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

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|      |                                                                         | Page No. |
|-----------|------------------------------------------------------------------------------|----------|
|      |                                                                         |     |
| PART I    |                                                                         |     |
| Item 1.   | Identity of Directors, Senior Management and Advisers                        | 6        |
| Item 2.   | Offer Statistics and Expected Timetable                                      | 6        |
| Item 3.   | Key Information                                                              | 6        |
| Item 4.   | Information on the Company                                                   | 34       |
| Item 4A.  | Unresolved Staff Comments                                                    | 67       |
| Item 5.   | Operating and Financial Review and Prospects                                 | 67       |
| Item 6.   | Directors, Senior Management and Employees                                   | 105      |
| Item 7.   | Major Shareholders and Related Party Transactions                            | 135      |
| Item 8.   | Financial Information                                                        | 143      |
| Item 9.   | The Offer and Listing                                                        | 145      |
| Item 10.  | Additional Information                                                       | 146      |
| Item 11.  | Quantitative and Qualitative Disclosures About Market Risk                   | 172      |
| Item 12.  | Description of Securities Other than Equity Securities                       | 172      |
| PART II   |                                                                         |     |
| Item 13.  | Defaults, Dividend Arrearages and Delinquencies                              | 172      |
| Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 172      |
| Item 15.  | Controls and Procedures                                                      | 172      |
| Item 16.  | [Reserved]                                                                   | 173      |
| Item 16A. | Audit Committee Financial Expert                                             | 173      |
| Item 16B. | Code of Ethics                                                               | 173      |
| Item 16C. | Principal Accountant Fees and Services                                       | 174      |
| Item 16D. | Exemptions from the Listing Standards for Audit Committees                   | 174      |
| Item 16E. | Purchases of Equity Securities by the Issuer and Associate Purchasers        | 174      |
| Item 16 F | Change in Registrant's Certifying Accountant                                 | 174      |
| Item 16 G | Corporate Governance                                                         | 174      |
| PART III  |                                                                         |     |
| Item 17.  | Financial Statements                                                         | 175      |
| Item 18.  | Financial Statements                                                         | 175      |
| Item 19.  | Exhibits                                                                     | 175      |

----

----

----

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

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

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

----

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

|                                                                                                                                                                                                                                                                                                                                                                                                              |   | Years ended December 31, |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2008                     |    |   | 2009 |   |   | 2010 |   |   | 2011 |   |
| Income                                                                                                                                                                                                                                                                                                                                                                                                            |   |                     |    |   |   |   |   |   |   |   |   |   |
| Sales of goods                                                                                                                                                                                                                                                                                                                                                                                                    |   |                     | 6,237   |   |   |   | 9,904 |   |   |   | 9,608 |   |   |   | 14,103 |   |
| Gain from disposal of businesses and associates and changes in holding in associates, net                                                                                                                                                                                                                                                                                                                         |   |                     | 783     |   |   |   | 31,802 |   |   |   | 160,010 |   |   |   | 35, 815 |   |
| Financial income                                                                                                                                                                                                                                                                                                                                                                                                  |   |                     | 6,259   |   |   |   | 1,413 |   |   |   | 2,739 |   |   |   | 1,504 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                              |   |                     | 13,279  |   |   |   | 43,119 |   |   |   | 172,357 |   |   |   | 51,422 |   |
| Cost and Expenses:                                                                                                                                                                                                                                                                                                                                                                                                |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                                                                                                                                                                                                                                                                                                                                                                     |   |                     | 3,200   |   |   |   | 4,824 |   |   |   | 3,948 |   |   |   | 5,823 |   |
| Research and development expenses, net                                                                                                                                                                                                                                                                                                                                                                            |   |                     | 29,911  |   |   |   | 25,699 |   |   |   | 18,209 |   |   |   | 18,184 |   |
| Selling and marketing expenses                                                                                                                                                                                                                                                                                                                                                                                    |   |                     | 7,525   |   |   |   | 8,985 |   |   |   | 6,551 |   |   |   | 5,672 |   |
| General and administrative expenses                                                                                                                                                                                                                                                                                                                                                                               |   |                     | 19,065  |   |   |   | 15,865 |   |   |   | 13,577 |   |   |   | 10,474 |   |
| Equity in losses of associates, net                                                                                                                                                                                                                                                                                                                                                                               |   |                     | 40,146  |   |   |   | 10,514 |   |   |   | 10,863 |   |   |   | 10,374 |   |
| Amortization of intangible assets                                                                                                                                                                                                                                                                                                                                                                                 |   |                     | 1,061   |   |   |   | 1,416 |   |   |   | 1,484 |   |   |   | 313 |   |
| Other expenses, net                                                                                                                                                                                                                                                                                                                                                                                               |   |                     | 257     |   |   |   | 2,230 |   |   |   | 3,136 |   |   |   | 19,434 |   |
| Financial expenses                                                                                                                                                                                                                                                                                                                                                                                                |   |                     | 4,800   |   |   |   | 5,434 |   |   |   | 3,031 |   |   |   | 3,859 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                              |   |                     | 105,965 |   |   |   | 74,967 |   |   |   | 60,799 |   |   |   | 74,133 |   |
| Income (loss) before taxes on income                                                                                                                                                                                                                                                                                                                                                                              |   |                     | (92,686 | ) |   |   | (31,848 | ) |   |   | 111,558 |   |   |   | (22,711 | ) |
| Taxes on income (tax benefit)                                                               |   |                     | (32     | ) |   |   | (2,453 | ) |   |   | 6,112 |   |   |   | 602 |   |
| Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                 |   |                     | (92,654 | ) |   |   | (29,395 | ) |   |   | 105,446 |   |   |   | (23,313 | ) |
| Net income (loss) attributable to Elron's shareholders                                                                                                                                                                                                                                                                                                                                                            |   |                     | (71,834 | ) |   |   | (14,304 | ) |   |   | 60,678 |   |   |   | (17,021 | ) |
| Net income (loss) attributable to non-controlling interest                                                                                                                                                                                                                                                                                                                                                        |   |                     | (20,820 | ) |   |   | (15,091 | ) |   |   | 44,768 |   |   |   | (6,292 | ) |
| Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                 |   |                     | (92,654 | ) |   |   | (29,395 | ) |   |   | 105,446 |   |   |   | (23,313 | ) |
| Net income (loss) per share attributable to shareholders:                                                                                                                                                                                                                                                                                                                                                         |   |                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic gain (loss) per share                                                                                                                                                                                                                                                                                                                                                                                       |   |                     | (2.43   | ) |   |   | (0.48 | ) |   |   | 1.98 |   |   |   | (0.63 | ) |
| Weighted average number of ordinary shares used in computing basic gain (loss) per share (in thousands)                                                                                                                                                                                                                                                                                                           |   |                     | 29,650  |   |   |   | 29,650 |   |   |   | 29,655 |   |   |   | 29,660 |   |
| Diluted gain (loss) per share                                                                                                                                                                                                                                                                                                                                                                                     |   |                     | (2.44   | ) |   |   | (0.49 | ) |   |   | 1.98 |   |   |   | (0.63 | ) |
| Weighted average number of ordinary shares used in computing diluted gain (loss) per share (in thousands)                                                                                                                                                                                                                                                                                                         |   |                     | 29,650  |   |   |   | 29,650 |   |   |   | 29,666 |   |   |   | 29,660 |   |

----

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

|                                                                                                           |   | Year endedDecember 31 |    |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                           |   | 2007                  |    |
|                                                                                                           |   |                  |    |
| Income:                                                                                                        |   |                  |    |
| Net revenues                                                                                                   |   |                  | 4,371   |   |
| Equity in losses of affiliated companies ....                                                             |   |                  | (20,416 | ) |
| Gain from disposal of businesses and affiliated companies and changes in holdings in affiliated companies, net |   |                  | 14,854  |   |
| Other expenses, net                                                                                            |   |                  | (3,214  | ) |
| Financial income, net                                                                                          |   |                  | 3,945   |   |
|                                                                                                           |   |                  | (460    | ) |
| Costs and expenses:                                                                                            |   |                  |    |   |
| Cost of revenues                                                                                               |   |                  | 2,233   |   |
| Research and development costs, net                                                                            |   |                  | 13,284  |   |
| Marketing and selling expenses, net                                                                            |   |                  | 2,802   |   |
| General and administrative expenses                                                                            |   |                  | 13,716  |   |
| Amortization of intangible assets and acquired in- process- research and development write-off                 |   |                  | 2,306   |   |
|                                                                                                           |   |                  | 34,341  |   |
|                                                                                                           |   |                  |    |   |
| Loss before taxes on income from continuing operations                                                         |   |                  | (34,801 | ) |
| Taxes on income                                                                                                |   |                  | (7,544  | ) |
| Net loss from continuing operations                                                                            |   |                  | (42,345 | ) |
| Net loss                                                                                                       |   |                  | (42,345 | ) |
|                                                                                                           |   |                  |    |   |
| Net income (loss) per share:                                                                                   |   |                  |    |   |
| Basic -                                                                                                        |   |                  |    |   |
| Net loss attributable to Elron's shareholders                                                                  |   |                  | (1.25   | ) |
| Weighted average number of ordinary shares used in computing basic net income per share (in thousands)         |   |                  | 29,619  |   |
| Diluted -                                                                                                      |   |                  |    |   |
| Net loss attributable to Elron's shareholders                                                                  |   |                  | (1.27   | ) |
| Weighted average number of ordinary shares used in computing diluted net income per share in thousands)        |   |                  | 29,619  |   |

----

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

|                                                                                |   | As of January 1, |    |   | As of December 31, |   |
|-------------------------------------------------------------------------------------|--------|------------------|---------|--------|--------------------|--------|
|                                                                                |   | 2008             |    |   | 2008               |   |   | 2009 |   |   | 2010 |   |   | 2011 |   |
|                                                                                |   |             |    |   |               |   |   |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term and long term investments                     |   |             | 74,362  |   |               |   | 17,507 |   |   |   | 64,807 |   |   |   | 56,904 |   |   |   | 40,078 |   |
| Assets held for sale                                                                |   |             | -       |   |               |   | - |   |   |   | - |   |   |   | 17,211 |   |   |   | 3,155 |   |
| Investments in associate companies and in other companies and long term receivables |   |             | 158,059 |   |               |   | 175,877 |   |   |   | 128,704 |   |   |   | 157,808 |   |   |   | 134,237 |   |
| Total assets                                                                        |   |             | 243,426 |   |               |   | 219,579 |   |   |   | 213,080 |   |   |   | 250,338 |   |   |   | 208,054 |   |
| Total current liabilities                                                           |   |             | 22,056  |   |               |   | 20,095 |   |   |   | 25,937 |   |   |   | 14,782 |   |   |   | 4,993 |   |
| Long term loans from banks and others                                               |   |             | 2,244   |   |               |   | 35,141 |   |   |   | 36,981 |   |   |   | 535 |   |   |   | 3,288 |   |
| Long term loans from shareholders                                                   |   |             | -       |   |               |   | 6,176 |   |   |   | 16,737 |   |   |   | - |   |   |   | - |   |
| Employee benefits                                                                   |   |             | 561     |   |               |   | 991 |   |   |   | 194 |   |   |   | 134 |   |   |   | 1 |   |
| Total equity                                                                        |   |             | 212,656 |   |               |   | 146,051 |   |   |   | 122,093 |   |   |   | 219,493 |   |   |   | 193,808 |   |
| Equity attributable to Elron's shareholders                                         |   |             | 209,613 |   |               |   | 139,506 |   |   |   | 126,469 |   |   |   | 195,921 |   |   |   | 173,373 |   |
| Capital stock                                                                       |   |             | 208,338 |   |               |   | 209,558 |   |   |   | 209,968 |   |   |   | 214,806 |   |   |   | 208,973 |   |

