  6 6 8 8 3 . P h o n e : ( 9 7 2 ) ( 3 ) 5 6 6 5
  0 0 6 .  F a c s i m i l e : ( 9 7 2 ) ( 3 ) 5 6 6 5 0 0 1 . W e b  s i t e : w w w . g
  s t . c o . i l

Auditors Report to the Shareholders ofDin Dynamic Ltd.

We
have audited the accompanying balance sheets of Din Dynamic Ltd. (the Company)
as of December 31, 2007, 2006 and 2005 and the statements of operations,
statements of changes in shareholders equity and statements of cash flows for
each of the years then ended. These financial statements are the responsibility
of the board of directors and management of the Company. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the companys board of directors and management, as
well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2007, 2006 and 2005 and the results of
operations, changes shareholders equity and cash flows for each of the years then
ended, in conformity with generally accepted accounting principles in Israel.

As explained in Note 2.A, the
financial statements are presented in reported amounts, in accordance with the Accounting
Standards of the Israel Accounting Standards Board.

Accounting standards accepted in
Israel vary in certain significant respects from accounting principles generally accepted
in the United States of America. Information relating to the nature and effect of such
principal differences is presented in Note 21 to the financial statements.

|                          |  |                                    
|------------------------- |  | -----------------------------------
|                          |  | Goldstein Sabo Tevet               
|                          |  | Certified Public Accountants (Isr.)
|                          |  |                                    
|Tel Aviv, March 25, 2008. |  |                                    

(LOGO)

---

---

D i n   D y n a m i c   L t d .B a l a n c e   S h e e t

As of December 31Note

2 0 0 7

2 0 0 6

2 0 0 5R e p o r t e d  N I
  S  , 0 0 0A s s e t sCurrent assetsCash and cash equivalents


3


486


484


1,065Trade receivables


4


18,232


21,399


23,147Other receivables and debit balances


5


5,620


1,259


2,927Inventory





10,445


10,933


11,81134,783


34,075


38,950Long-term investments and
  receivablesFunded liability in excess of accrued
  severance pay


6


850


67


322Deposits


7


278


287


3391,128


354


661Fixed assets


8


4,528


4,761


4,890Other assets


9


4,423


4,445


4,31444,862


43,635


48,815


As of December 31Note

2 0 0 7

2 0 0 6

2 0 0 5R e p o r t e d  N I
  S  , 0 0 0Liabilities and EquityCurrent liabilitiesShort-term credit


10





6,526


53Trade payables


11


4,027


2,287


23,153Other payables and credit balances


12


6,802


7,813


5,28510,829


16,626


28,491Commitments, liens and
  guarantees


13,20Shareholders equityShare capital


14


1


1


1Capital reserves





175


144


Retained earnings





33,857


26,864


20,32334,033


27,009


20,32444,862


43,635


48,815


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

|                  |  |                 
|----------------- |  | ----------------
|/s/ Shahar Landau |  | /s/ Ilan Ben-Dov
|                  |  |                 
|Shahar Landau     |  | Ilan Ben-Dov    
|Director          |  | Director        

Approval
date of financial statements: March 25, 2008

3

---

---

Din Dynamic Ltd.Statement of Operations

|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|------------------------------------------ |  |  | ---- |  | --------------------------------- | ------- | ------- |  | ------- |  |  | ------- | 
|                                           |  |  |      |  | For the year ended December 31    |        
|                                           |  |  |      |  |                                   |        
|                                           |  |  |      |  | 2 0 0 7                           |         | 2 0 0 6 |  | 2 0 0 5 | 
|                                           |  |  |      |  |                                   |         |         |  |         | 
|                                           |  |  | Note |  | R e p o r t e d  N I
  S  , 0 0 0 |        
|                                           |  |  |      |  |                                   |        
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Revenues from sales and services           |  |  |      |  |                                   | 138,180 |         |  | 141,099 |  |  | 109,698 | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Cost of sales and services                 |  |  | 15   |  |                                   | 88,703  |         |  | 90,609  |  |  | 71,233  | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Gross profit                               |  |  |      |  |                                   | 49,477  |         |  | 50,490  |  |  | 38,465  | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Selling expenses                           |  |  | 16   |  |                                   | 30,406  |         |  | 30,896  |  |  | 24,119  | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|General and administrative expenses        |  |  | 17   |  |                                   | 10,061  |         |  | 10,362  |  |  | 8,244   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|                                           |  |  |      |  |                                   | 40,467  |         |  | 41,258  |  |  | 32,363  | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Operating income before
  financing income |  |  |      |  |                                   | 9,010   |         |  | 9,232   |  |  | 6,102   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Financing income, net                      |  |  |      |  |                                   | 403     |         |  | 364     |  |  | 194     | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Operating income after
  financing income  |  |  |      |  |                                   | 9,413   |         |  | 9,596   |  |  | 6,296   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Gain from realization of fixed assets      |  |  |      |  |                                   |        |         |  | 24      |  |  | 16      | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Income before taxes on income              |  |  |      |  |                                   | 9,413   |         |  | 9,620   |  |  | 6,312   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Taxes on income                            |  |  | 18   |  |                                   | 2,420   |         |  | 3,079   |  |  | 2,280   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 
|Income for the year                        |  |  |      |  |                                   | 6,993   |         |  | 6,541   |  |  | 4,032   | 
|                                           |  |  |      |  |                                   |         |         |  |         |  |  |         | 

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

4

---

---

Din Dynamic Ltd.Statement of Changes in
Shareholders Equity

|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|-------------------------------------------------- |  | --------------------------------- | ---- | ----------------- |  | ------------------- |  | ----- | ------ |  |  | ------ | 
|                                                   |  | Share capital                     |      | Capital
  reserve |  | Retained
  earnings |  | Total |       
|                                                   |  |                                   |      |                   |  |                     |  |       |       
|                                                   |  | R e p o r t e d  N I
  S  , 0 0 0 |     
|                                                   |  |                                   |     
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Balance as of January 1,
  2005                    |  |                                   | (*)1 |                   |  |                    |  |       | 16,291 |  |  | 16,292 | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Changes during the year
  ended December 31, 2005: |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Income for the year                                |  |                                   |     |                   |  |                    |  |       | 4,032  |  |  | 4,032  | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Balance as of December
  31, 2005                  |  |                                   | (*)1 |                   |  |                    |  |       | 20,323 |  |  | 20,324 | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Changes during the year
  ended December 31, 2006: |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Cost of share-based payment                        |  |                                   |     |                   |  | 144                 |  |       |       |  |  | 144    | 
|Income for the year                                |  |                                   |     |                   |  |                    |  |       | 6,541  |  |  | 6,541  | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Balance as of December
  31, 2006                  |  |                                   | (*)1 |                   |  | 144                 |  |       | 26,864 |  |  | 27,009 | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Changes during the year
  ended December 31, 2007: |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Cost of share-based payment                        |  |                                   |     |                   |  | 31                  |  |       |       |  |  | 31     | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Income for the year                                |  |                                   |     |                   |  |                    |  |       | 6,993  |  |  | 6,993  | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 
|Balance as of December
  31, 2007                  |  |                                   | (*)1 |                   |  | 175                 |  |       | 33,857 |  |  | 34,033 | 
|                                                   |  |                                   |      |                   |  |                     |  |       |        |  |  |        | 

(*) Rounded to the nearest NIS 1
thousand.

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

5

---

---

Din Dynamic Ltd.Statement of Cash Flows

|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------ | ------- |  | ------- | - |  | ------ | -
|                                                                               |  | For the year ended December 31  |       
|                                                                               |  |                                 |       
|                                                                               |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 |  
|                                                                               |  |                                 |        |         |  |         |  
|                                                                               |  | R
e p o r t e d  N I S  , 0 0 0 |       
|                                                                               |  |                                 |       
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Cash flows  operating activities                                              |  |                                 |        |         |  |         |   |  |        |  
|Income for the  year                                                           |  |                                 | 6,993  |         |  | 6,541   |   |  | 4,032  |  
|Adjustments to present cash flows from
  operating activities (see Appendix A) |  |                                 | (126   | )       |  | (12,211 | ) |  | 3,385  |  
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Net cash provided by (used in) operating
  activities                          |  |                                 | 6,867  |         |  | (5,670  | ) |  | 7,417  |  
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|                                                                              
|Cash flows  investing activities                                              |  |                                 |        |         |  |         |   |  |        |  
|Withdrawal from (deposit in) severance pay
  fund, net                         |  |                                 |       |         |  | 255     |   |  | (220   | )
|Realization (granting) of long-term
  deposits, net                            |  |                                 | 9      |         |  | 52      |   |  | (91    | )
|Purchase of fixed assets                                                       |  |                                 | (53    | )       |  | (505    | ) |  | (2,361 | )
|Proceeds from sale of fixed assets                                             |  |                                 |       |         |  | 24      |   |  | 16     |  
|Investment in other assets                                                     |  |                                 | (65    | )       |  | (169    | ) |  | (11    | )
|Repayment of supplier credit for fixed
  assets                                |  |                                 | (230   | )       |  | (1,041  | ) |  | (55    | )
|Acquisition of operation                                                       |  |                                 |       |         |  |        |   |  | (4,434 | )
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Net cash used in investing
  activities                                        |  |                                 | (339   | )       |  | (1,384  | ) |  | (7,156 | )
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|                                                                              
|Cash flows  financing activities                                              |  |                                 |        |         |  |         |   |  |        |  
|Receipt (repayment) of short-term credit,
  net                                |  |                                 | (6,526 | )       |  | 6,473   |   |  | (202   | )
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Net cash provided by (used in) financing
  activities                          |  |                                 | (6,526 | )       |  | 6,473   |   |  | (202   | )
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Increase (decrease) in cash and cash
  equivalents                             |  |                                 | 2      |         |  | (581    | ) |  | 59     |  
|Cash and cash equivalents balance 
  beginning of year                        |  |                                 | 484    |         |  | 1,065   |   |  | 1,006  |  
|                                                                               |  |                                 |        |         |  |         |   |  |        |  
|Cash and cash equivalents balance  end of
  year                              |  |                                 | 486    |         |  | 484     |   |  | 1,065  |  
|                                                                               |  |                                 |        |         |  |         |   |  |        |  