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----

----

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

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

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

|   | · | announcements by our group companies (or by us regarding our group companies), their competitors or other third parties of technological innovations, new products, regulatory developments, new clinical data regarding current or future products or earnings or losses; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

----

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

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

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

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

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

----

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

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

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

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

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

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

----

----

|   | · | Local Manufacturing Obligation: Products developed as a result of OCS funded R&D must, as a general matter, be manufactured in Israel. The transfer of manufacturing capacity outside of Israel, in whole or in part, is subject to the OCS's prior written approval (except for the transfer of less than 10% of the manufacturing capacity in the aggregate) and the payment of royalties at an increased rate (between 120% and 300% of the amount of the grant (depending on the manufacturing volume that is performed outside of Israel), less royalties already paid to the OCS). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

|   | · | international geographical events; |
|--------|--------|------------------------------------|

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

----

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

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

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

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

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

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

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

|   | · | increasing tension with Iran; |
|--------|--------|-------------------------------|

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

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

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

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

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

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

----

----

----

----

----

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

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

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

|   | · | The time it takes the physician to read the video captured by the PillCam COLON capsule; |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | The level of professional education and hands-on training of medical staff in performing the PillCam COLON procedure and reading and interpreting the images captured by the capsule, since the procedure and the reading are different than what many medical staff is used to with colonoscopy; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

----

----

----

|   | Risk Factor Influence on the Company |
|--------|--------------------------------------|
|   | Major  Influence           | Medium Influence | Minor Influence |

| Specific Risks Affecting Us                                                                                                                                                                                                      |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| We have voluntarily delisted from the Nasdaq Global Select Market and intend to seek to terminate our Exchange Act registration.                                                                                                 |   |   | ü |
| If our cash resources are insufficient to finance our operations, we may be unable to obtain alternative sources of financing and consequently may be unable to invest in existing and new companies.                            |   | ü |   |
| We may be deemed to be an investment company under the U.S. Investment Company Act of 1940.                                                                                                                                      |   |   | ü |
| If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.                                                                 |   |   | ü |
| It may be difficult to serve process or to enforce a U.S. judgment against us, our directors and our officers.                                                                                                                   |   |   | ü |
| Our controlling shareholder, Discount Investment Corporation, or DIC, has the ability to control our business and affairs.                                                                                                       |   |   | ü |
| Risks Affecting Us and the Companies in Our Group                                                                                                                                                                                |   |   |   |
| Ongoing uncertainty regarding global and local economic conditions has adversely affected and may continue to adversely affect our and our group companies' results and financial condition and could lead to impairment charges | ü |   |   |

----

|   | Risk Factor Influence on the Company |
|--------|--------------------------------------|
|   | Major  Influence           | Medium Influence | Minor Influence |

| Our financial results and financial condition are principally impacted by the results of operation of, and the value of our holdings in, our group companies, which are primarily concentrated in Given Imaging. | ü |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Our financial results significantly depend on the results of operations of our group companies, which continue to invest heavily in their development and have generated losses.                                 | ü |   |   |
| Our financial results and our cash reserves are directly impacted by our ability to conclude "exit" transactions at significant values, which has been made more difficult by the global economic downturn.      | ü |   |   |
| We compete with other entities for acquisition and investment opportunities.                                                                                                                                     |   | ü |   |
| We may face difficulties in our ability to dispose of our shares in companies in our group.                                                                                                                      | ü |   |   |
| Our ability to invest in companies or conclude exit transactions may be adversely affected and/or prevented by anti-trust regulations both in Israel and abroad.                                                 |   |   | ü |
| Recent recommendations of the Israeli committee for increasing competitiveness in the economy may adversely affect our business.                                                                                 | ü |   |   |
| Recent antitrust legislation passed in Israel imposing restrictions on concentrated groups may adversely affect our business.                                                                                    |   |   | ü |
| We may not receive the entire proceeds due to us from exit transactions of our group companies.                                                                                                                  |   | ü |   |
| Our market value significantly depends on the market values of publicly traded companies in our group.                                                                                                           | ü |   |   |
| The market price of our ordinary shares is subject to fluctuations.                                                                                                                                              | ü |   |   |
| Many of our group companies may face difficulties in obtaining future financing on favorable terms or at all.                                                                                                    | ü |   |   |
| Bank of Israel regulations limit our and our group companies' ability to borrow from Israeli banks.                                                                                                              |   | ü |   |
| Our results, and the value of our investments, are affected by volatility in the securities markets.                                                                                                             | ü |   |   |
| There is no assurance that our subsidiary, RDC, will be able to continue to develop technologies and/or new companies.                                                                                           |   |   | ü |
| Most of our group companies are dependent upon proprietary technology, which may be infringed by, or may infringe upon, the proprietary technology of others.                                                    | ü |   |   |

----

|   | Risk Factor Influence on the Company |
|--------|--------------------------------------|
|   | Major  Influence           | Medium Influence | Minor Influence |

| The technological fields within which our group companies operate involve a high level of risk and uncertainty.                                                                                                                                                                                     | ü |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Many of our group companies experience intense competition.                                                                                                                                                                                                                                         |   | ü |   |
| Israeli government programs in which certain of our group companies participate may be terminated or reduced in the future and may be restrictive in their terms.                                                                                                                                   |   |   | ü |
| We and our group companies may have difficulty retaining key employees.                                                                                                                                                                                                                             | ü |   |   |
| Certain of our group companies depend on international operations.                                                                                                                                                                                                                                  |   |   | ü |
| Conditions in Israel may affect our operations and the operations of our group companies.                                                                                                                                                                                                           |   |   | ü |
| Our and our group companies' operations could be disrupted as a result of the obligation of personnel in Israel to perform military service.                                                                                                                                                        |   |   | ü |
| The results of operations of our group companies may be harmed by foreign currency exchange rate fluctuations.                                                                                                                                                                                      |   |   | ü |
| Product liability claims could adversely affect the business results of our group companies, especially those operating in the medical device industry.                                                                                                                                             |   |   | ü |
| Product regulation may adversely affect the ability of our medical device group companies to bring new products to market or to continue to supply existing products to the market.                                                                                                                 | ü |   |   |
| Because the medical device industry is litigious, our medical device group companies are susceptible to intellectual property suits that could cause our medical device group companies to incur substantial costs or pay substantial damages or prohibit them from selling their products.         | ü |   |   |
| If our medical device group companies are unable to obtain reimbursement coverage from third-party healthcare payors for procedures using their products, or if reimbursement is insufficient to cover the costs of purchasing their products, demand for their products may be adversely affected. |   | ü |   |
| Changes in legislation and government regulation of the healthcare industry, as well as third-party payors' efforts to control the costs of healthcare, could materially adversely the business of our medical device group companies.                                                              |   | ü |   |
| The development of products by our group companies in the medical device field is dependent upon the success of clinical trials.                                                                                                                                                                    | ü |   |   |
| Risks Affecting Our Holdings in Given Imaging                                                                                                                                                                                                                                                       | ü |   |   |

----

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

----

|   | · | Transfer of Investment in Kyma to RDC. In March 2011, we transferred our shares in Kyma Medical Technologies Ltd., or Kyma, to RDC in consideration for the amount invested by us in Kyma (including transaction costs), following which we held approximately 33% of Kyma indirectly, and approximately 65% on a consolidated basis. In September 2011, RDC entered into a share purchase agreement with Kyma whereby RDC undertook to invest $2.5 million in Kyma in three installments during 2012, of which the first installment was paid in January 2012. Following the first installment we hold approximately 34% of Kyma indirectly, and approximately 67% on a consolidated basis. Following completion of the transaction, we will hold approximately 37% of Kyma indirectly, and approximately 73% on a consolidated basis. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Establishment of Navitrio. In May 2011, we, together with a co-founder, founded Navitrio, in order to incubate projects and to invest in companies based on technologies in the fields of electronic commerce, mobile applications, cloud computing applications, social networks, medical and pharmaceutical digital applications and other related fields. We hold 80% of Navitrio's outstanding shares. In June 2011, we completed our first investment in Navitrio in the amount of $1.5 million. |
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|   | · | Loans to RDC. In May 2011, we and Rafael entered into a loan agreement with RDC, each committing to advance $5 million to RDC. A loan of $2 million was immediately advanced to RDC of which our share was $1 million. In October 2011, an additional amount of $4.5 million in respect of this loan was advanced to RDC of which our share was $2.25 million. |
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|   | · | Investment in BrainsGate. In July 2011, BrainsGate signed an investment agreement with its major shareholders, including us, raising approximately $20 million in three equal installments of which our share is approximately $7.1 million. The first and second installments in the aggregate amount of $13.4 million were advanced in August 2011 and in January 2012. Our share in the installments advanced to date amount to $4.8 million. The investors have committed to advance the final installment in July 2012. On the assumption that the investment round is completed, we will hold 30% of BrainsGate's outstanding share capital and approximately 27% of its fully diluted share capital. |
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|   | · | Establishment of Smartwave. In September 2011, RDC established Smartwave Medical Ltd., or Smartwave. SmartWave is developing a fully automatic implantable atrial defibrillator (IAD) that detects and terminates atrial fibrillation episodes (a type of irregular heartbeat) with minimal patient discomfort. In December 2011, RDC completed its first investment in Smartwave in the amount of $ 0.5 million. |
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|   | · | Sale of Starling's Business. In September 2011, an asset sale agreement for the sale of Starling Advanced Communication Ltd.'s, or Starling's, entire business in the field of non-military satellite communication systems to a major international company, a world leader in the communications market, in consideration for payment in the aggregate amount of approximately $13.1 million, was completed and came into effect. As a result of the transaction, we recognized an approximately $4.7 million net gain (net of non-controlling interest). This amount takes into account expenses in respect of an inventory write-down and provisions for repairs and the termination of agreements with customers and suppliers following the decision of Starling's board of directors to cease its operations. |
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|   | · | Sale of Safend. In September 2011, all the shares of Safend Ltd., or Safend, were sold to Wave Systems Corp., a NASDAQ-traded supplier of data protection solutions, or Wave, in consideration for approximately $12.8 million, consisting mostly of shares of Wave, based on their trailing 10-day average closing price on the Nasdaq prior to the closing date of the sale. Safend, which was approximately 25% held by us prior to its sale, provides endpoint data protection solutions for corporations. In consideration for the aforesaid sale, we received shares of Wave amounting to approximately $2.7 million based on their trailing 10-day average closing price on the Nasdaq prior to the closing date of the sale, and recorded an approximately $2.3 million net gain in the third quarter of 2011. |
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|   | · | Sale of Wavion. In November 2011 we sold, by way of merger, all the shares of Wavion an approximately 67% held subsidiary of ours, to Alvarion Ltd. (Nasdaq: ALVR), or, Alvarion, in consideration of aggregate proceeds of approximately $30 million. Out of the consideration Alvarion paid for the purchase of all the shares, we received an amount of approximately $16.2 million (of which an amount of approximately $2 million was deposited in escrow). In accordance with a report we received from Alvarion after the date of this Annual Report, we expect to receive an additional amount of approximately $1.3 million in the second quarter of 2012 with respect to consideration contingent upon Wavion's revenues in the fourth quarter of 2011. There is no assurance that we will receive the above additional consideration. As a result of this sale, we recorded a net gain in the fourth quarter of 2011 of $21.4 million. |
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|   | · | Credit Line. In November 2011, we entered into a binding agreement with Silicon Valley Bank (the "Bank") to receive a credit line in the amount of $30 million for a period of up to 18 months (the "Credit Period"). The credit line was obtained in order to diversify and ensure additional sources of financing towards continued investing in companies held by us and new companies and to finance our ongoing operations. During the Credit Period, we will be entitled to draw down loans from the credit line for periods of up to 3 years from the date of each respective drawdown, at the Wall Street Journal prime rate of interest plus 0.75% per annum. According to the terms of the credit line, we will be able to make early repayment of all the loans without any cost. At the time the credit line is actually utilized, we will pledge shares directly held by us in Given Imaging in an amount equal to maintain a 3.25 ratio of the market value of the pledged shares (based on their trailing 5-day average closing price prior to the computation date) to the amount of credit utilized. Pursuant to the credit agreement, should the ratio of the market value of the pledged shares to the credit amount utilized decrease below 3, then we shall either pledge additional Given Imaging shares or repay a portion of the credit utilized in order to maintain a coverage ratio of 3.25, or  provide alternative collateral acceptable to the Bank. |
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|   | · | Receipt of CE and commencement of FDA Trial by Pocared. In January, 2012, Pocared Diagnostics Ltd., or Pocared, received the CE mark in accordance with the applicable European directive for the manufacturing and marketing of in-vitro diagnostic medical devices. Furthermore, in November 2011, Pocared commenced a diagnostic trial in support of its planned application filing to the FDA for approval to market its system in the United States. The object of the trial is to assess the efficacy of the system's first application, diagnosis of urinary tract infection. The diagnostic trial is being carried out at five of the world's leading medical centers. |
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|   | · | Investments in Medingo. In February 2009, then shareholders of Medingo Ltd., or Medingo, signed a convertible loan agreement for extending to Medingo, loans in the aggregate amount of $5.5 million of which our share was $0.5 million and RDC's share was $4.6 million. In July 2009, then shareholders of Medingo, including us and RDC, granted Medingo an additional convertible loan in the aggregate amount of $8 million of which our and RDC's share was approximately $0.7 million and $6.7 million, respectively. |
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|   | · | Dividend Distribution by Given Imaging. In March 2009, Given Imaging distributed a special cash dividend of approximately $0.54 per share, or $16 million in the aggregate, of which our and RDC's share was approximately $3.7 million and $1.4 million, respectively. |
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|   | · | Investments in Pocared.  During April 2009, Pocared completed a financing round of $6.6 million of which our share was $2.4 million. Following the above transaction, we held approximately 31% of Pocared's share capital on a fully diluted and on as converted basis. |
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|   | · | Dividend Distribution by NetVision. In April 2009, NetVision Ltd., or NetVision, (then held 15.24% by us) distributed cash dividends of approximately NIS 3.08 and NIS 0.86 per share, respectively (approximately $0.73 and $0.23, respectively) or NIS 90 million and NIS 26.0 million, respectively (approximately $21.2 million and $7.0 million, respectively), in the aggregate. Our share in the above-mentioned dividends amounted to approximately NIS 14.2 million and NIS 4 million, respectively (approximately $3.4 million and $1 million, respectively). |
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|   | · | Sale of 3DV. In June 2009, 3DV Systems Ltd., or 3DV, in which we beneficially owned approximately 51% of the outstanding shares representing all the shares owned by us and RDC (or approximately 36% representing our direct holding and our concatenated share of the holding of RDC) completed the sale of substantially all of its assets to a third party and entered into voluntary liquidation. 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds of which we and RDC received approximately $3.1 million and $3.7 million, respectively. As a result of the sale of 3DV’s assets, we recorded a gain of approximately $6.1 million in 2009. In the third quarter of 2010, the balance of the consideration in the amount of $0.4 million and $0.6 million then held in escrow was released and paid to us and RDC respectively resulting in us recording an additional gain of approximately $1 million in the third quarter of 2010. |
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|   | · | Impliant. In July 2009, Impliant Inc., or Impliant, completed the recapitalization and a conversion of certain loans into the most senior preferred stock of Impliant. During the period of July to September 2009, we, together with other then shareholders of Impliant, entered into investment agreements with Impliant, according to which an aggregate amount of $8 million (of which our share was $2 million), was invested in Impliant as a prepayment toward the purchase of senior preferred shares of Impliant. Following the above transactions, we held approximately 39% of Impliant's share capital on a fully diluted and on an as-converted basis. The financing round led to our de-consolidation of Impliant. |
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|   | · | Sale of Sela. In September 2009, Camtek Ltd. an Israeli company publicly traded on the NASDAQ and the TASE: CAMT, acquired the entire share capital of Sela Semiconductor Engineering Laboratories Ltd., or SELA, in which we beneficially owned approximately 75% of the outstanding shares representing all the shares owned by us and RDC (or approximately 50% representing our direct holding and our concatenated share of the holding of RDC). As consideration for the shares, Camtek will pay SELA's selling shareholders contingent future payments in the aggregate amount of up to $9.5 million, depending on SELA's future revenues, of which our and RDCs portions are estimated to be up to $1.8 million and $4.5 million, respectively. To date, we and RDC have received $0.08 million and $0.21 respectively on account of such future payments. As a result of the transaction we recorded a gain of approximately $1.1 million in 2009 and an additional gain in the fourth quarter of 2010 of $1 million. |
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|   | · | Investments in Wavion. In October 2009, we together with another shareholder of Wavion, granted Wavion a convertible bridge loan in the aggregate amount of $1.5 million, of which our share was approximately $0.96 million. |
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|   | · | Sale of NetVision. In October 2009, we completed the sale of our holdings in NetVision, then representing approximately 15% of NetVision to our associates, DIC and Clal Industries and Investments Ltd., or CII, in consideration of an aggregate amount of NIS 228.7 million (approximately $60.7 million). DIC and CII are both majority-owned subsidiaries of IDBD. As a result, we recorded, in the fourth quarter of 2009, a gain of approximately $21.9 million. |
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|   | · | Sale of ChipX. In November 2009, ChipX Inc., or ChipX, then 28% held by us, completed a merger with GigOptix Inc, or GigOptix., a U.S. company traded "over-the-counter" in the United States (GGOX.OB), pursuant to which the shareholders of ChipX received 40% of the shares of the merged company, constituting about 26% of the total shares on a fully diluted basis, of which we owned 8.71% on an issued and outstanding basis. As a result of the merger, we recognized a gain of approximately $1.5 million during the fourth quarter of 2009. These shares were subject to a lock up which ended on January 2, 2011. During the first quarter of 2011, we sold approximately 450,000 shares of GigOptix in open market sales for approximately $1.3 million as a result of which we recorded  a gain in the amount of $0.4 million in the first quarter of 2011. |
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|   | · | Loans to Starling. During the months of May 2009 through August 2011, we and RDC entered into eight loan agreements with Starling, pursuant to which loans in the aggregate amount of $35 million were advanced to Starling. Our share in this amount is approximately $16.3 million. |
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|   | · | Delisting and Transition to IFRS. On January 6, 2010, we voluntarily delisted from the Nasdaq. We further intend, at this stage, to terminate the registration of our ordinary shares under the Exchange Act as soon as possible under SEC rules, thereby releasing us from our obligation to file annual and other reports with the SEC. Deregistration will be possible if either (1) the average daily trading volume, or ADTV, of our ordinary shares in the United States has been no greater than 5% of the worldwide ADTV of our ordinary shares during a recent consecutive 12-month period or (2) on a date within 120 days before filing the deregistration form, our ordinary shares are held of record by less than 300 persons resident in the U.S. or less than 300 persons on a worldwide basis. We cannot project when and if such deregistration will take place. Our ordinary shares continue to be listed and traded on the TASE, our principal trading market. So long as we are listed on TASE we will continue to make public reports with the Israeli Securities Authority and TASE, filed in Hebrew, in accordance with the Israeli securities laws and regulations including an annual report, filed with the Israeli Securities Authority simultaneously with this Annual Report and available at www.magna.co.il. In addition, our quarterly financial statements and any material event are reported in immediate releases in Hebrew and translated into English and filed with the SEC under Form 6-K. |
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|   | · | Investments in NuLens. In January 2010, NuLens Ltd., or NuLens, completed a financing round of approximately $4.6 million, in which we invested $2 million. We hold approximately 35% of NuLens' outstanding shares. In June 2011, we together with other shareholders of NuLens, signed an agreement to invest an aggregate amount of $4 million in NuLens in two payments, of which our share was approximately $2.5 million, the first of which was advanced immediately, and the second of which was advanced in January 2012. |
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|   | · | Sale of investment in Galil Medical. In March 2010, our audit committee and board of directors approved the transaction in which we, together with RDC and DIC (who together held approximately 42% of Galil Medical Ltd., or Galil Medical) and certain other shareholders of Galil Medical entered into an agreement to sell all their respective holdings in Galil Medical to certain other Galil Medical shareholders for an immediate payment in the aggregate amount of approximately $1.33 million and for an additional contingent future payment, conditional upon certain future events occurring within 24 months from the consummation of the above transaction which period has since lapsed. The consideration was allocated among the selling shareholders proportionally to the number of Galil Medical shares sold by each of them, irrespective of their class and liquidation preference. Accordingly, our and RDC's portion in the immediate payment was approximately $0.4 million and approximately $0.5 million, respectively. In April 2010, subsequent to the receipt of all required approvals, the transaction was completed. As a result of the sale, in the second quarter of 2010, we recorded a gain (attributable to the Company's shareholders) in the amount of approximately $0.5 million (a consolidated net gain of approximately $0.8 million). |
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|   | · | Sale of Medingo. In April, 2010, a definitive agreement was executed for the sale of all of the shares of Medingo to F. Hoffman-La Roche Ltd., or Roche. Medingo, which prior to the sale, was held 92% by us, including 84% by RDC, is developing an insulin patch pump aimed at improving the quality of life for people living with diabetes. The principal terms of the sale included, inter alia, the following: (i) upon completion of the transaction, the selling shareholders received consideration in the aggregate amount of $160 million, subject to certain adjustments, of which an amount of $29 million is held in escrow for a period of up to 24 months to cover mainly potential indemnification payments which may be due from the selling shareholders in connection with breaches, if any, of the sale agreement and certain potential future claims relating to Medingo, if any, (ii) the selling shareholders will receive gradual payments of additional contingent consideration of up to $40 million conditional upon Medingo achieving, gradually, over a certain period, certain operational milestones, including, inter alia, the establishment of a production line with certain operational characteristics. Our and RDC's maximum potential indemnification obligations under the sale agreement are limited to approximately 110% of our respective parts of the total consideration amount except – with respect to each of us and RDC separately – in case of fraud or willful misconduct by us or RDC, respectively. |