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

6

---

---

Din Dynamic Ltd.Appendices to Statement of Cash Flows

|   |                                                            
|-- | -----------------------------------------------------------
|A. | Adjustments to present cash flows from
operating activities

|                                                              |  |                                 |        |         |  |         |   |  |         |  
|------------------------------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- | - |  | ------- | -
|                                                              |  | For the year ended December 31  |       
|                                                              |  |                                 |       
|                                                              |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 |  
|                                                              |  |                                 |        |         |  |         |  
|                                                              |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                                              |  |                                 |       
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Revenues and expenses not involving cash
  flows:             |  |                                 |        |         |  |         |   |  |         |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Depreciation and amortization                                 |  |                                 | 957    |         |  | 902     |   |  | 851     |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Decrease in accrued severance pay, net                        |  |                                 | (783   | )       |  |        |   |  |        |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Increase in deferred taxes                                    |  |                                 | (3     | )       |  | (41     | ) |  | (14     | )
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Capital gain, net                                             |  |                                 |       |         |  | (24     | ) |  | (16     | )
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Cost of share-based payment                                   |  |                                 | 31     |         |  | 144     |   |  |        |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Changes in operating assets and
  liabilities:                |  |                                 |        |         |  |         |   |  |         |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Decrease in trade receivables                                 |  |                                 | 3,167  |         |  | 1,748   |   |  | (11,479 | )
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Decrease (increase) in other receivables
  and debit balances |  |                                 | (4,358 | )       |  | 1,709   |   |  | (328    | )
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Decrease in inventory                                         |  |                                 | 488    |         |  | 878     |   |  | (6,539  | )
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Increase (decrease) in trade payables                         |  |                                 | 1,386  |         |  | (20,055 | ) |  | 19,788  |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|Increase (decrease) in other payables and
  credit balances   |  |                                 | (1,011 | )       |  | 2,528   |   |  | 1,122   |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  
|                                                              |  |                                 | (126   | )       |  | (12,211 | ) |  | 3,385   |  
|                                                              |  |                                 |        |         |  |         |   |  |         |  

|   |                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Non-cash activities                                                                                                                                      
|   |                                                                                                                                                          
|   | In the
  current year, fixed assets were purchased with supplier credit totaling NIS
  584 thousand (2006  NIS 230 thousand; 2005  NIS 1,041 thousand).

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

7

---

---

Din Dynamic Ltd.Notes to the Financial Statements as of
December 31, 2007

|          |        
|--------- | -------
|Note 1   | General

| |    |                 |                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | The Company -   | Din Dynamic
  Ltd., wholly-owned and controlled by Suny Electronics Ltd., a company whose
  shares are traded on the Tel Aviv Stock Exchange (the parent company), is
  engaged in the operation of a chain of stores, and in the importing,
  marketing and servicing of cellular telephone handsets intended for use on
  the communication network of Cellcom Israel Ltd. (Cellcom).
| |    |                 |                                                                                                                                                                                                                                                                                                                                                                                            
| | B. | Related party - | As defined
  in Opinion No. 29 of the Institute of Certified Public Accountants in Israel,
  including a related party as defined in the Israeli Securities Regulations
  (Preparation of Annual Financial Statements), 1993.                                                                                                                                                              

|          |                                                                                                                                             
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------
|Note 2   | Significant accounting policies                                                                                                             
|          |                                                                                                                                             
|          | The
  significant accounting policies applied in preparation of the financial
  statements, in a manner consistent with the prior year, are:

| |    |                                    
| | -- | -----------------------------------
| | A. | Financial statement reporting basis

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | Until
  December 31, 2003 the Company prepared its financial statements on the basis
  of nominal cost adjusted for changes in the Consumer Price Index  in Israel. The
  adjusted amounts that were included in the Companys financial statements as
  of December 31, 2003 (the transition date) served as the starting point for
  financial reporting from this date henceforth.
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | Condensed
  nominal financial statements of the Company, for tax purposes, are included
  in Note 19.                                                                                                                                                                                                                                                                                  
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 2. | Financial statements in reported amounts                                                                                                                                                                                                                                                                                                                                               
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | The reported
  amounts, which relate to periods after the transition date, are comprised as
  follows:All amounts originating in the period after the transition date are
  included in the financial statements at nominal values.                                                                                                                                                    
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  |    | All amounts
  originating in the period before the transition date, including depreciation
  and amortization and changes in non-monetary items, are comprised of amounts
  adjusted only to the transition date, plus (or minus, as applicable) amounts
  in nominal values originating in changes after the transition date.                                                         
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 3. | The amounts
  according to which the non-monetary assets and liabilities are stated in
  these financial statements do not necessarily represent realization value or
  updated economic value, but rather the reported amounts (or adjusted amounts,
  as applicable) of those assets, on the relevant dates.                                                                         

| |    |                                                                                            
| | -- | -------------------------------------------------------------------------------------------
| | B. | Cash and cash equivalents                                                                  
| |    |                                                                                            
| |    | Includes
  bank deposits with an original term to maturity of not more than three
  months.

8

---

---

|          |                                          
|--------- | -----------------------------------------
|Note 2   | Significant
  accounting policies (cont.)

| |    |                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Provision
  for doubtful debts                                                                                                                            
| |    |                                                                                                                                                           
| |    | The provision for doubtful
  debts is calculated specifically for debts, the collection of which is
  doubtful in the opinion of the Companys management.
| |    |                                                                                                                                                           
| | D. | Inventory                                                                                                                                                 
| |    |                                                                                                                                                           
| |    | Inventory is valued at the
  lower of cost, on the basis of first in  first out, or market value.                                                      
| |    |                                                                                                                                                           
| | E. | Fixed
  assets                                                                                                                                            

| |  |    |                                                                                                                                                             
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1. | Assets are stated at cost.
  Improvements and renovations are capitalized to the cost of the assets,
  whereas current maintenance and repairs are expensed.
| |  |    |                                                                                                                                                             
| |  | 2. | Depreciation is calculated
  by the straight-line method, over the estimated useful life of the assets.
  The annual depreciation rates are:                

|                                     |     
|------------------------------------ | ----
|                                     | %   
|                                     |     
|                                     |     
|Instruments and equipment            | 7-25
|Office furniture and
  equipment     | 7-15
|Computers and peripheral
  equipment | 33  
|Vehicles                             | 15  
|Leasehold improvements               | 7-10

| |  |    |                                                                                                                                                                                                                                                                           
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | The residual value and the useful life of each asset are examined at least at the end of every
year. The changes are accounted for prospectively, as a change in accounting estimate. The
need for recording an impairment provision is also examined (see Par. L. below).

| |    |               
| | -- | --------------
| | F. | Other
  assets

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                       
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Rental rights in stores,
  as well as goodwill from the acquisition of operation, are stated at cost.
  The rental rights are amortized at annual rates of 10%-12.5% per year,
  according to the expected period of economic benefit.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                       
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Computer software and
  licenses are stated at cost. The assets are amortized at an annual rate of
  33%, according to the expected period of economic benefit.                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                       
| | G. | Deferred
  taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                       
| |    | Deferred taxes are
  calculated for temporary differences between the timing of amounts included
  in the adjusted financial statements and the amounts taken into account for
  tax purposes. Deferred tax balances are calculated according to the tax rate
  expected to be in effect when these taxes flow through to the statement of
  operations, based on information available at the time the financial
  statements are prepared.                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | H. | Share-based
  payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The cost of employee benefits settled
in capital instruments, such as shares or options for shares of the Company and/or the
parent company, is measured according to the fair value of the financial instruments on
the grant date. Additional expense will be charged if a change will be made to the terms
of the arrangement, which increases its total fair value. The cost is charged to the
Companys statement of operations concurrent with a corresponding increase in its
shareholders equity, over the period in which the conditions of the service are
fulfilled, a period ending on the date the employees are eligible for compensation
(vesting period).

9

---

---

|         |                                        
|-------- | ---------------------------------------
|Note 2  | Significant accounting policies (cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I. | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Revenues
from product sales are included when the products are supplied, the date that the
significant risks and rewards deriving from ownership are transferred to the buyer; the
Company does not retain any ongoing managerial involvement that characterizes ownership
and does not retain effective control of the goods sold; the amount of revenues and costs
that were generated or could be generated by the transaction may be reliably measured, and
the economic benefits deriving from the transaction are expected to flow to the Company.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Revenues
from service fees are included over the service contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | J. | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Within the
  framework of financial statement preparation, in conformity with generally
  accepted accounting principles, the Companys management is required to use
  estimates and to make assessments and assumptions that impact the reported
  data relating to the assets and liabilities and to contingent assets and
  liabilities as of the date of the financial statements, and on the revenue
  and expense data during the reported periods.                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The actual results could differ
  from these estimates and assessments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | K. | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  Companys financial instruments are comprised of non-derivative assets and
  liabilities that mainly include working capital items.Due to their nature,
  the fair value of the financial instruments included in working capital are
  generally the same or approximate their carrying value.                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | L. | Impairment of assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Periodically, the Company evaluates
the need to record an impairment provision, in order to assure that its fixed assets, and
other assets, are not stated at an amount exceeding their recoverable amount,
which is the higher of the net sales price and the present value of the estimated future
cash flows expected to derive from the use and realization of the asset. A recognized
impairment loss will be reversed only when changes have occurred in the estimates used to
determine the assets recoverable amount.                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | M. | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Certain
  items included in the comparative figures for prior periods in the financial
  statements were reclassified, in order to faithfully reflect the
  classification of those items in the current financial statements.                                                                                                                                                                                                                                                                                                                          

10

---

---

|             |                                          
|------------ | -----------------------------------------
|Note 2
     | Significant
  accounting policies (cont.)