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|   | (i) | In accordance with Medingo's capital structure and the shareholders' rights to Medingo's capital, we and RDC received approximately $13.7 million and approximately $93.5 million, respectively, upon completion of the transaction. During the third quarter of 2010,  we and RDC additionally received approximately $0.2 million and approximately $1.5 million, respectively for certain adjustments to the initial consideration, and may receive in the future additional amounts of up to approximately $2.7 million and up to approximately $20 million, respectively, from the amount held in escrow in connection with the transaction for a period of up to 24 months, and up to approximately $3 million and up to approximately $29.2 million, respectively, out of the contingent consideration. |
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|   | (ii) | We recorded a net gain (attributable to our shareholders) in the second quarter of 2010 in the amount of approximately $70.8 million (a consolidated net gain in the amount of approximately $124.7 million). An additional net gain (attributable to the our shareholders), currently estimated at an aggregate amount of up to approximately $13.9 million (a consolidated net gain of up to approximately $24.9 million) may be recorded at later stages, taking into consideration certain future events affecting the amounts we and RDC may receive from the contingent consideration. Our net gain amounts include our share of the net gain of RDC in respect of the aforementioned sale. |
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|   | (i) | There are certain operational risks, outlined in the said report from Roche, which may lead to delays or prevent the achievement of the milestones, including inter alia, due to the unsuitability of the required operational characteristics. |
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|   | (ii) | It can reasonably be assumed that Medingo is expected to achieve some of the said operational milestones. However, there are operational risks as detailed in paragraph (i) above. |
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|   | (iii) | It is not possible to provide information as to the possibility of the fourth milestone being achieved. |
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|   | · | Sale of Teledata. In April 2010, a definitive merger agreement was executed between Teledata Networks Ltd., or Teledata, its principal shareholders, including us and Enablence, a foreign company, publicly traded on the TSX Venture Exchange which designs, manufactures and sells optical components and systems to a global customer base, for the sale, by way of merger, of all of the outstanding shares of Teledata to Enablence. Teledata, 21% held by us prior to the merger, provides innovative access products and solutions for both traditional and Next Generation Networks, or NGN, to telecom operators and service providers. The principal terms of the merger agreement include, inter alia, the following: (i) upon completion of the transaction, consideration was received in the aggregate amount of $50 million, including $10 million payable in cash, $10 million paid in non-tradable bonds of Enablence and $30 million payable in publicly tradable shares of Enablence. Of this consideration, shares of Enablence equivalent to $5 million were deposited in escrow for a period of up to 12 months to cover, mainly, possible indemnification which may become due to Enablence in connection with breaches, if any, of the merger agreement by any of the other parties thereto and possible future claims relating to Teledata, if any, (ii) upon completion of the transaction all outstanding shareholders' loans granted to Teledata by us (in the aggregate amount of approximately $0.8 million, and which are convertible into Teledata shares) were assigned to Enablence. The abovementioned consideration includes the consideration for such assignment, (iii) each of the principal shareholders shall only be liable for part of the indemnification amounts that may become due to Enablence, according to its share of the consideration, and will not be liable for any breaches of the merger agreement by any of the other principal shareholders. The liability of each principal shareholder for its representations and obligations to Enablence will be limited to its share of the aggregate consideration, while its liability for representations and obligations relating to Teledata shall be limited (except in certain matters) to each such shareholder's share of the consideration held in escrow described above, (iv) the shares of Enablence received as part of the consideration were subject to a lock-up period of 6 to 12 months commencing from the closing date of the transaction all of which to date have been released from the lock up, and (v) on the closing date of the transaction, all shareholders' guarantees granted by the principal shareholders to Teledata, and all obligations their commitments to grant shareholders guarantees or collateral for loans to Teledata, were cancelled. |
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|   | (i) | In accordance with Teledata's capital structure and the shareholders' rights to Teledata's capital, we received aggregate proceeds of approximately $23.2 million, including approximately $3.0 million paid in cash, approximately $3.8 million paid in bonds of Enablence and approximately $16.4 million paid in shares of the Enablence based on their price on the TSX Venture Exchange on the closing date of the sale (of which Enablence shares representing approximately $2.3 million, based on their share price on the TSX Venture Exchange on the closing date of the transaction, were held in escrow for up to 12 months). |
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|   | (ii) | Pursuant to the terms of the transaction, guarantees and commitments to grant guarantees which were provided in the past by us to Teledata in the aggregate amount of approximately $4.2 million were cancelled. |
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|   | (iii) | We recorded a net gain in the second quarter of 2010 in the amount of approximately $22.4 million. |
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|   | · | Repayment of Loans to Israel Discount Bank and DIC. In June 2010, our audit committee and board of directors approved in accordance with the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760-2000, the prepayment of our entire debt to Israel Discount Bank Ltd. in respect of loans granted to us by the bank in the aggregate amount of $30 million (without incurring a prepayment commission), on the interest payment dates in respect of the debt, the last of which was in September 2010. Therefore, and pursuant to the terms of the loan agreements with DIC, upon repayment of our entire debt to the bank in September 2010, our entire debt in respect of the loans granted to us by DIC in the aggregate amount of approximately $17.5 million (including interest) was prepaid as well (without incurring a prepayment commission). The average effective rate of interest paid to DIC and the bank was 4.63% and 1.67% respectively (without taking into account any increase in the consumer price index or any change in the NIS-Dollar exchange rate) per year. Upon repayment of our entire debt to the bank, the pledge on 3,359,676 Given Imaging shares held by us in favor of the bank, then representing approximately 11% of Given Imaging's outstanding shares, was removed. |
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|   | · | Repayment of RDC bank loans. During June 2010, RDC's entire debt in respect of loans granted to it in the amount of $10 million by Bank Mizrahi Tefahot Ltd. was repaid (without incurring a prepayment commission). As a result of such repayment, the pledge on 2,467,334 Given Imaging shares held by RDC in favor of this bank, then representing approximately 8% of Given Imaging's outstanding shares, was removed. |
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|   | · | Repayment of RDC Shareholder loans. During June 2010, RDC's entire debt in respect of loans granted to it by its shareholders (us and Rafael) in the aggregate amount of approximately $32 million was prepaid (without incurring a prepayment commission), of which an amount of approximately $13 million was repaid to Rafael and an amount of approximately $19 million was repaid to us. |
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|   | · | Zvi Slovin resigns as Co-CEO. In June 2010, Dr. Zvi Slovin, resigned, at his instance and request, his position as our Co-CEO with effect from June 30, 2010. As a result, Mr. Ari Bronshtein became sole CEO of the Company. Dr. Slovin remains employed by DIC and continues to provide us with business guidance and serves as a director of several group companies. |
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|   | · | RDC Dividend. In August 2010, RDC paid a special cash dividend in the aggregate amount of approximately $30 million. Our share of this dividend amounted to approximately $15 million. The balance of the dividend amount was distributed to Rafael. |
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|   | · | Investment in Kyma. In September 2010, we and Kyma signed an investment agreement according to which we invested $1 million in Kyma for 27% of Kyma's outstanding shares. Kyma is developing a remote, radar technology based, system for continuous home monitoring of chronic heart failure, or CHF, to enable early treatment of pulmonary edema thereby reducing unnecessary hospitalization. In January 2011, we exercised our right, pursuant to the investment agreement to invest an additional $4 million thereby increasing our shareholdings to 65% of Kyma's outstanding shares. |
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| (a) | Qualitative criterion – a company is a main company from our perspective, even though it does not meet our quantitative criterion below, due to our significant investment commitments therein, significant risks and exposure in connection with an investment therein, the potential inherent in the investment therein from the management’s perspective, significant value (current or potential) of our holding therein. |
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| (b) | Quantitative criterion – a company in which the total investment on our Statement of Financial Position exceeds 10% of our equity. |
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| Company name                                   | Field                       | Method of Accounting in Elron's Financial Statements | Rights to appoint directors                                                                                                                                                                          | Percentage of shareholdings and voting rights                                  | Percentage holding fully  diluted  shareholding and voting rights |
|------------------------------------------------|-----------------------------|------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| AQWISE - WISE WATER TECHNOLOGIES LTD           | Clean technology            | Equity Method                                        | Three directors (out of eleven directors)2                                                                                                                                                           | 34.03%                                                                         | 29.95%                                                                                |
| ATLANTIUM TECHNOLOGIES LTD                     | Clean technology            | Equity Method                                        | One director (out of seven directors)                                                                                                                                                                | 23.44%                                                                         | 20.22%                                                                                |
| BRAINSGATE LTD                                 | Medical devices             | Equity Method                                        | One director (out of five directors)                                                                                                                                                                 | 27.26%                                                                         | 22.86%                                                                                |
| CLOUDYN SOFTWARE LTD                           | Digital                     | Consolidated                                         | Three directors (out of five directors)                                                                                                                                                              | 51% of voting rights and  27.03% of shareholdings (by Navitrio only) | 51% of voting rights and  25.00% of shareholdings (by Navitrio only)        |
| GIVEN IMAGING LTD                              | Medical devices             | Equity Method                                        | Public company. Two directors (out of nine directors who serve at the date of this Annual Report) are  officeholders of Elron                                                              | 31.08%(8.74% by RDC)                                                           | 26.04%(7.32 % by RDC)                                                                 |
| JORDAN VALLEY SEMICONDUCTORS LTD               | Semiconductors              | Available for sale                                   | One director (out of seven directors)                                                                                                                                                                | 18.83%                                                                         | 17.51%                                                                                |
| KYMA MEDICAL TECHNOLOGIES LTD                  | Medical devices             | Consolidated                                         | Three directors (out of five  directors)                                                                                                                                                   | 65.27% (by RDC only)                                                           | 53.07% (by RDC only)                                                                  |
| NAVITRIO LTD                                   | Holding company             | Consolidated                                         | Two directors (out of three directors)                                                                                                                                                               | 80.00%                                                                         | 80.00%                                                                                |
| NOTAL VISION LTD                               | Medical devices             | Available for sale                                   | One director (out of seven directors)                                                                                                                                                                | 20.31%                                                                         | 15.42%                                                                                |
| NULENS LTD                                     | Medical devices             | Equity Method                                        | Two directors (out of nine directors)                                                                                                                                                                | 34.72%                                                                         | 29.84%                                                                                |
| PLYMEDIA INC                                   | Internet technology         | Equity Method                                        | One director (out of five directors)                                                                                                                                                                 | 27.96%                                                                         | 21.84%                                                                                |
| POCARED DIAGNOSTICS LTD                        | Medical devices             | Equity Method                                        | Two directors (out of six directors)                                                                                                                                                                 | 40.84%                                                                         | 36.97%                                                                                |
| RDC – RAFAEL DEVELOPMENT CORPORATION LTD | Holding company             | Consolidated                                         | Four directors (out of seven directors)                                                                                                                                                              | 50.10%                                                                         | 50.10%                                                                                |
|  SMARTWAVE MEDICAL LTD                    | Medical Devices             | Consolidated                                         | Three directors (out of three directors)3                                                                                                                                                            | 100% (by RDC only)                                                             | 100% (by RDC only)                                                                    |
| STARLING ADVANCED COMMUNICATIONS LTD           | Communica-tions Technology4 | Consolidated                                         | Public company. Three directors (out of 9 directors who serve at the date of this Annual Report) serve on Starling's board of directors are office holders of Elron, RDC, or their main shareholders | 82.98% (44.44% by RDC)                                                         | 80.91% (43.33 % by RDC)                                                               |
| SYNC-RX LTD                                    | Medical devices             | Consolidated                                         | Three directors (out of five directors)5                                                                                                                                                             | 87.47% (by RDC only)                                                           | 78.10% (by RDC only)                                                                  |

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|   | (i) | Proof of technological feasibility – at this stage, preliminary tests are performed, the purpose of which is to prove the effectiveness of the technology. |
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|   | (ii) | Prototype design – at this stage, ex-vivo experiments and other experiments are usually performed for the purpose of development of the device and determination of its effectiveness. |
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|   | (iii) | Preclinical studies – at this stage, testing is usually performed on animals, the purpose of which is to examine the safety and effectiveness of the device before testing it on humans. Based on the results received from these tests, the clinical end-point is determined, according to which the effectiveness of the device in the clinical trials will be determined. In addition, on the basis of the results received from these tests, the regulatory strategy is determined according to which the company will act for the purpose of receiving regulatory approval to market the device. |
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|   | (iv) | Clinical trials – at this stage, trials are performed on humans, and it includes several sub-stages: |
|--------|------|------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

----

|   | 1. | CE Certification (“CE Mark”) for the marketing of a medical device in Europe – To the best of our knowledge and in reliance on publicly available information, commercialization of medical devices in member countries of the European Union is regulated by directives adopted by the European Union. The European Union presently requires that all medical products bear the CE mark, an international symbol of adherence to quality assurance standards and demonstrated clinical effectiveness. Compliance with the Medical Device Directive, as certified by a recognized European Notified Body, permits the manufacturer to affix the CE mark on its products. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 2. | Procedure for receipt of FDA clearance for the marketing of a medical device in the United States – To the best of our knowledge and in reliance on publicly available information, the FDA is a federal agency in the United States whose role is to protect the American public’s health through the establishment and enforcement of a high product standard and through various regulatory requirements, which will ensure the safety and effectiveness of products such as drugs which are intended for human and veterinary use, biological products and medical devices. FDA requirements include, inter alia, the manufacturing of the medical devices in accordance with quality system regulation (QSR), receipt of a scientifically based submission file on the medical device, the appointment of an American agent and, if required, provision of an opportunity for FDA representatives to supervise the manufacturing procedure at the plant. FDA clearance for a medical device is granted according to compliance with several conditions of the relevant proceeding. The Premarket Notification 510(K) proceeding is a relatively short proceeding during which it is demonstrated to the FDA that the medical device for which the clearance is sought is substantially equivalent, having the same intended use and technological characteristics, to a "predicate device" – a device that is already legally marketed for the same intended use and which is not subject to a Premarket Approval, or PMA, proceeding. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of a device, either for which there is no predicate device, or due to the level of risk associated with such device. For such devices, the FDA has determined that general and special controls alone are insufficient to provide reasonable assurance that the device is safe and effective for its intended use. The PMA proceeding requires, inter alia, clinical trials at a larger scope and mandatory pre-approval inspection of the manufacturing facility, which may extend the period of time until receipt of regulatory approvals and increase the costs required therefor. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Procedure for receipt of the approval of the Ministry of Health for the marketing of a medical device in Israel – To the best of our knowledge, in reliance on publicly available information, a medical device company requires the approval of Israel's Ministry of Health's Unit for Medical Means and Devices, or MOH Medical Devices Unit, to market its medical device in Israel. Medical devices are defined as a device, instrument, chemical substance, biological or technological product, which is used in medical treatment, or which is required for the action of a device or instrument which is used for treatment and which is not intended, in essence, to act as a medicinal measure. The MOH Medical Devices Unit is responsible for granting import permits of various types for medical devices and monitoring the marketing of medical devices in Israel. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Aqwise Wise Water Technologies Ltd., or Aqwise, provides biological water and wastewater treatment solutions for the industrial and municipal markets. As of the date of filing this Annual Report, we hold approximately 34% of Aqwise's outstanding share capital and 30% of Aqwise's fully diluted share capital. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Atlantium Inc., or Atlantium, provides ultraviolet-based water disinfection solutions. As of the date of filing this Annual Report, we hold approximately 23% of Atlantium's outstanding share capital and 20% of Atlantium's fully diluted share capital. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Jordan Valley Semiconductors Ltd., or Jordan Valley, provides metrology solutions for manufacturing process control in the semiconductors industry. Jordan Valley's revenues in 2011 amounted to $35.2 million, compared with $31 million in 2010 and $14.3 million in 2009. As of the date of filing this Annual Report, we hold approximately 19% of Jordan Valley's outstanding share capital and 18% of Jordan Valley's fully diluted share capital. The metrology system that Jordan Valley is developing includes innovative and advanced technologies enabling, inter alia, measurement of thickness, density and chemical composition of thin layers that compose the semiconductors integrated circuits designated for the semiconductor and compound markets. Jordan Valley's technology is considered most suitable for manufacturing process control of DRAM, NAND & NOR Flash, Logic and Compound, especially suitable for modern mobile products such as smartphones and palm computers, LED and Solar. The size of the worldwide metrology market was estimated by VLSI Research in July 2010 at approximately $1.5 billion per year (Long-Term IC Manufacturing Equipment History and Forecast, 2004-2012). Jordan Valley's customers include seven out of the top 10 world's largest semiconductor manufacturers. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Navitrio is a digital investment venture, established in order to incubate projects and to invest in companies based on technologies in the fields of electronic commerce, mobile applications, cloud computing applications, social networks, medical and pharmaceutical digital applications and other related fields. Since its establishment in 2011, Navitrio has invested in Cloudyn (held 27% by Navitrio) which is developing technological solutions for the optimization of resources and costs related to the cloud environment. In addition, Navitrio has commenced the incubation of the Cemmerce project within the framework of which it is developing an electronic retail platform for bloggers and internet sites. As of the date of filing this Annual Report, we hold 80% of Navitrio's outstanding share capital and fully diluted share capital. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Notal Vision Inc., or Notal Vision, provides a system and services for remote monitoring of AMD patients at risk of vision loss, for the early detection of important visual changes. As of the date of filing this Annual Report, we hold 20% of Notal Vision's outstanding share capital and 16% of Notal Vision's fully diluted share capital. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | NuLens is developing intra-ocular accommodating lenses, or IOLs, capable of restoring vision at all distances (near, intermediate and distance). As of the date of filing this Annual Report, we hold approximately 35% of NuLens' outstanding share capital and approximately 30% of its fully diluted share capital. Following recent changes in FDA requirements regarding clinical trials for accommodating IOLs, the expected duration of these trials has been lengthened and NuLens has been prevented from the possibility of submitting an application to the FDA to commence clinical trials for market approval on the basis of the results of trials conducted to date. NuLens is currently considering the manner and duration of the continued development of its product and the regulatory track which it will select for the purpose of marketing its product. In addition, the other main shareholder of NuLens, Warburg Pincus, decided not to exercise its right to participate in the second installment of the last financing. NuLens is examining the possibility of raising capital from additional investors. As a result of accumulation of these events, it is the opinion of our management that the expected duration of the period until possible realization of our holding in NuLens has been lengthened and the level of the risk related to the investment in NuLens has increased, and as a result, NuLens ceased to constitute a main company for us. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Plymedia Inc., or Plymedia, provides products for overlaying contextual content on web videos. As of the date of filing this Annual Report, we hold 28% of Plymedia's outstanding share capital and 22% of Plymedia's fully diluted share capital. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Starling – As described in Item 4A above, in September 2011, Starling became a public shell company after it sold its business in the field of satellite communication systems outside of the military field and following the decision of its board of directors to cease its operations. As a result, Starling ceased to be a main company for us. As of the date of the filing of this Annual Report, we hold (including through RDC) approximately 83% of the issued share capital of Starling and 81% on a fully diluted basis. In February 2012, we and RDC signed a merger agreement with Starling according to which a wholly owned subsidiary of ours and RDC will be merged with and into Starling and all publicly-held Starling shares will be purchased by us and RDC in consideration for cash at a price per share of NIS0.87 (approximately $0.23). With the completion of the merger, Starling's shares will be delisted from trading on the TASE and Starling will become a private company held 46.45% and 53.55% by us and RDC, as applicable. The merger consideration is expected to amount to approximately NIS1.6 million (approximately $400,000) which will be paid by us and RDC in proportion to each party's respective holdings in Starling post the merger. The completion of the merger is subject to the fulfillment of various conditions precedent including, inter alia, receipt of approval of the shareholders of Starling expected to convene in April 2012 and receipt of other approvals required by law. There is no assurance as to the completion of the merger transaction and the timing thereof. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

|   | 3. | Identification and exploitation of investment opportunities with the potential for significant returns. |
|--------|----|---------------------------------------------------------------------------------------------------------|

|   | 4. | Involvement and the ability to influence the management and guidance of group companies including through active participation on their boards of directors and hands-on assistance to their management. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Exploitation of opportunities for the purpose of realizing group companies. |
|--------|----|-----------------------------------------------------------------------------|

|   | 6. | Increasing the value of our group companies, inter alia, by providing assistance in the advancement of their technology, forming strategic relationships, access to capital, development and operational guidance, business plan preparation, investment and budget approval, appointing the senior executive team, and general supervision on the performance of group companies. In addition, we provide active assistance to the management of group companies. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | · | Impairment of  investments in group companies and financial assets |
|--------|--------|------------------------------------------------------------------------------|