| |    |                                               |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | N. | Linked balances and foreign currency balances
| |    |                                               |                                                                                                                                                                                                                                                                                             
| |    | 1.                                            | Balances
  denominated in or linked to foreign currency are included in the financial
  statements at the representative exchange rates. Balances linked to the
  Consumer Price Index in Israel (CPI) are included on the basis of the relevant CPI
  for each linked asset or liability.
| |    |                                               |                                                                                                                                                                                                                                                                                             
| |    | 2.                                            | Presented
  below are data on the CPI and representative exchange rate of the U.S.
  dollar:                                                                                                                                                                                                

|                                                                                                   |  |  |                 |   |               |      |  
|-------------------------------------------------------------------------------------------------- |  |  | --------------- | - | ------------- | ---- | -
|                                                                                                   |  |  | Consumer        |   | Exchange rate
|                                                                                                   |  |  | Price Index (*) |   | of $1        
|                                                                                                   |  |  |                 |   |              
|                                                                                                   |  |  | Points          |   | NIS          
|                                                                                                   |  |  |                 |   |              
|                                                                                                   |  |  |                 |   |               |      |  
|In month at end of period                                                                          |  |  |                 |   |               |      |  
|December 2007                                                                                      |  |  | 113.6           |   |               | 3.85 |  
|December 2006                                                                                      |  |  | 109.9           |   |               | 4.23 |  
|December 2005                                                                                      |  |  | 110.0           |   |               | 4.60 |  
|                                                                                                   |  |  |                 |   |               |      |  
|                                                                                                   |  |  | %               |   | %            
|                                                                                                   |  |  |                 |   |              
|                                                                                                   |  |  |                 |   |               |      |  
|Rate of change during the year                                                                     |  |  |                 |   |               |      |  
|Year ended December 31, 2007                                                                       |  |  | 3.4             |   |               | (9.0 | )
|Year ended December 31, 2006                                                                       |  |  | (0.1            | ) |               | (8.1 | )
|Year ended December 31, 2005                                                                       |  |  | 2.4             |   |               | 6.8  |  
|                                                                                                   |  |  |                 |   |               |      |  
|(*) According to CPI for
  month ended on balance sheet date, at average basis of 2000=100 points.

| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | O. | Initial
  application of Accounting Standards
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 1.                                            | Beginning
  January 1, 2007, the Company has applied Accounting Standard No. 26 
  Inventory (the Standard), of the Israel Accounting Standards Board (ASB),
  which provides the financial statement accounting treatment and measurement
  of inventory.                                                                                                                                                                                                                                           
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                               | The initial
  application of the Standard did not have a material effect on the financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 2.                                            | Beginning
  January 1, 2007, the Company has applied Accounting Standard No. 27 of the
  ASB  Fixed Assets, and No. 28  Amendment of Transitional Provisions of
  Accounting Standard 27 (the Standards), which provide the accounting
  treatment of fixed assets required in the financial statements.                                                                                                                                                                                              
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                               | In view of
  the Companys decision to apply the cost model, the initial application of
  the Standard did not have a material effect on the financial statements.                                                                                                                                                                                                                                                                                                                                        
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 3.                                            | Beginning
  January 1, 2007, the Company has applied Accounting Standard No. 30 of ASB 
  Intangible Assets, which was published in March 2007 (the Standard). The
  Standard is based on International Accounting Standard No. 38, which provides
  the accounting treatment, recognition and measurement and disclosure
  requirements related to intangible assets that are not dealt with in another
  Standard. With its publication, Accounting Standard No. 20 (Amended) of ASB
  was cancelled.
| |    |                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                               | As a result of the initial
application of the Standard, the Company classified the cost and accumulated amortization
of computer software and licenses from fixed assets to other assets, in the amount of NIS
162 thousand and of NIS 10 thousand, as of December 31, 2006 and 2005.                                                                                                                                                                                                                     

11

---

---

|          |                                       
|--------- | --------------------------------------
|Note 2   | Significant accounting policies(cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | O. | Initial application of Accounting Standards(cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Aside from
  the aforesaid, the initial application of the Standard did not have a
  material effect on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | P. | Disclosure of the effect of new Accounting Standard in the period
  before application                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | In July
  2006, Accounting Standard No. 29 of the ASB (the Standard) was published
  regarding the adoption of International Financial Reporting Standards (IFRS
  Standards) in Israel.

..                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | IFRS
  Standards are standards and interpretations that were adopted by the
  International Accounting Standards Board, and they include international
  financial reporting standards (IFRS), international accounting standards (IAS), and
  interpretations prescribed by the International Financial Reporting
  Interpretations Committee (IFRIC) or the committee that preceded it for interpretation
  of international accounting standards (SIC).                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Standard
  allows the Company to adopt the said provisions in its financial statements.
  If the Company elects to apply IFRS Standards, it will have to provide
  financial statement disclosure, inter alia, of the adjustments to
  shareholders equity or income or losses that were reported in the past for
  reporting periods for which their comparative periods are included in the
  financial statements, as a result of the transition from the existing standards
  to reporting according to IFRS Standards.

12

---

---

|          |                                       
|--------- | --------------------------------------
|Note 2   | Significant accounting policies(cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Q. | Disclosure of the effect of new Accounting Standard in the period
  before application(cont.)                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  application of IFRS Standards could have a material effect on the Companys
  assets and liabilities, and hence, also on the Companys financial position
  and operating results, as they will be reflected in its financial statements.
  Adoption of the Standards requires the Company to evaluate the differences
  between the IFRS Standards and the accounting standards now practiced in
  Israel  which requires considerable time and resources.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company
  intends to change to reporting according to IFRS Standards during 2008. The
  initial adoption of the IFRS Standards will be carried out while applying
  IFRS Standard 1  Initial Adoption of IFRS Standards.                                                                                                                                                                                                                                     

|          |                          
|--------- | -------------------------
|Note 3   | Cash and cash equivalents

|                          |  |                                 |     |         |  |         |  |  |       | 
|------------------------- |  | ------------------------------- | --- | ------- |  | ------- |  |  | ----- | 
|                          |  | As of December 31               |    
|                          |  |                                 |    
|                          |  | 2 0 0 7                         |     | 2 0 0 6 |  | 2 0 0 5 | 
|                          |  |                                 |     |         |  |         | 
|                          |  | R e p o r t e d  N I S  , 0 0 0 |    
|                          |  |                                 |    
|                          |  |                                 |     |         |  |         |  |  |       | 
|Composition:              |  |                                 |     |         |  |         |  |  |       | 
|In Israeli currency       |  |                                 | 464 |         |  | 450     |  |  | 1,057 | 
|Linked to the U.S. dollar |  |                                 | 22  |         |  | 34      |  |  | 8     | 
|                          |  |                                 |     |         |  |         |  |  |       | 
|                          |  |                                 | 486 |         |  | 484     |  |  | 1,065 | 
|                          |  |                                 |     |         |  |         |  |  |       | 

|          |                  
|--------- | -----------------
|Note 4   | Trade receivables

|                                                                  |  |                                 |        |         |  |         |  |  |        | 
|----------------------------------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                                                                  |  | As of December 31               |       
|                                                                  |  |                                 |       
|                                                                  |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                                                  |  |                                 |        |         |  |         | 
|                                                                  |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                                                  |  |                                 |       
|                                                                  |  |                                 |        |         |  |         |  |  |        | 
|Composition:                                                      |  |                                 |        |         |  |         |  |  |        | 
|Open accounts                                                     |  |                                 | 11,101 |         |  | 14,776  |  |  | 18,483 | 
|Checks, credit card company vouchers
  and automatic debit orders |  |                                 | 7,131  |         |  | 6,623   |  |  | 4,664  | 
|                                                                  |  |                                 |        |         |  |         |  |  |        | 
|                                                                  |  |                                 | 18,232 |         |  | 21,399  |  |  | 23,147 | 
|                                                                  |  |                                 |        |         |  |         |  |  |        | 
|Net of provision for doubtful
  debts                             |  |                                 | 59     |         |  | 37      |  |  | 37     | 
|                                                                  |  |                                 |        |         |  |         |  |  |        | 
|Of which  Cellcom, net                                           |  |                                 | 10,139 |         |  | 13,556  |  |  | 18,253 | 
|                                                                  |  |                                 |        |         |  |         |  |  |        | 

13

---

---

|          |                                     
|--------- | ------------------------------------
|Note 5   | Other receivables and debit balances

|                              |  |                                 |       |         |  |         |  |  |       | 
|----------------------------- |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ----- | 
|                              |  | As of December 31               |      
|                              |  |                                 |      
|                              |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|                              |  |                                 |       |         |  |         | 
|                              |  | R e p o r t e d  N I S  , 0 0 0 |      
|                              |  |                                 |      
|                              |  |                                 |       |         |  |         |  |  |       | 
|Composition:                  |  |                                 |       |         |  |         |  |  |       | 
|Government
  institutions     |  |                                 | 813   |         |  | 714     |  |  | 2,257 | 
|Deferred
  taxes              |  |                                 | 159   |         |  | 156     |  |  | 115   | 
|Related
  parties             |  |                                 | 3,852 |         |  |        |  |  |      | 
|Prepaid
  expenses and sundry |  |                                 | 796   |         |  | 389     |  |  | 555   | 
|                              |  |                                 |       |         |  |         |  |  |       | 
|                              |  |                                 | 5,620 |         |  | 1,259   |  |  | 2,927 | 
|                              |  |                                 |       |         |  |         |  |  |       | 

|          |                                                    
|--------- | ---------------------------------------------------
|Note 6   | Funded liability in excess of accrued severance pay

|   |                                  |  |                                 |       |         |  |         |  |  |       | 
|-- | -------------------------------- |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ----- | 
|   |                                  |  | As of December 31               |      
|   |                                  |  |                                 |      
|   |                                  |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|   |                                  |  |                                 |       |         |  |         | 
|   |                                  |  | R e p o r t e d  N I S  , 0 0 0 |      
|   |                                  |  |                                 |      
|   |                                  |  |                                 |       |         |  |         |  |  |       | 
|A. | Composition:                     |  |                                 |       |         |  |         |  |  |       | 
|   | Funded
  liability               |  |                                 | 4,438 |         |  | 4,174   |  |  | 3,833 | 
|   | Net of 
  accrued severance pay |  |                                 | 3,588 |         |  | 4,107   |  |  | 3,511 | 
|   |                                  |  |                                 |       |         |  |         |  |  |       | 
|   |                                  |  |                                 | 850   |         |  | 67      |  |  | 322   | 
|   |                                  |  |                                 |       |         |  |         |  |  |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | The Companys liabilities for the payment of accrued severance pay and
          retirement to its employees, calculated on the basis of their last salary
          (regarding employees whose income is influenced by the Companys revenues
          (mainly  marketing and sales personnel) calculated on the basis of their
          average monthly salary, during the twelve months period prior financial
          balance sheet date) and their period of employment, are covered by premium
          payments for managers insurance and by the funded severance pay. The
          amounts accrued for the insurance policies were not included in the financial
          statements, since they are not under the Companys control and management.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | C. | The balance in the severance pay fund includes accrued earnings. A withdrawal
          from the severance pay fund is contingent on compliance with the provisions of
          the Severance Pay Law in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|          |         
|--------- | --------
|Note 7   | Deposits

| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Includes
  deposits given by the Company to property owners to secure its liabilities,
  under the terms of rental contracts, in some of the stores it has opened.