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

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

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

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

|   | · | Fair value measurement of contingent consideration |
|--------|--------|----------------------------------------------------|

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

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

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

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| Year ended December 31,                            |
|----------------------------------------------------|
| 2011                                               |   | 2010 |   | 2009 |
| RDCStarlingSync-RxSmartWave1Navitrio2Cloudyn3Kyma4 |   | RDCStarlingWavion5Sync-RxActySafe 6  |   | RDCMedingo7StarlingSync-RxXSIGHTS8Wavion5ActySafe |

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| Year ended December 31,                      |
|----------------------------------------------|
| 2011                                         |   | 2010 |   | 2009 |
| AtlantiumAqwiseBrainsGateGiven ImagingNuLens | PocaredPLYmedia  |   | AtlantiumAqwiseBrainsGateGalil Medical1Given ImagingNuLens | Notal Vision9Galil Medical1Safend2PocaredPLYmediaKyma3Teledata4 |   | Impliant5Teledata4BrainsGateNuLensSafend2AtlantiumEnure10Pocared3DV11 | BPT6PLYmediaGiven ImagingNetVision7ChipX8AqwiseNotal Vision9Galil Medical1 |

| Year ended December 31,                         |
|-------------------------------------------------|
| 2011                                            |   | 2010 |   | 2009 |
| Jordan ValleyNotal Vision1GigOptixEnablenceWave |   | BPT2Jordan ValleyNotal Vision1EVS3GigOptixEnablence |   | Jordan ValleyBPT2EVS3GigOptix |

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|                                                             |   | Year ended December 31,                |   |
|------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                             |   | 2011                                   |   |   | 2010 |   |   | 2009 |   |
|                                                             |   | (millions of $, except per share data) |   |
|                                                             |   | Audited                                |   |
| Net income (loss) attributable to Elron's shareholders           |   |                                   | (17.0  | ) |   |   | 60.7 |   |   |   | (14.3 | ) |
| Net income (loss) per share attributable to Elron's shareholders |   |                                   | (0.63  | ) |   |   | 1.98 |   |   |   | (0.48 | ) |

|                                                              |   | Year ended December 31, |   |
|-------------------------------------------------------------------|--------|-------------------------|--------|
|                                                              |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|                                                              |   | (millions of $)         |   |
|                                                              |   | Unaudited               |   |
| Our share in net losses of group companies                        |   |                    | (22.5  | ) |   |   | (23.7 | ) |   |   | (27.4 | ) |
| Excess cost amortization                                          |   |                    | (4.7   | ) |   |   | (5.6 | ) |   |   | (5.9 | ) |
| Impairment of investments in group companies and financial assets |   |                    | (15.7  | ) |   |   | (3.3 | ) |   |   | (1.8 | ) |
| Total losses in respect of group companies                        |   |                    | (42.9  | ) |   |   | (32.6 | ) |   |   | (35.1 | ) |
| Gain from exit transactions and changes in holdings (net of tax)  |   |                    | 31.0   |   |   |   | 97.9 |   |   |   | 29.5 |   |
| Corporate operating expenses                                      |   |                    | (4.9   | ) |   |   | (5.6 | ) |   |   | (6.9 | ) |

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|   | · | An approximately $21.4 million gain from the sale of Wavion by way of merger to Alvarion Ltd; |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | An approximately $4.7 million gain (net of non-controlling interest) from Starling's sale of its business in the field of non-military satellite communication systems; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $2.3 million gain from the sale of Safend to Wave; |
|--------|--------|---------------------------------------------------------------------|

|   | · | An approximately $1.6 million gain (net of non-controlling interest) from a decrease in our holding in Given Imaging as a result of options granted to Given Imaging employees having been exercised or having expired. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $70.8 million gain (net of non-controlling interest and of tax) from the sale of Medingo to F. Hoffmann-La Roche; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $22.4 million gain from the sale of Teledata by way of merger to Enablence (for details regarding impairment charges in respect of our holding in Enablence shares and debentures, see "Other expenses, net" below); |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $21.9 million gain from the sale of all our holdings in NetVision (approximately 15%) to companies in the IDBD group; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $4.4 million gain (net of non-controlling interest) from 3DV's sale of substantially all of its assets to a third party; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | An approximately $1.5 million gain from the sale of ChipX by way of merger to GigOptix. |
|--------|--------|-----------------------------------------------------------------------------------------|

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|                                                                                     |   | Year ended December 31, |   |
|------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                     |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|                                                                                     |   | (millions of $)         |   |
|                                                                                     |   | Audited                 |   |
| Income from sales                                                                        |   |                    | 14.1   |   |   |   | 9.6 |   |   |   | 9.9 |   |
| Gain from disposal of business and associates and changes in holdings in associates, net |   |                    | 35.8   |   |   |   | 160.0 |   |   |   | 31.8 |   |
| Financial income                                                                         |   |                    | 1.5    |   |   |   | 2.8 |   |   |   | 1.4 |   |
| Total income                                                                             |   |                    | 51.4   |   |   |   | 172.4 |   |   |   | 43.1 |   |
| Cost of sales                                                                            |   |                    | 5.8    |   |   |   | 3.9 |   |   |   | 4.8 |   |
| Research and development expenses, net                                                   |   |                    | 18.2   |   |   |   | 18.2 |   |   |   | 25.7 |   |
| Selling and marketing expenses                                                           |   |                    | 5.7    |   |   |   | 6.6 |   |   |   | 9.0 |   |
| General and administrative expenses                                                      |   |                    | 10.5   |   |   |   | 13.6 |   |   |   | 15.9 |   |
| Equity in losses of associates, net                                                      |   |                    | 10.3   |   |   |   | 10.9 |   |   |   | 10.5 |   |
| Amortization of intangible assets                                                        |   |                    | 0.3    |   |   |   | 1.5 |   |   |   | 1.4 |   |
| Financial expenses                                                                       |   |                    | 3.9    |   |   |   | 3.0 |   |   |   | 5.4 |   |
| Other expenses, net                                                                      |   |                    | 19.4   |   |   |   | 3.1 |   |   |   | 2.2 |   |
| Total costs and expenses                                                                 |   |                    | 74.1   |   |   |   | 60.8 |   |   |   | 75.0 |   |
| Income (Loss) before taxes on income                                                     |   |                    | (22.7  | ) |   |   | 111.6 |   |   |   | (31.8 | ) |
| Taxes on income (Tax benefit)                                                            |   |                    | 0.6    |   |   |   | 6.1 |   |   |   | (2.5 | ) |
| Income (Loss)                                                                            |   |                    | (23.3  | ) |   |   | 105.5 |   |   |   | (29.4 | ) |
| Net income (loss) attributable to the Company's shareholders                             |   |                    | (17.0  | ) |   |   | 60.7 |   |   |   | (14.3 | ) |
| Net income (loss) attributable to non-controlling interest                               |   |                    | (6.3   | ) |   |   | 44.8 |   |   |   | (15.1 | ) |
| Basic income (loss) per share attributable to the Company's shareholders (in $)          |   |                    | (0.63  | ) |   |   | 1.98 |   |   |   | (0.48 | ) |
| Diluted income (loss) per share attributable to the Company's shareholders (in $)        |   |                    | (0.63  | ) |   |   | 1.98 |   |   |   | (0.49 | ) |

|    |   | Year ended December 31, |   |
|---------|--------|-------------------------|--------|
|    |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|    |   | (millions of $)         |   |
| Wavion1 |   |                    | 14.1   |   |   |   | 9.6 |   |   |   | 7.7 |   |
| SELA2   |   |                    | -      |   |   |   | - |   |   |   | 2.2 |   |
| Total   |   |                    | 14.1   |   |   |   | 9.6 |   |   |   | 9.9 |   |

|   | 1 | Wavion was consolidated until November 2011, following its sale. |
|--------|---|------------------------------------------------------------------|

|   | 2 | SELA was consolidated until September 2009, following its sale. |
|--------|---|-----------------------------------------------------------------|

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|       |   | Year ended December 31, |   |
|------------|--------|-------------------------|--------|
|       |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|       |   | (millions of $)         |   |
| Corporate  |   |                    | 4.9    |   |   |   | 5.6 |   |   |   | 6.9 |   |
| RDC        |   |                    | 1.9    |   |   |   | 4.1 |   |   |   | 2.6 |   |
| Wavion 1   |   |                    | 11.5   |   |   |   | 8.6 |   |   |   | 7.8 |   |
| Kyma 2     |   |                    | 2.6    |   |   |   | - |   |   |   | - |   |
| Starling   |   |                    | 9.9    |   |   |   | 10.0 |   |   |   | 6.7 |   |
| Medingo3   |   |                    | -      |   |   |   | 6.9 |   |   |   | 15.9 |   |
| Impliant 4 |   |                    | -      |   |   |   | - |   |   |   | 4.9 |   |
| SELA5      |   |                    | -      |   |   |   | - |   |   |   | 1.8 |   |
| Other 6    |   |                    | 3.6    |   |   |   | 3.2 |   |   |   | 3.9 |   |
|       |   |                    | 34.4   |   |   |   | 38.4 |   |   |   | 50.5 |   |