14

---

---

|          |             
|--------- | ------------
|Note 8   | Fixed assets

Composition:

|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|-------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------------- | -------- | ---------------------------------------- | --------------------- | ------- | ------------------------- | ------- |  | ------- | - |  | ----- | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                                   |  | Instruments
  and
  equipment   |       | Furniture
  
  and office
  equipment |          | Computers
  and
  peripheral
  equipment |                       |         |                           |         |  |         |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         | Total
  as of December 31 |        
|                                                   |  |                                 |       |                                       |          |                                          | Leaseholdimprovements |         |                           |        
|                                                   |  |                                 |       |                                       | Vehicles |                                          |                       | 2 0 0 7 |                           | 2 0 0 6 |  | 2 0 0 5 |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   | 
|                                                   |  | R e p o r t e d  N I S  , 0 0 0 |      
|                                                   |  |                                 |      
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|Cost (1)                                           |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|Balance  beginning of year                        |  |                                 | 2,103 |                                       |          | 3,474                                    |                       |         | 3,562                     |         |  | 138     |   |  | 4,255 |   |  | 13,532 |   |  | 12,888 |   |  | 9,559  |  
|Additions for year                                 |  |                                 | 28    |                                       |          | 88                                       |                       |         | 125                       |         |  |        |   |  | 396   |   |  | 637    |   |  | 735    |   |  | 3,402  |  
|Disposals for year                                 |  |                                 | (617  | )                                     |          | (1,294                                   | )                     |         | (2,566                    | )       |  | (138    | ) |  | (871  | ) |  | (5,486 | ) |  | (91    | ) |  | (73    | )
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|                                                   |  |                                 | 1,514 |                                       |          | 2,268                                    |                       |         | 1,121                     |         |  |        |   |  | 3,780 |   |  | 8,683  |   |  | 13,532 |   |  | 12,888 |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|Accumulated depreciation                           |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|Balance  beginning of year                        |  |                                 | 1,547 |                                       |          | 1,907                                    |                       |         | 3,157                     |         |  | 138     |   |  | 2,022 |   |  | 8,771  |   |  | 7,998  |   |  | 7,423  |  
|Additions for year                                 |  |                                 | 120   |                                       |          | 157                                      |                       |         | 223                       |         |  |        |   |  | 370   |   |  | 870    |   |  | 864    |   |  | 648    |  
|Disposals for year                                 |  |                                 | (617  | )                                     |          | (1,294                                   | )                     |         | (2,566                    | )       |  | (138    | ) |  | (871  | ) |  | (5,486 | ) |  | (91    | ) |  | (73    | )
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|                                                   |  |                                 | 1,050 |                                       |          | 770                                      |                       |         | 814                       |         |  |        |   |  | 1,521 |   |  | 4,155  |   |  | 8,771  |   |  | 7,998  |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|Net book value                                     |  |                                 | 464   |                                       |          | 1,498                                    |                       |         | 307                       |         |  |        |   |  | 2,259 |   |  | 4,528  |   |  | 4,761  |   |  | 4,890  |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  
|(1) Includes cost of fully
  depreciated assets of |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  | 1,241   |   |  | 6,382 |   |  | 6,301  |  
|                                                   |  |                                 |       |                                       |          |                                          |                       |         |                           |         |  |         |   |  |       |   |  |        |   |  |        |   |  |        |  

15

---

---

|          |             
|--------- | ------------
|Note 9   | Other assets

|   |                                                      |  |                                 |       |         |  |         |  |  |       |  | 
|-- | ---------------------------------------------------- |  | ------------------------------- | ----- | ------- |  | ------- |  |  | ----- |  | 
|   |                                                      |  | As of December 31               |      
|   |                                                      |  |                                 |      
|   |                                                      |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 | 
|   |                                                      |  |                                 |       |         |  |         | 
|   |                                                      |  | R e p o r t e d  N I S  , 0 0 0 |      
|   |                                                      |  |                                 |      
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|A. | Composition:                                         |  |                                 |       |         |  |         |  |  |       | 
|   | Cost of
  intangible assets (1)                      |  |                                 | 276   |         |  | 211     |  |  | 42    | 
|   | Disposals                                            |  |                                 | (31   | )       |  |        |  |  |      | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|   |                                                      |  |                                 | 245   |         |  | 211     |  |  | 42    | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|   | Less 
  accumulated amortization                    |  |                                 | 125   |         |  | 49      |  |  | 32    | 
|   | Disposals                                            |  |                                 | (31   | )       |  |        |  |  |      | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|   |                                                      |  |                                 | 94    |         |  | 49      |  |  | 32    | 
|   |                                                      |  |                                 |       |         |  |         |  |  |      
|   |                                                      |  |                                 | 151   |         |  | 162     |  |  | 10    | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|   | Rental
  rights in stores, net of amortization (1)   |  |                                 | 12    |         |  | 23      |  |  | 44    | 
|   | Goodwill on
  acquisition of operation (see B below) |  |                                 | 4,260 |         |  | 4,260   |  |  | 4,260 | 
|   |                                                      |  |                                 |       |         |  |         |  |  |      
|   |                                                      |  |                                 | 4,423 |         |  | 4,445   |  |  | 4,314 | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 
|   | (1) Includes
  cost of fully amortized assets of     |  |                                 |      |         |  | 31      |  |  | 31    | 
|   |                                                      |  |                                 |       |         |  |         |  |  |       | 

| |    |                                                                                                                                                                                                                                                                                                        
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | Acquisition
  of the operation of See Communication                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                        
| |    | In July
  2005, the Company entered into an agreement with See Communication Shehuda
  Ltd. (See) and its major shareholder, to acquire the operations of See, a
  private company operating 14 points of retail marketing and sale of cellular
  communication products used by the Cellcom network.
| |    |                                                                                                                                                                                                                                                                                                        
| |    | The
  agreement stipulated, inter alia, that in consideration for the acquired
  operations and assets, the Company will pay NIS 7 million to See. Part was allocated to fixed assets and the balance  to goodwill.                                                                                   

|           |                                                                                           
|---------- | ------------------------------------------------------------------------------------------
|Note 10   | Short-term credit                                                                         
|           |                                                                                           
|           | Last year,
  includes short-term bank credit bearing annual interest at the rate of 5.75%.

16

---

---

|           |               
|---------- | --------------
|Note 11   | Trade payables

|                               |  |                   |                                 |         |  |         |  |  |        | 
|------------------------------ |  | ----------------- | ------------------------------- | ------- |  | ------- |  |  | ------ | 
|                               |  | As of December 31 |                                
|                               |  |                   |                                
|                               |  | 2 0 0 7           |                                 | 2 0 0 6 |  | 2 0 0 5 | 
|                               |  |                   |                                 |         |  |         | 
|                               |  |                   | R e p o r t e d  N I S  , 0 0 0 |        
|                               |  |                   |                                
|                               |  |                   |                                 |         |  |         |  |  |        | 
|Composition:                   |  |                   |                                 |         |  |         |  |  |        | 
|Open debts
  (1)               |  |                   | 2,394                           |         |  | 1,552   |  |  | 21,143 | 
|Post-dated
  checks payable    |  |                   | 1,633                           |         |  | 735     |  |  | 2,010  | 
|                               |  |                   |                                 |         |  |         |  |  |        | 
|                               |  |                   | 4,027                           |         |  | 2,287   |  |  | 23,153 | 
|                               |  |                   |                                 |         |  |         |  |  |        | 
|(1) Includes
  related company |  |                   | 48                              |         |  | 12      |  |  | 18,361 | 
|                               |  |                   |                                 |         |  |         |  |  |        | 

|           |                                   
|---------- | ----------------------------------
|Note 12   | Other payables and credit balances

|                               |  |                   |                                 |         |  |         |  |  |       | 
|------------------------------ |  | ----------------- | ------------------------------- | ------- |  | ------- |  |  | ----- | 
|                               |  | As of December 31 |                                
|                               |  |                   |                                
|                               |  | 2 0 0 7           |                                 | 2 0 0 6 |  | 2 0 0 5 | 
|                               |  |                   |                                 |         |  |         | 
|                               |  |                   | R e p o r t e d  N I S  , 0 0 0 |        
|                               |  |                   |                                
|                              
|Composition:                   |  |                   |                                 |         |  |         |  |  |       | 
|Employees
  and salary-related |  |                   | 3,528                           |         |  | 3,389   |  |  | 3,346 | 
|Prepaid
  income               |  |                   | 2,956                           |         |  | 2,863   |  |  | 826   | 
|Related parties                |  |                   |                                |         |  |        |  |  | 886   | 
|Accrued
  expenses and sundry  |  |                   | 318                             |         |  | 1,561   |  |  | 227   | 
|                               |  |                   |                                 |         |  |         |  |  |       | 
|                               |  |                   | 6,802                           |         |  | 7,813   |  |  | 5,285 | 
|                               |  |                   |                                 |         |  |         |  |  |       | 

|           |            
|---------- | -----------
|Note 13   | Commitments

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Distribution agreement (non-exclusive) with Cellcom                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The
Company has undertaken, pursuant to an agreement between the parent company and Cellcom in
a non-exclusive distribution agreement, to serve as an authorized distributor of the
Cellcom products and services. Moreover, the parent company received approval from Cellcom
to provide to its clients certain software and activation services, in the framework of
its import and distribution business and cellular phones service contracts.
In
April, 2005, the term of this contract was extended for a period of additional 4 years.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | B. | Agreements with related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Agreements
  were signed between the Company and related parties which arrange the
  business relations between them, the way transactions are effected and their
  financing. Company management believes that the allocation of expenses
  between the related parties, pursuant to these agreements, is proper.                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | C. | Store rental agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company
  and the parent company have entered into agreements with third parties for
  the rental of properties serving as stores and counters (including: stores in
  Tel Aviv, in Segula and in shopping malls throughout Israel).                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The rental
  fees paid in the stores and shopping mall counters are determined according
  to a percentage of sales or a fixed sum linked to the Israeli CPI (or occasionally to
  the U.S. dollar), whichever is higher.                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The fixed
  monthly rental fees on all the above properties in December 2007 total NIS
  524 thousand (December 2006  NIS 510 thousand, December 2005  NIS 500 thousand).                                                                                                                                                                                                                                                                                                                                                                  

17

---

---

|           |              
|---------- | -------------
|Note 14   | Share capital

|                                                                                          |  |                                           |        |                              |  |         | 
|----------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------ | ---------------------------- |  | ------- | 
|                                                                                          |  | As of December 31, 2007, 2006 
  and 2005 |       
|                                                                                          |  |                                           |       
|                                                                                          |  | Authorized
  capital                      |        | Issued and
  paid-up capital | 
|                                                                                          |  |                                           |        |                              | 
|                                                                                          |  | Number of
  shares                        |        | N I S                        | 
|                                                                                          |  |                                           |        |                              | 
|                                                                                          |  |                                           |        |                              |  |         | 
|Ordinary
  shares, NIS 1 par value each                                                   |  |                                           | 23,800 |                              |  | (*) 100 | 
|                                                                                          |  |                                           |        |                              |  |         | 
|                                                                                          |  |                                           |        |                              |  |         | 
|(*) Share
  capital is stated in the balance sheet rounded to the nearest NIS 1 thousand. |  |                                           |        |                              |  |         | 

|            |              
|----------- | -------------
|Note 15    | Cost of sales

|                                                  |  |                                 |        |         |  |         |  |  |        |  
|------------------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | -
|                                                  |  | For the year ended December 31  |       
|                                                  |  |                                 |       
|                                                  |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                                  |  |                                 |        |         |  |         | 
|                                                  |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                                  |  |                                 |       
|                                                  |  |                                 |        |         |  |         |  |  |        |  
|Composition:                                      |  |                                 |        |         |  |         |  |  |        |  
|Purchases (1)(2)                                  |  |                                 | 80,581 |         |  | 82,452  |  |  | 71,314 |  
|Salaries and related expenses (1)                 |  |                                 | 5,533  |         |  | 5,180   |  |  | 4,360  |  
|Other expenses (1)                                |  |                                 | 2,100  |         |  | 2,099   |  |  | 2,098  |  
|Add (deduct)  decrease (increase) in
  inventory |  |                                 | 489    |         |  | 878     |  |  | (6,539 | )
|                                                  |  |                                 |        |         |  |         |  |  |        |  
|                                                  |  |                                 | 88,703 |         |  | 90,609  |  |  | 71,233 |  
|                                                  |  |                                 |        |         |  |         |  |  |        |  
|(1) Includes from related parties                 |  |                                 | 23,257 |         |  | 24,924  |  |  | 36,611 |  
|                                                  |  |                                 |        |         |  |         |  |  |        |  
|(2) Includes from another major supplier          |  |                                 | 46,427 |         |  | 46,592  |  |  | 25,001 |  
|                                                  |  |                                 |        |         |  |         |  |  |        |  

|            |                 
|----------- | ----------------
|Note 16    | Selling expenses

|                                         |  |                                 |        |         |  |         |  |  |        | 
|---------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ------ | 
|                                         |  | For the year ended December 31  |       
|                                         |  |                                 |       
|                                         |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                         |  |                                 |        |         |  |         | 
|                                         |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                         |  |                                 |       
|                                         |  |                                 |        |         |  |         |  |  |        | 
|Composition:                             |  |                                 |        |         |  |         |  |  |        | 
|Salaries and related  expenses           |  |                                 | 17,130 |         |  | 17,071  |  |  | 14,028 | 
|Store rental fees and maintenance        |  |                                 | 9,102  |         |  | 9,354   |  |  | 7,180  | 
|Advertising, marketing and commissions   |  |                                 | 2,128  |         |  | 2,441   |  |  | 1,361  | 
|Depreciation, amortization and disposals |  |                                 | 836    |         |  | 768     |  |  | 488    | 
|Other                                    |  |                                 | 1,210  |         |  | 1,262   |  |  | 1,062  | 
|                                         |  |                                 |        |         |  |         |  |  |        | 
|                                         |  |                                 | 30,406 |         |  | 30,896  |  |  | 24,119 | 
|                                         |  |                                 |        |         |  |         |  |  |        | 

18

---

---

|           |                                    
|---------- | -----------------------------------
|Note 17   | General and administrative expenses

|                                               |  |                                 |        |         |  |         |  |  |       | 
|---------------------------------------------- |  | ------------------------------- | ------ | ------- |  | ------- |  |  | ----- | 
|                                               |  | For the year ended December 31  |       
|                                               |  |                                 |       
|                                               |  | 2 0 0 7                         |        | 2 0 0 6 |  | 2 0 0 5 | 
|                                               |  |                                 |        |         |  |         | 
|                                               |  | R e p o r t e d  N I S  , 0 0 0 |       
|                                               |  |                                 |       
|                                               |  |                                 |        |         |  |         |  |  |       | 
|Composition:                                   |  |                                 |        |         |  |         |  |  |       | 
|Salaries and related                           |  |                                 | 4,004  |         |  | 3,675   |  |  | 2,917 | 
|Office maintenance                             |  |                                 | 791    |         |  | 879     |  |  | 587   | 
|Management fees to related party               |  |                                 | 4,835  |         |  | 4,938   |  |  | 3,852 | 
|Other                                          |  |                                 | 431    |         |  | 870     |  |  | 888   | 
|                                               |  |                                 |        |         |  |         |  |  |       | 
|                                               |  |                                 | 10,061 |         |  | 10,362  |  |  | 8,244 | 
|                                               |  |                                 |        |         |  |         |  |  |       | 
|(*) Includes expenses to related party         |  |                                 | 537    |         |  | 432     |  |  | 388   | 
|                                               |  |                                 |        |         |  |         |  |  |       | 
|(*) Includes rental fees to related party
  of |  |                                 | 456    |         |  | 341     |  |  | 180   | 
|                                               |  |                                 |        |         |  |         |  |  |       | 

|           |                
|---------- | ---------------
|Note 18   | Taxes on income

|   |                             |  |                                 |       |         |  |         |   |  |       |  
|-- | --------------------------- |  | ------------------------------- | ----- | ------- |  | ------- | - |  | ----- | -
|   |                             |  | For the year ended December 31  |      
|   |                             |  |                                 |      
|   |                             |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 |  
|   |                             |  |                                 |       |         |  |         |  
|   |                             |  | R e p o r t e d  N I S  , 0 0 0 |      
|   |                             |  |                                 |      
|   |                             |  |                                 |       |         |  |         |   |  |       |  
|A. | Composition:                |  |                                 |       |         |  |         |   |  |       |  
|   | Current
  taxes  provision |  |                                 | 2,423 |         |  | 3,120   |   |  | 2,294 |  
|   | Less  deferred
  taxes     |  |                                 | (3    | )       |  | (41     | ) |  | (14   | )
|   |                             |  |                                 |       |         |  |         |   |  |       |  
|   |                             |  |                                 | 2,420 |         |  | 3,079   |   |  | 2,280 |  
|   |                             |  |                                 |       |         |  |         |   |  |       |  

|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|-- | ------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ------- |  | ------- | - |  | ----- | -
|   |                                                                                 |  | For the year ended December 31  |      
|   |                                                                                 |  |                                 |      
|   |                                                                                 |  | 2 0 0 7                         |       | 2 0 0 6 |  | 2 0 0 5 |  
|   |                                                                                 |  |                                 |       |         |  |         |  
|   |                                                                                 |  | R e p o r t e d  N I S  , 0 0 0 |      
|   |                                                                                 |  |                                 |      
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|B. | Reconciliation of theoretical tax to actual tax                                 |  |                                 |       |         |  |         |   |  |       |  
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|   | Income before taxes on income, as in Statement of Operations                    |  |                                 | 9,413 |         |  | 9,620   |   |  | 6,312 |  
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|   | Tax rate applicable to the Company                                              |  |                                 | 29    | %       |  | 31      | % |  | 34    | %
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|   | Theoretical tax calculated according to tax rate applicable to the Company      |  |                                 | 2,729 |         |  | 2,982   |   |  | 2,146 |  
|   | Adjustment for expenses that are not yet deductible/(currently deductible), net |  |                                 | (31   | )       |  | 134     |   |  | 21    |  
|   | Adjustment for capital losses (gains)                                           |  |                                 |      |         |  |        |   |  | (5    | )
|   | Adjustments for prior years                                                     |  |                                 | (96   | )       |  | 9       |   |  | 206   |  
|   | Adjustment for change in tax rate                                               |  |                                 | 12    |         |  | 11      |   |  |      |  
|   | Adjustment for inflationary effect in
  Israel                                  |  |                                 | (194  | )       |  | (57     | ) |  | (88   | )
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  
|   | Tax expenses, in Statement of Operations                                        |  |                                 | 2,420 |         |  | 3,079   |   |  | 2,280 |  
|   |                                                                                 |  |                                 |       |         |  |         |   |  |       |  

19

---

---

|           |                       
|---------- | ----------------------
|Note 18   | Taxes on income(cont.)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | The Company
  has been issued final tax assessments for the tax years through 2000. The tax
  assessment for year 2003 became final at the end of 2007.                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | D. | Taxes under
  inflationary conditions                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | According
to Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes in Israel
were measured on a real basis, adjusted to the changes in the CPI in Israel.
The applicability of this law was limited, subsequent to the balance sheet date, in an
Amendment to the Law, which was passed by the Knesset in February 2008.                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Accordingly,
beginning from January 1, 2008, the results for tax purposes will be measured on a nominal
basis, with certain adjustment deriving from the transitional provisions stipulated in the
Amendment.                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | E. | Change in corporate tax rate in Israel                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | On
July 25, 2005, the Knesset passed an Amendment to the Income Tax Ordinance (No. 147)
(Temporary Provision), 2005 (the Amendment). The Amendment provides a gradual
reduction in the corporate tax rate in Israel, as follows: In 2008, a tax rate of 27% will
apply (compared with a rate of 29% in 2007), in 2009  26% and from 2010 henceforth,
a rate of 25% will apply. Moreover, it was provided that as from year 2010, a real capital
gain will be subject to tax at a rate of 25%.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Company
  assesses that the Amendment does not have a material effect on the financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                        

20

---

---

|           |                                                                            
|---------- | ---------------------------------------------------------------------------
|Note 19   | Condensed Company financial statements, in nominal values, for tax
purposes

| |    |                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | The Company
  includes historical nominal data for income tax purposes alone. These
  statements were prepared in accordance with generally accepted accounting principles
  on the basis of the historical cost convention, without taking into account
  the changes in the general purchasing power of the Israeli currency.
| |    |                                                                                                                                                                                                                                                                                                                                
| | B. | Balance sheet                                                                                                                                                                                                                                                                                                                  