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|                                    |   | Year ended December 31, 2011 |   |   | Increase (Decrease) |   |   | Year ended December 31,2010 |   |   | Increase (Decrease) |   |   | Year ended December 31,2009 |   |
|-----------------------------------------|--------|------------------------------|--------|--------|---------------------|--------|--------|-----------------------------|--------|--------|---------------------|--------|--------|-----------------------------|--------|
|                                    |   | (millions of $)              |   |   | %                   |   |   | (millions of $)             |   |   | %                   |   |   | (millions of $)             |   |
| Revenues                                |   |                         | 177.9  |   |                |   | 12.8   |                        |   |   | 157.8               |   |   |                        | 11.3   | % |   |   | 141.8 |   |
| Operating income                        |   |                         | 12.3   |   |                |   | 59.3   |                        |   |   | 7.7                 |   |   |                        | (27.6  | )% |   |   | 10.7 |   |
| Net income attributable to shareholders |   |                         | 7.4    |   |                |   | (43.1  | )%                          |   |   | 13.1                |   |   |                        | (25.0  | )% |   |   | 17.5 |   |

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|          |   | Comprehensive income |   |   |                        |   |   | Interest        |   |
|---------------|--------|----------------------|--------|--------|-----------------------------|--------|--------|-----------------|--------|
|          |   | Income (Loss)        |   |   | Other Comprehen-sive income |   |   | Dividend income |   |   | Interest income |   |   | Date received |   |
|          |   | (millions of $)      |   |   |                        |   |
| Subsidiaries: |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |
| Elbit         |   |                 | (5.7   | )      |                        |   | (0.1   | )               |   |   | 1.1 |   |   |   | - |   |   |   | - |   |
| DEP           |   |                 | (6.7   | )      |                        |   | 1.0    |            |   |   | 16.6 |   |   |   | - |   |   |   | - |   |
| Mediagate     |   |                 | -      |   |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Starling1     |   |                 | (11.9  | )      |                        |   | -      |            |   |   | - |   |   |   | 1.6 |   |   |   | - | 4 |
| Wavion        |   |                 | (3.5   | )      |                        |   | (0.1   | )               |   |   | - |   |   |   |   |   |   |   |   |   |
| Navitrio      |   |                 | (0.7   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
|          |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |   |   |   |   |   |
| Associates:   |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |   |   |   |   |   |
| Given Imaging |   |                 | 7.6    |   |                        |   | (0.2   | )               |   |   | - |   |   |   | - |   |   |   | - |   |
| Aqwise        |   |                 | -      | 3      |                        |   | -      |            |   |   | - | 3 |   |   | - | 3 |   |   |  - | 4 |
| NuLens        |   |                 | (5.0   | )      |                        |   | -      |            |   |   | - |   |   |   | - | 3 |   |   | - | 4 |
| BrainsGate    |   |                 | (7.6   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Safend2       |   |                 | (1.6   | )      |                        |   | -      |            |   |   | - |   |   |   | - | 3 |   | September 2011 |   |
| Atlantium     |   |                 | (7.3   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Pocared       |   |                 | (5.6   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Plymedia      |   |                 | 0.1    |   |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |

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|          |   | Comprehensive income |   |   |                        |   |   | Interest        |   |
|---------------|--------|----------------------|--------|--------|-----------------------------|--------|--------|-----------------|--------|
|          |   | Income (Loss)        |   |   | Other Comprehen-sive income |   |   | Dividend income |   |   | Interest income |   |   | Date received |   |
|          |   | (millions of $)      |   |   |                        |   |
| Subsidiaries: |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |
| RDC           |   |                 | (15.2  | )      |                        |   | 7.0    |            |   |   | - |   |   |   | - | 1 |   |   | 2014 |   |

----

|          |   | Comprehensive income |   |   |                        |   |   | Interest        |   |
|---------------|--------|----------------------|--------|--------|-----------------------------|--------|--------|-----------------|--------|
|          |   | Income (Loss)        |   |   | Other Comprehen-sive income |   |   | Dividend income |   |   | Interest income |   |   | Date received |   |
|          |   | (millions of $)      |   |   |                        |   |
| Subsidiaries: |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |
| Actysafe      |   |                 | (0.7   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Xsights 1     |   |                 | -      |   |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| SyncRx        |   |                 | (2.2   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Smartwave     |   |                 | (0.2   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |
| Kyma          |   |                 | (2.7   | )      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |

----

|          |   | Comprehensive income |   |   |                        |   |   | Interest        |   |
|---------------|--------|----------------------|--------|--------|-----------------------------|--------|--------|-----------------|--------|
|          |   | Income (Loss)        |   |   | Other Comprehen-sive income |   |   | Dividend income |   |   | Interest income |   |   | Date received |   |
|          |   | (millions of $)      |   |   |                        |   |
| Subsidiaries: |   |                 |   |   |                        |   |   |            |   |   |   |   |   |   |   |
| Cloudyn1      |   |                 | -      | 2      |                        |   | -      |            |   |   | - |   |   |   | - |   |   |   | - |   |

----

----

----

|                                                             |   | Year ended                             |   |   | Three months ended |   |
|------------------------------------------------------------------|--------|----------------------------------------|--------|--------|--------------------|--------|
|                                                             |   | December 31, 2011                      |   |   | March 31, 2011     |   |   | June 30, 2011 |   |   | September 30, 2011 |   |   | December 31, 2011 |   |
|                                                             |   | (millions of $, except per share data) |   |
|                                                             |   | Unaudited                              |   |
| Net income (loss) attributable to Elron's shareholders           |   |                                   | (17.0  | )      |               |   | (4.3 | ) |   |   | (16.4 | ) |   |   | (5.3 | ) |   |   | 9.0 |   |
| Net income (loss) per share attributable to Elron's shareholders |   |                                   | (0.63  | )      |               |   | (0.16 | ) |   |   | (0.57 | ) |   |   | (0.19 | ) |   |   | 0.29 |   |

|                                                             |   | Year ended                             |   |   | Three months ended |   |
|------------------------------------------------------------------|--------|----------------------------------------|--------|--------|--------------------|--------|
|                                                             |   | December 31, 2010                      |   |   | March 31, 2010     |   |   | June 30, 2010 |   |   | September 30, 2010 |   |   | December 31, 2010 |   |
|                                                             |   | (millions of $, except per share data) |   |
|                                                             |   | Unaudited                              |   |
| Net income (loss) attributable to Elron's shareholders           |   |                                   | 60.7   |   |               |   | (12.9 | ) |   |   | 81.1 |   |   |   | (4.5 | ) |   |   | (3.0 | ) |
| Net income (loss) per share attributable to Elron's shareholders |   |                                   | 1.98   |   |               |   | (0.44 | ) |   |   | 2.72 |   |   |   | (0.17 | ) |   |   | (0.12 | ) |

----

|                                                                    |   | Three months ended |   |
|-------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                    |   | March 31, 2010     |   |   | June 30, 2010 |   |   | September 30, 2010 |   |   | December 31, 2010 |   |
|                                                                    |   | (millions of $)    |   |
|                                                                    |   | Unaudited          |   |
| Our share in net losses of group companies                              |   |               | (9.8   | ) |   |   | (6.6 | ) |   |   | (4.5 | ) |   |   | (2.8 | ) |
| Excess cost amortization                                                |   |               | (1.4   | ) |   |   | (1.4 | ) |   |   | (1.4 | ) |   |   | (1.4 | ) |
| Impairment of investments in group companies                            |   |               | -      |   |   |   | (2.5 | ) |   |   | - |   |   |   | (0.8 | ) |
| Total losses in respect of group companies                              |   |               | (11.2  | ) |   |   | (10.5 | ) |   |   | (5.9 | ) |   |   | (5.0 | ) |
| Gain (loss) from exit transactions and changes in holdings (net of tax) |   |               | (0.1   | ) |   |   | 93.8 |   |   |   | 0.7 |   |   |   | 3.4 |   |
| Corporate operating expenses                                            |   |               | (1.1   | ) |   |   | (1.1 | ) |   |   | (1.3 | ) |   |   | (2.1 | ) |

|                                                              |   | Three months ended |    |
|-------------------------------------------------------------------|--------|--------------------|---------|
|                                                              |   | March 31, 2011     |    |   | June 30, 2011 |   |   | September 30, 2011 |   |   | December 31, 2011 |   |
|                                                              |   | (millions of $)    |    |
|                                                              |   | Unaudited          |    |
| Our share in net losses of group companies                        |   | (3.9               | )  |   |   | (5.7 | ) |   |   | (9.3 | ) |   |   | (3.6 | ) |
| Excess cost amortization                                          |   |               | (1.2    | ) |   |   | (1.2 | ) |   |   | (1.2 | ) |   |   | (1.1 | ) |
| Impairment of investments in group companies and financial assets |   |               | -       |   |   |   | (9.2 | ) |   |   | (1.4 | ) |   |   | (5.1 | ) |
| Total losses in respect of group companies                        |   |               | (5.1    | ) |   |   | (16.1 | ) |   |   | (11.9 | ) |   |   | (9.8 | ) |
| Gain from exit transactions and changes in holdings               |   |               | 1.6     |   |   |   | 0.9 |   |   |   | 7.0 |   |   |   | 21.5 |   |
| Corporate operating expenses                                      |   |               | (1.0    | ) |   |   | (1.1 | ) |   |   | (1.0 | ) |   |   | (1.8 | ) |