As of December 312 0 0 7

2 0 0 6

2 0 0 5N I S  , 0 0 0AssetsCurrent assetsCash and cash equivalents


486


484


1,065Trade receivables


18,232


21,399


23,147Other receivables and debit balances


5,620


1,259


2,927Inventory


10,445


10,933


11,81134,783


34,075


38,950Long-term investments and receivablesFunded liability in excess of accrued severance pay


850


67


322Deposits


278


287


338Partnership








11,128


354


661Fixed assets


4,501


4,725


4,843Other assets


4,423


4,445


4,31444,835


43,599


48,768


As of December 312 0 0 7

2 0 0 6

2 0 0 5N I S  , 0 0 0Liabilities and EquityCurrent liabilitiesShort-term credit





6,526


53Trade payables


4,027


2,287


23,153Other payables and credit balances


6,802


7,813


5,28510,829


16,626


28,491Shareholders equityShare capital


1


1


1Capital reserves


175


144


Retained earnings


33,830


26,828


20,27634,006


26,973


20,27744,835


43,599


48,768


21

---

---

|         |                                                                                    
|-------- | -----------------------------------------------------------------------------------
|Note 19 | Condensed Company financial statements, in nominal values, for tax
purposes (cont.)

| |    |                        
| | -- | -----------------------
| | C. | Statement of operations

|                                           |  |                                |         |         |  |         |  |  |         | 
|------------------------------------------ |  | ------------------------------ | ------- | ------- |  | ------- |  |  | ------- | 
|                                           |  | For the year ended December 31 |        
|                                           |  |                                |        
|                                           |  | 2 0 0 7                        |         | 2 0 0 6 |  | 2 0 0 5 | 
|                                           |  |                                |         |         |  |         | 
|                                           |  | N I S  , 0 0 0                 |        
|                                           |  |                                |        
|                                           |  |                                |         |         |  |         |  |  |         | 
|Revenues from sales and
  services         |  |                                | 138,180 |         |  | 141,099 |  |  | 109,698 | 
|Cost of sales and services                 |  |                                | 88,701  |         |  | 90,606  |  |  | 71,227  | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Gross
  profit                             |  |                                | 49,479  |         |  | 50,493  |  |  | 38,471  | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Selling expenses                           |  |                                | 30,399  |         |  | 30,887  |  |  | 24,108  | 
|General and administrative
  expenses      |  |                                | 10,061  |         |  | 10,362  |  |  | 8,242   | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|                                           |  |                                | 40,460  |         |  | 41,249  |  |  | 32,350  | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Operating
  income before financing income |  |                                | 9,019   |         |  | 9,244   |  |  | 6,121   | 
|Financing income, net                      |  |                                | 403     |         |  | 364     |  |  | 194     | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Operating
  income after financing income  |  |                                | 9,422   |         |  | 9,608   |  |  | 6,315   | 
|Gain from realization of
  fixed assets    |  |                                |        |         |  | 23      |  |  | 16      | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Income
  before taxes on income            |  |                                | 9,422   |         |  | 9,631   |  |  | 6,331   | 
|Taxes on income                            |  |                                | 2,420   |         |  | 3,079   |  |  | 2,280   | 
|                                           |  |                                |         |         |  |         |  |  |         | 
|Income for
  the year                      |  |                                | 7,002   |         |  | 6,552   |  |  | 4,051   | 
|                                           |  |                                |         |         |  |         |  |  |         | 

22

---

---

|         |                                                                                    
|-------- | -----------------------------------------------------------------------------------
|Note 19 | Condensed Company financial statements, in nominal values, for tax
purposes (cont.)

| |    |                                             
| | -- | --------------------------------------------
| | D. | Statement of changes in shareholders equity

|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|------------------------------------------------ |  |  | -------------- |  | ----------------- | --- | ------------------- |  | ------ |  |  | ------ | 
|                                                 |  |  | Share capital  |  | Capital
  reserve |     | Retained
  earnings |  | Total  | 
|                                                 |  |  |                |  |                   |     |                     |  |        | 
|                                                 |  |  | N I S  , 0 0 0 | 
|                                                 |  |  |                | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Balance as of January 1, 2005                    |  |  | (*)1           |  |                   |    |                     |  | 16,225 |  |  | 16,226 | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Changes during the year ended December 31,
2005: |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Income for the year                              |  |  |               |  |                   |    |                     |  | 4,051  |  |  | 4,051  | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Balance as of December 31, 2005                  |  |  | (*)1           |  |                   |    |                     |  | 20,276 |  |  | 20,277 | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Changes during the year ended December 31,
2006: |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Cost of share-based payment                      |  |  |               |  |                   | 144 |                     |  |       |  |  | 144    | 
|Income for the year                              |  |  |               |  |                   |    |                     |  | 6,552  |  |  | 6,552  | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Balance as of December 31, 2006                  |  |  | (*)1           |  |                   | 144 |                     |  | 26,828 |  |  | 26,973 | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Changes during the year ended December 31, 2007: |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Cost of share-based payment                      |  |  |               |  |                   | 31  |                     |  |       |  |  | 31     | 
|Income for the year                              |  |  |               |  |                   |    |                     |  | 7,002  |  |  | 7,002  | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 
|Balance as of December 31, 2007                  |  |  | (*)1           |  |                   | 175 |                     |  | 33,830 |  |  | 34,006 | 
|                                                 |  |  |                |  |                   |     |                     |  |        |  |  |        | 

(*) Rounded to the nearest
NIS 1 thousand.

|         |                     
|-------- | --------------------
|Note 20 | Liens and guarantees

| |    |                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | To secure
  the Companys liabilities pursuant to the distribution agreement with Cellcom
  (see Note 13A above), the Company furnished Cellcom with CPI-linked bank
  guarantees totaling NIS 1,518 thousand.  
| |    |                                                                                                                                                                                                                 
| | B. | To secure
  the Companys liabilities pursuant to store rental agreements it signed (see
  Note 13C above), the Company furnished property owners with CPI-linked
  bank guarantees totaling NIS 1,487 thousand.
| |    |                                                                                                                                                                                                                 
| | C. | The balance
  of the Companys liabilities secured by the above liens and guarantees, as of
  the date of the financial statements, totals NIS 299 thousand.                                                    

23

---

---

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 21  | Differences between Israeli and US GAAPThe Companys financial
statements are prepared in accordance with accounting standards generally accepted in
Israel (Israeli GAAP), which vary, in certain significant respects, from
accounting principles generally accepted in the United States of America (US
GAAP). Information relating to the nature and effect of such principal differences
is presented below, together with explanations of certain adjustments made.

| |    |                         
| | -- | ------------------------
| | A. | Balance sheet adjustment

|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|--------------------------------------------------- |  |  |  |  | ------------------------------- | ------ | ------------------------------- |  | ------------------------------- |  | -------------- | ------ | ------------------------------- |  | ------- |  | -------------- | --- | ------------------------------- |  | ------- |  |  | ------ |  |  | --- |  |  | ------ | 
|                                                    |  |  |  |  | As of December 31, 2007         |        | As of December 31, 2006         |  | As of December 31, 2005         | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 | 
|                                                    |  |  |  |  | Israeli
  GAAP                  |        | Effect of
  change to
  US GAAP |  | US GAAP                         |  | Israeli
  GAAP |        | Effect of
  change to
  US GAAP |  | US GAAP |  | Israeli
  GAAP |     | Effect of
  change to
  US GAAP |  | US GAAP | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|                                                    |  |  |  |  | R e p o r t e d  N I S  , 0 0 0 |        | R e p o r t e d  N I S  , 0 0 0 |  | R e p o r t e d  N I S  , 0 0 0 | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Current assets                                      |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Cash and cash equivalents                           |  |  |  |  |                                 | 486    |                                 |  |                                |  |                | 486    |                                 |  | 484     |  |                |    |                                 |  | 484     |  |  | 1,065  |  |  |    |  |  | 1,065  | 
|Trade receivables                                   |  |  |  |  |                                 | 18,232 |                                 |  |                                |  |                | 18,232 |                                 |  | 21,399  |  |                |    |                                 |  | 21      |  |  | 23,147 |  |  |    |  |  | 23,147 | 
|                                                   
|Other receivables and debit balances                |  |  |  |  |                                 | 5,620  |                                 |  |                                |  |                | 5,620  |                                 |  | 1,259   |  |                |    |                                 |  | 1,259   |  |  | 2,927  |  |  |    |  |  | 2,927  | 
|Inventory                                           |  |  |  |  |                                 | 10,445 |                                 |  |                                |  |                | 10,445 |                                 |  | 10,933  |  |                |    |                                 |  | 10,933  |  |  | 11,811 |  |  |    |  |  | 11,811 | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|                                                    |  |  |  |  |                                 | 34,783 |                                 |  |                                |  |                | 34,783 |                                 |  | 34,075  |  |                |    |                                 |  | 34,075  |  |  | 38,950 |  |  |    |  |  | 38,950 | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Long-term investments and receivables               |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Funded liability in excess of accrued severance pay |  |  |  |  |                                 | 850    |                                 |  |                                |  |                | 850    |                                 |  | 67      |  |                |    |                                 |  | 67      |  |  | 322    |  |  |    |  |  | 322    | 
|Deposits                                            |  |  |  |  |                                 | 278    |                                 |  |                                |  |                | 278    |                                 |  | 287     |  |                |    |                                 |  | 287     |  |  | 339    |  |  |    |  |  | 339    | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|                                                    |  |  |  |  |                                 | 1,128  |                                 |  |                                |  |                | 1,128  |                                 |  | 354     |  |                |    |                                 |  | 354     |  |  | 661    |  |  |    |  |  | 661    | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|                                                   
|Fixed assets                                        |  |  |  |  |                                 | 4,528  |                                 |  | 151                             |  |                | 4,679  |                                 |  | 4,761   |  |                | 162 |                                 |  | 4,923   |  |  | 4,890  |  |  | 10  |  |  | 4,900  | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Other assets                                        |  |  |  |  |                                 | 4,423  |                                 |  | 23                              |  |                | 4,446  |                                 |  | 4,445   |  |                | 12  |                                 |  | 4,457   |  |  | 4,314  |  |  | 164 |  |  | 4,478  | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Total assets                                        |  |  |  |  |                                 | 44,862 |                                 |  | 174                             |  |                | 45,036 |                                 |  | 43,635  |  |                | 174 |                                 |  | 43,809  |  |  | 48,815 |  |  | 174 |  |  | 48,989 | 
|                                                    |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 

24

---

---

|            |                                                  
|----------- | -------------------------------------------------
|Note 21    | Differences between Israeli and US GAAP
  (cont.)

| |    |                                 
| | -- | --------------------------------
| | A. | Balance sheet adjustment (cont.)

|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|------------------------------------ |  |  |  |  | ------------------------------- | ------ | ------------------------------- |  | ------------------------------- |  | -------------- | ------ | ------------------------------- |  | ------- |  | -------------- | --- | ------------------------------- |  | ------- |  |  | ------ |  |  | --- |  |  | ------ | 
|                                     |  |  |  |  | As of December 31, 2007         |        | As of December 31, 2006         |  | As of December 31, 2005         | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 | 
|                                     |  |  |  |  | Israeli
  GAAP                  |        | Effect of
  change to
  US GAAP |  | US GAAP                         |  | Israeli
  GAAP |        | Effect of
  change to
  US GAAP |  | US GAAP |  | Israeli
  GAAP |     | Effect of
  change to
  US GAAP |  | US GAAP | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|                                     |  |  |  |  | R e p o r t e d  N I S  , 0 0 0 |        | R e p o r t e d  N I S  , 0 0 0 |  | R e p o r t e d  N I S  , 0 0 0 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Current
  liabilities                |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Short-term credit                    |  |  |  |  |                                 |       |                                 |  |                                |  |                |       |                                 |  | 6,526   |  |                |    |                                 |  | 6,526   |  |  | 53     |  |  |    |  |  | 53     | 
|Trade payables                       |  |  |  |  |                                 | 4,027  |                                 |  |                                |  |                | 4,027  |                                 |  | 2,287   |  |                |    |                                 |  | 2,287   |  |  | 23,153 |  |  |    |  |  | 23,153 | 
|Other payables and credit
  balances |  |  |  |  |                                 | 6,802  |                                 |  |                                |  |                | 6,802  |                                 |  | 7,813   |  |                |    |                                 |  | 7,813   |  |  | 5,285  |  |  |    |  |  | 5,285  | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|                                     |  |  |  |  |                                 | 10,829 |                                 |  |                                |  |                | 10,829 |                                 |  | 16,626  |  |                |    |                                 |  | 16,626  |  |  | 28,491 |  |  |    |  |  | 28,491 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|Shareholders
  equity               |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         |  |  |        |  |  |     |  |  |        | 
|Share capital                        |  |  |  |  |                                 | 1      |                                 |  |                                |  |                | 1      |                                 |  | 1       |  |                |    |                                 |  | 1       |  |  | 1      |  |  |    |  |  | 1      | 
|Capital reserves                     |  |  |  |  |                                 | 175    |                                 |  |                                |  |                | 175    |                                 |  | 144     |  |                |    |                                 |  | 144     |  |  |       |  |  |    |  |  |       | 
|Retained earnings                    |  |  |  |  |                                 | 33,857 |                                 |  | 174                             |  |                | 34,031 |                                 |  | 26,864  |  |                | 174 |                                 |  | 27,038  |  |  | 20,323 |  |  | 174 |  |  | 20,497 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|Shareholders equity                 |  |  |  |  |                                 | 34,033 |                                 |  | 174                             |  |                | 34,207 |                                 |  | 27,009  |  |                | 174 |                                 |  | 27,183  |  |  | 20,324 |  |  | 174 |  |  | 20,498 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 
|Total
  liabilities and equity       |  |  |  |  |                                 | 44,862 |                                 |  | 174                             |  |                | 45,036 |                                 |  | 43,635  |  |                | 174 |                                 |  | 43,809  |  |  | 48,815 |  |  | 174 |  |  | 48,989 | 
|                                     |  |  |  |  |                                 |        |                                 |  |                                 |  |                |        |                                 |  |         |  |                |     |                                 |  |         | 

25

---

---

|         |                                                
|-------- | -----------------------------------------------
|Note 21 | Differences between Israeli and US GAAP
(cont.)

| |    |                             
| | -- | ----------------------------
| | B. | Adjustment of income or loss

|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|------------------------------------------------------------------- |  | ----------------------------------------- | ----- | ------- |  | ------- |  |  | ----- | 
|                                                                    |  | For the year ended December 31            |      
|                                                                    |  |                                           |      
|                                                                    |  | 2 0 0 7                                   |       | 2 0 0 6 |  | 2 0 0 5 | 
|                                                                    |  |                                           |       |         |  |         | 
|                                                                    |  | R e p o r t e d  N I S  t h o u s a n d s |      
|                                                                    |  |                                           |      
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|Net income per statement of operations                              |  |                                           | 6,993 |         |  | 6,541   |  |  | 4,032 | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|Items increasing net income                                         |  |                                           |       |         |  |         |  |  |       | 
|Reversal of amortization of goodwill from acquisition of
operations |  |                                           |      |         |  |        |  |  | 174   | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|                                                                    |  |                                           |      |         |  |        |  |  | 174   | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|                                                                   
|Items reducing net income                                           |  |                                           |      |         |  |        |  |  |      | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|                                                                    |  |                                           |      |         |  |        |  |  |      | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 
|Net income according to US GAAP                                     |  |                                           | 6,993 |         |  | 6,541   |  |  | 4,206 | 
|                                                                    |  |                                           |       |         |  |         |  |  |       | 

| |    |                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Cash flow adjustments                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                        
| |    | There are no
  material changes in the Companys statement of cash flows for the years ended
  December 31, 2007, 2006 and 2005, between that presented in the financial
  statements and in the statement of cash flows required according to US GAAP.
| |    |                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                
| | D. | Explanations of
significant adjustments of balance sheets as of December 31, 2007, 2006 and 2005 or
income or loss for the years then ended:                                                                                                           
| |    |                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                
| |    | Other assets                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                         | According to Israeli GAAP, until
December 31, 2005, goodwill from the acquisition of operations is amortized by the
straight-line method. Commencing January 2006, following the initial application of
Accounting Standard No. 20 (Amended), the Company discontinued the systematic amortization
of goodwill.
| |    |                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                         | According to US GAAP, intangible
assets having an indefinite useful life will not be amortized on a regular basis, but will
be subject to impairment tests.                                                                                                                                                    

26

---

---

# UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS

The
following unaudited condensed combined pro forma financial statements for the year ended
December 31, 2007 and the Six months ended June 30, 2008 and at June 30, 2008 reflect the
historical results of Suny Communication and Dynamics. (Suny) and Scailex
Corporation Ltd. (Scailex), adjusted to give effect to the merger.

We
are providing this information to assist you in your analysis of the financial aspects of
the merger. We derived this information from (i) the audited consolidated financial
statements of Suny as of, and for the year ended, December 31, 2007, (ii) the unaudited
consolidated financial statements of Suny as of, and for the Six months ended, June 30,
2008, (iii) the audited consolidated financial statements of Scailex as of, and for the
year ended, December 31, 2007, and (iv) the unaudited consolidated financial statements of
Suny as of, and for the six months ended, June 30, 2008. This information should be read
together with the Suny consolidated financial statements and related notes included
elsewhere in this Form 20-F and the Scailex consolidated financial statements and related
notes incorporated from the Scailex annual report on Form 20-F filed on June 30, 2008.

The
following unaudited pro forma condensed combined financial statements combine (i) the
historical balance sheets of Scailex as of June 30, 2008 and Suny as of June 30, 2008
giving pro forma effect to the merger of Scailex and Suny as if it had occurred on June
30, 2008, (ii) the historical statements of Scailex for the year ended December 31, 2007
and Suny for the year ended December 31, 2007 giving pro forma effect to the merger of
Scailex and Suny as if it had occurred on January 1, 2007 and (iii) the historical
statements of operations of Scailex and Suny for the six months ended June 30, 2008 and
June 30, 2008, respectively, giving pro forma effect to the merger of Scailex and Suny as
if it had occurred on January 1, 2007 and carried forward through June 30, 2008.

The
pro forma adjustments are preliminary, and the unaudited pro forma condensed combined
financial statements are not necessarily indicative of the financial position or results
of operations that may have actually occurred had the merger taken place on the dates
noted, or the future financial position or operating results of Scailex or Suny. The pro
forma adjustments are based upon available information and assumptions that we believe are
reasonable. Under the purchase method of accounting, the total purchase price will be
allocated to the net tangible and intangible assets acquired and liabilities assumed,
based on various estimates of their respective fair values. Scailex will determine the
estimated fair values of acquired assets and assumed liabilities with the assistance of
third party valuation specialists in accordance with Statement of Financial Accounting
Standard No. 141, Business Combinations (SFAS No. 141).
The purchase price allocations set forth in the following unaudited pro forma condensed
combined financial statements are based on preliminary valuation estimates of Sunys
tangible and intangible assets. The final valuations, and any interim updated preliminary
valuation estimates, may differ materially from these preliminary valuation estimates and,
as a result, the final allocation of the purchase price may result in reclassifications of
the allocated amounts that are materially different from the purchase price allocations
reflected below. Any material change in the valuation estimates and related allocation of
the purchase price would materially impact Scailexs depreciation and amortization
expenses, the unaudited pro forma condensed combined financial statements and
Scailexs results of operations after the merger.



---

---

# Unaudited Pro Forma
Condensed Combined Balance Sheet

June 30, 2008
                                           (in thousands)

|                                                       | As of June 30, 2008
|------------------------------------------------------ | -------------------
|
|
|
|
|A S S E T S                                            |                    
|                                                       |                    
|CURRENT ASSETS                                         |                    
|Cash and cash equivalents                              |                    
|Trade accounts receivable:                             |                    
|Related parties                                        |                    
|Customers                                              |                    
|Other receivables                                      |                    
|Inventories                                            |                    
|HTM and AFS securities                                 |                    
|Other current assets                                   |                    
|                                                       |                    
|Total current assets                                   |                    
|                                                       |                    
|LONG-TERM INVESTMENTS                                  |                    
|                                                       |                    
|PROPERTY AND EQUIPMENT, NET                            |                    
|                                                       |                    
|FRANCHISE WITH SAMSUNG                                 |                    
|GOODWILL                                               |                    
|                                                       |                    
|TOTAL ASSETS                                           |                    
|                                                       |                    
|                                                       |                    
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |                    
|                                                       |                    
|CURRENT LIABILITIES                                    |                    
|Short term borrowings                                  |                    
|Trade accounts payable                                 |                    
|Other current liabilities                              |                    
|Current liabilities related to discontinued operations |                    
|                                                       |                    
|Total current liabilities                              |                    
|                                                       |                    
|OTHER LONG-TERM LIABILITIES                            |                    
|                                                       |                    
|DEFERRED TAX LIABILITY                                 |                    
|                                                       |                    
|MINORITY INTEREST                                      |                    
|                                                       |                    
|Total liabilities                                      |                    
|                                                       |                    
|SHAREHOLDERS' EQUITY                                   |                    
|                                                       |                    
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             |                    
|                                                       |                    

See
notes to the unaudited pro forma condensed combined financial statements.



---

---

# Unaudited Pro Forma
Condensed Combined Statement of Operations

Year Ended December 31, 2007
                                (in thousands, except per share data)

|                                                | Year ended ended December 31, 2007
|----------------------------------------------- | ----------------------------------
|
|
|
|REVENUES                                        |                                   
|                                                |                                   
|COST OF SALES                                   |                                   
|                                                |                                   
|GROSS PROFFIT                                   |                                   
|                                                |                                   
|                                                |                                   
|OPERATING COSTS AND EXPENSES                    |                                   
|                                                |                                   
|Selling and Marketing                           |                                   
|General and administrative                      |                                   
|Amortization of intangible assets               |                                   
|                                                |                                   
|                                                |                                   
|OPERATING PROFFIT                               |                                   
|                                                |                                   
|FINANCING INCOME (EXPENSE), NET                 |                                   
|                                                |                                   
|OTHER INCOME (EXPENSE), NET                     |                                   
|                                                |                                   
|                                                |                                   
|Net proffit before income tax                   |                                   
|                                                |                                   
|MINORITY INTEREST IN LOSS OF A SUBSIDIARY       |                                   
|                                                |                                   
|Income tax expense                              |                                   
|                                                |                                   
|                                                |                                   
|NET INCOME FROM CONTINUING OPERATIONS           |                                   
|                                                |                                   
|                                                |                                   
|BASIC PROFFIT PER ORDINARY SHARE                |                                   
|                                                |                                   
|Continuing operations                           |                                   
|                                                |                                   
|                                                |                                   
|Weighted average number of ordinary             |                                   
|shares outstanding - in thousands               |                                   
|                                                |                                   
|                                                |                                   
|See notes to consolidated financial statements. |                                   

See
notes to the unaudited pro forma condensed combined financial statements.



---

---

# Unaudited Pro Forma
Condensed Combined Statement of Operations

Six Months Ended June 30, 2008
                           (in thousands, except share and per share data)

|                                                | Six months ended June 30, 2008
|----------------------------------------------- | ------------------------------
|
|
|
|
|REVENUES                                        |                               
|                                                |                               
|COST OF SALES                                   |                               
|                                                |                               
|                                                |                               
|GROSS PROFFIT                                   |                               
|                                                |                               
|                                                |                               
|OPERATING COSTS AND EXPENSES                    |                               
|                                                |                               
|Selling and Marketing                           |                               
|General and administrative                      |                               
|Amortization of intangible assets               |                               
|                                                |                               
|                                                |                               
|OPERATING INCOM (LOSS)                          |                               
|                                                |                               
|FINANCING INCOME ( EXPENSE), NET                |                               
|                                                |                               
|OTHER INCOME , NET                              |                               
|                                                |                               
|                                                |                               
|Net Income before income tax                    |                               
|                                                |                               
|MINORITY INTEREST IN LOSS OF A SUBSIDIARY       |                               
|                                                |                               
|Income tax expense                              |                               
|                                                |                               
|                                                |                               
|NET INCOME FROM CONTINUING OPERATIONS           |                               
|                                                |                               
|                                                |                               
|BASIC EARNING PER ORDINARY SHARE                |                               
|                                                |                               
|Continuing operations                           |                               
|                                                |                               
|Weighted average number of ordinary             |                               
|shares outstanding - in thousands               |                               
|                                                |                               
|                                                |                               
|See notes to consolidated financial statements. |                               

See
notes to the unaudited pro forma condensed combined financial statements.



---

---

# NOTES TO UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

# NOTE 1 
DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION

On
September 29, 2008, Scailex signed a Merger Agreement with Suny Electronics (the parent
company of Suny). The Agreement provides that, upon the terms and subject to the
conditions set in the Agreement, Sunys operations will be transferred to Scailex
(the Acquisition). Upon the closing of the Acquisition, Scailex will
transfer to Suny Electronics $76,300 (the purchase price) in consideration for the assets
and liabilities of Suny.

For
purposes of these unaudited pro forma condensed combined financial statements, Scailex has
assumed the total consideration of the merger to be $77,599 thousands as follows:

|                                           | (in thousands)
|------------------------------------------ | --------------
|
|
|
|
|Merger consideration                       |               
|Estimated fees and expenses of Scailex (a) |               
|                                           |               
|Total                                      |               
|                                           |               

---

(a) Estimated fees and
expenses include fees of consultants, legal fees and expenses, printing and mailing costs
for this Form 20-F, SEC filing fees, financial advisor fees and expenses, financing fees
and related expenses, and other miscellaneous expenses directly related to the merger and
the transactions contemplated thereby.

# NOTE 2  PRO FORMA
ADJUSTMENTS

|A. | Merger
consideration
|-- | --------------------

|                                                                    | 
|------------------------------------------------------------------- | 
|
|
|
|
|                                                                    | 
|Suny's historical stockholders' equity acquired as of June 30, 2008 | 
|Estimated fees and expenses of Suny (1)                             | 
|                                                                    | 
|Total                                                               | 
|                                                                    | 

(1)
          Estimated fees and expenses include fees of consultants, legal fees and
          expenses, financial advisor fees and expenses, financing fees and related
          expenses, and other miscellaneous expenses directly related to the merger and
          the transactions contemplated thereby.



---

---

|B. | Preliminary
purchase price allocation
|-- | -------------------------------------

| | Under
the purchase method of accounting, the total purchase price will be allocated to the net
tangible and intangible assets acquired and liabilities assumed, based on various
estimates of their respective fair values. Scailex determined, provisionally, the
estimated fair values of certain assets and liabilities to be closed to their carrying
values. The final purchase price allocation will be done with assistance of third party
valuation specialists. Based on preliminary valuation estimates, the total purchase price
will be allocated as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | As of June
30, 2008 | Additional
Value (1) | Purchase
Price
Allocation
|------------------------- | ------------------- | -------------------- | -------------------------
|
|
|
|
|Inventories               |                     |                      | $                        
|Other tangible assets     |                     |                      |                          
|Franchise with Samsung    |                     |                      |                          
|Goodwill                  |                     |                      |                          
|Liabilities assumed       |                     |                      |                          
|Expenses incurred by Suny |                     |                      |                          
|                          |                     |                      |                          
|Total                     |                     |                      |                          
|                          |                     |                      |                          

| | The purchase price allocations set
forth in these unaudited pro forma condensed combined financial statements are based on
preliminary valuation estimates of Sunys tangible and intangible assets which as
described above. The Company allocated preliminarily, 2\3 of the excess cost over
purchased tangible asset to the franchise contract with the major supplier of Suny
(Samsung) and the rest was allocated to goodwill. Such preliminary allocation is due to
the significance of the franchise to the operations of Suny. The final valuations, and any
interim updated preliminary valuation estimates, may differ materially from these
preliminary valuation estimates and, as a result, the final allocation of the purchase
price may result in reclassifications of the allocated amounts that are materially
different from the purchase price allocations reflected herein. Any material change in the
valuation estimates and related allocation of the purchase price would materially impact
Scailexs depreciation and amortization expenses, the unaudited pro forma condensed
combined financial statements and Scailexs results of operations after the merger.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|C. | The
related party receivable for the sale of PCH was paid on July 1st. For the
          purpose of this pro-forma it was assumed that such payment took place in June
          30, 2008.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|D. | The Franchise contract with Samsung
was assumed to have definite useful live of 3 years. For the purpose of the pro forma
result of operation for the year ended December 31, 2007 and six months period ended June
30, 2008 $10,871 and $5,436 of amortization was assumed.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---

|E. | According
to the agreement Scailex did not purchased certain assets and did not           assumed
certain liabilities as follows:
|-- | ---------------------------------------------------------------------------------------------------------------------------------

|                                                                              | As of June 30,
2008
|----------------------------------------------------------------------------- | -------------------
|
|
|
|
|Historical shareholders Equity of Suny (both Suny Communication and Dynamics) |                    
|Liabilities not assumed (1)                                                   |                    
|Assets not acquired (2)                                                       |                    
|                                                                              |                    
|Total                                                                         |                    
|                                                                              |                    

|(1) | Comprised
of loans from Bank Leumi in the amount of $32,836 (NIS 110,000) and           Other
current liabilities in the amount of $1,809 mainly related to tax           authorities.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Comprised
of other receivables in the amount of $3,661 mainly related to VAT           taxes,
traded securities and cash balances in the amount of $3,107  ($2,571 cash and $536 traded securities)  and goodwill           in the
amount of $1,326.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|F. | The
amount is comprised of:
|-- | ---------------------------

|                                                                              | As of June 30,
2008
|----------------------------------------------------------------------------- | -------------------
|
|
|
|
|Cash not part of acquired assets                                              |                    
|Receivable from related party that was assumed to be received as of June 30   |                    
|(See note C above)                                                            |                    
|Consideration paid by Scailex in connection with the merger (including merger |                    
|expenses)                                                                     |                    
|                                                                              |                    
|Total                                                                         |                    
|                                                                              |                    

|G. | Represents
the additional cost of inventory due to purchase price allocation.
|-- | -----------------------------------------------------------------------------

|H. | Represents the cancellation of intercompany transactions between Suny
          Communication and Dynamics
|-- | ----------------------------------------------------------------------------------------------------------



---

---

# SIGNATURES

The Registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this Report on its behalf.

| |  | SCAILEX CORPORATION LTD.(Registrant)By: /s/ Shachar Rachim
Shachar Rachim Chief Financial Officer
| |  | ---------------------------------------------------------------------------------------------------------------

Date: October 3, 2008

103

---

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