----

|                                                                                     |   | Year ended        |   |   | Three months ended |   |
|------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                                                     |   | December 31, 2011 |   |   | March 31, 2011     |   |   | June 30, 2011 |   |   | September 30, 2011 |   |   | December 31, 2011 |   |
|                                                                                     |   | Audited           |   |   | Unaudited          |   |
|                                                                                     |   | (millions of $)   |   |
| Income from sales                                                                        |   |              | 14.1   |   |               |   | 4.3 |   |   |   | 3.9 |   |   |   | 3.4 |   |   |   | 2.5 |   |
| Gain from disposal of business and associates and changes in holdings in associates, net |   |              | 35.8   |   |               |   | 1.4 |   |   |   | 1.0 |   |   |   | 11.9 |   |   |   | 21.5 |   |
| Financial income                                                                         |   |              | 1.5    |   |               |   | 0.9 |   |   |   | 0.9 |   |   |   | 0.5 |   |   |   | 0.5 |   |
| Total income                                                                             |   |              | 51.4   |   |               |   | 6.6 |   |   |   | 5.8 |   |   |   | 15.8 |   |   |   | 24.5 |   |
| Cost of sales                                                                            |   |              | 5.8    |   |               |   | 1.1 |   |   |   | 1.6 |   |   |   | 1.4 |   |   |   | 1.7 |   |
| Research and development expenses, net                                                   |   |              | 18.2   |   |               |   | 4.4 |   |   |   | 4.7 |   |   |   | 6.6 |   |   |   | 2.5 |   |
| Selling and marketing expenses                                                           |   |              | 5.7    |   |               |   | 2.0 |   |   |   | 1.3 |   |   |   | 1.5 |   |   |   | 0.9 |   |
| General and administrative expenses                                                      |   |              | 10.5   |   |               |   | 2.2 |   |   |   | 2.4 |   |   |   | 2.5 |   |   |   | 3.3 |   |
| Equity in losses of associates, net                                                      |   |              | 10.3   |   |               |   | 2.4 |   |   |   | 3.1 |   |   |   | 2.9 |   |   |   | 1.9 |   |
| Amortization of intangible  assets                                             |   |              | 0.3    |   |               |   | 0.08 |   |   |   | 0.08 |   |   |   | 0.08 |   |   |   | 0.06 |   |
| Financial expenses                                                                       |   |              | 3.9    |   |               |   | 0.5 |   |   |   | 0.4 |   |   |   | 3.6 |   |   |   | 0.5 |   |
| Other expenses (income), net                                                             |   |              | 19.4   |   |               |   | (0.3 | ) |   |   | 10.3 |   |   |   | 3.9 |   |   |   | 5.6 |   |
| Total costs and expenses                                                                 |   |              | 74.1   |   |               |   | 12.4 |   |   |   | 23.9 |   |   |   | 22.5 |   |   |   | 16.5 |   |
| Income (Loss) before taxes on income                                                     |   |              | (22.7  | )      |               |   | (5.8 | ) |   |   | (18.1 | ) |   |   | (6.7 | ) |   |   | 8 |   |
| Taxes on income                                                                          |   |              | 0.6    |   |               |   | - |   |   |   | - |   |   |   | - |   |   |   | 0.6 |   |
| Income (Loss)                                                                            |   |              | (23.3  | )      |               |   | (5.8 | ) |   |   | (18.1 | ) |   |   | (6.7 | ) |   |   | 7.4 |   |
| Net income (loss) attributable to Elron's shareholders                                   |   |              | (17.0  | )      |               |   | (4.3 | ) |   |   | (16.4 | ) |   |   | (5.2 | ) |   |   | 9.0 |   |
| Loss attributable to non-controlling interest                                            |   |              | (6.3   | )      |               |   | (1.4 | ) |   |   | (1.7 | ) |   |   | (1.5 | ) |   |   | (1.6 | ) |
| Basic income (loss) per share attributable to Elron's shareholders                       |   |              | (0.63  | )      |               |   | (0.16 | ) |   |   | (0.57 | ) |   |   | (0.19 | ) |   |   | 0.29 |   |
| Diluted income (loss) per share attributable to Elron's shareholders                     |   |              | (0.63  | )      |               |   | (0.16 | ) |   |   | (0.57 | ) |   |   | (0.19 | ) |   |   | 0.29 |   |

----

|                                                                                            |   | Year ended        |   |   | Three months ended |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                                                            |   | December 31, 2010 |   |   | March 31, 2010     |   |   | June 30, 2010 |   |   | September 30, 2010 |   |   | December 31, 2010 |   |
|                                                                                            |   | Audited           |   |   | Unaudited          |   |
|                                                                                            |   | (millions of $)   |   |
| Income from sales                                                                               |   |              | 9.6    |   |               |   | 1.7 |   |   |   | 1.7 |   |   |   | 1.9 |   |   |   | 4.4 |   |
| Gain (loss) from disposal of business and associates and changes in holdings in associates, net |   |              | 160.0  |   |               |   | (0.07 | ) |   |   | 156.6 |   |   |   | 1.0 |   |   |   | 2.4 |   |
| Financial income                                                                                |   |              | 2.8    |   |               |   | 0.5 |   |   |   | 1.0 |   |   |   | 2.2 |   |   |   | 1.5 |   |
| Total income                                                                                    |   |              | 172.4  |   |               |   | 2.1 |   |   |   | 159.4 |   |   |   | 5.1 |   |   |   | 8.3 |   |
| Cost of sales                                                                                   |   |              | 3.9    |   |               |   | 0.7 |   |   |   | 0.8 |   |   |   | 0.7 |   |   |   | 1.8 |   |
| Research and development expenses, net                                                          |   |              | 18.2   |   |               |   | 6.3 |   |   |   | 4.4 |   |   |   | 3.9 |   |   |   | 3.6 |   |
| Selling and marketing expenses                                                                  |   |              | 6.6    |   |               |   | 2.1 |   |   |   | 1.9 |   |   |   | 1.2 |   |   |   | 1.4 |   |
| General and administrative expenses                                                             |   |              | 13.6   |   |               |   | 4.6 |   |   |   | 3.2 |   |   |   | 2.2 |   |   |   | 3.5 |   |
| Equity in losses of associates, net                                                             |   |              | 10.9   |   |               |   | 4.5 |   |   |   | 2.6 |   |   |   | 2.7 |   |   |   | 1.0 |   |
| Amortization of intangible  assets                                                    |   |              | 1.4    |   |               |   | 0.4 |   |   |   | 0.4 |   |   |   | 0.4 |   |   |   | 0.4 |   |
| Financial expenses                                                                              |   |              | 3.0    |   |               |   | 1.6 |   |   |   | 2.4 |   |   |   | 1.3 |   |   |   | 0.3 |   |
| Other expenses (income), net                                                                    |   |              | 3.1    |   |               |   | (0.3 | ) |   |   | 3.3 |   |   |   | (1.9 | ) |   |   | 2.0 |   |
| Total costs and expenses                                                                        |   |              | 60.8   |   |               |   | 19.9 |   |   |   | 19.0 |   |   |   | 10.5 |   |   |   | 14.0 |   |
| Income (Loss) before taxes on income                                                            |   |              | 111.6  |   |               |   | (17.8 | ) |   |   | 140.4 |   |   |   | (5.4 | ) |   |   | (5.7 | ) |
| Taxes on income (Tax benefit)                                                                   |   |              | 6.1    |   |               |   | (0.3 | ) |   |   | 8.8 |   |   |   | (0.04 | ) |   |   | (2.4 | ) |
| Income (Loss)                                                                                   |   |              | 105.5  |   |               |   | (17.5 | ) |   |   | 131.6 |   |   |   | (5.4 | ) |   |   | (3.3 | ) |
| Net income (loss) attributable to Elron's shareholders                                          |   |              | 60.7   |   |               |   | (12.9 | ) |   |   | 81.1 |   |   |   | 4.5 |   |   |   | (3.0 | ) |
| Net income (loss) attributable to non-controlling interest                                      |   |              | 44.8   |   |               |   | (4.6 | ) |   |   | 50.5 |   |   |   | (0.9 | ) |   |   | (0.3 | ) |
| Basic income (loss) per share attributable to Elron's shareholders                              |   |              | 1.98   |   |               |   | (0.44 | ) |   |   | 2.72 |   |   |   | (0.17 | ) |   |   | (0.12 | ) |
| Diluted income (loss) per share attributable to Elron's shareholders                            |   |              | 1.98   |   |               |   | (0.44 | ) |   |   | 2.67 |   |   |   | (0.17 | ) |   |   | (0.13 | ) |

----

|                                                                     |   | Year ended        |   |   | Three months ended |   |
|--------------------------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                                     |   | December 31, 2011 |   |   | December 31, 2010  |   |   | December 31, 2011 |   |   | December 31, 2010 |   |
|                                                                     |   | Audited           |   |   | Unaudited          |   |
|                                                                     |   | (millions of $)   |   |
| Raising of  RDC's debt2                                        |   |              | 3.2    |   |               |   | - |   |   |   | 2.2 |   |   |   | - |   |
| Investments in our and RDC's group companies 3                           |   |              | 36.7   |   |               |   | 36.7 |   |   |   | 7.2 |   |   |   | 6.9 |   |
| Repayment of our and RDC's loans 4                                       |   |              | -      |   |               |   | 70.6 |   |   |   | - |   |   |   |   |   |
| Dividend distributed by RDC 5                                            |   |              | -      |   |               |   | 15.0 |   |   |   | - |   |   |   | - |   |
| Proceeds received from disposal of our and RDC's non-current investments |   |              | 16.3   |   |               |   | 114.3 |   |   |   | 14.6 |   |   |   | 0.1 |   |

| 1 | The amounts presented include RDC's cash flows in full (100%) in addition to our cash flows. |
|---|----------------------------------------------------------------------------------------------|

| 2 | Including shareholder loans from Rafael only. |
|---|-----------------------------------------------|

| 3 | Excluding our investment in RDC and the consideration transferred from RDC following the transfer of the investment in Kyma to RDC. |
|---|-------------------------------------------------------------------------------------------------------------------------------------|

| 4 | Including repayment of RDC's shareholder loans to Rafael only. |
|---|----------------------------------------------------------------|

| 5 | Dividend distributed by RDC to Rafael only. |
|---|---------------------------------------------|

----

----

|                             |   | Elron           |   |   | RDC    |   |
|----------------------------------|--------|-----------------|--------|--------|--------|--------|
|                             |   | 2011            |   |   | 2010   |   |   | 2011 |   |   | 2010 |   |
|                             |   | (millions of $) |   |
|                             |   | Audited         |   |
| Consolidated companies 1         |   |            |   |   |   |   |   |   |   |   |   |   |
| Starling 2                       |   |            | 7.5    |   |   |   | 8.7 |   |   |   | 8.6 |   |   |   | 10.0 |   |
| Kyma3                            |   |            | 4      |   |   |   | 1.0 |   |   |   | - |   |   |   | - |   |
| Navitrio 4                       |   |            | 1.5    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Wavion5                          |   |            | 0.9    |   |   |   | 3.4 |   |   |   | - |   |   |   | - |   |
| SmartWave 6                      |   |            | -      |   |   |   | - |   |   |   | 0.5 |   |   |   | - |   |
| Medingo7                         |   |            | -      |   |   |   | 0.4 |   |   |   | - |   |   |   | 4.2 |   |
| Sync-Rx                          |   |            | -      |   |   |   | - |   |   |   | 0.7 |   |   |   | 3.5 |   |
| Xsights 8                        |   |            | -      |   |   |   | - |   |   |   | - |   |   |   | 1.3 |   |
|                             |   |            | 13.9   |   |   |   | 13.5 |   |   |   | 9.8 |   |   |   | 19.0 |   |
| Associates and other investments |   |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pocared 9                        |   |            | 6.9    |   |   |   | 1.4 |   |   |   | - |   |   |   | - |   |
| Brainsgate                       |   |            | 2.4    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| NuLens                           |   |            | 1.0    |   |   |   | 2.0 |   |   |   | - |   |   |   | - |   |
| Safend                           |   |            | 0.6    |   |   |   | 0.3 |   |   |   | - |   |   |   | - |   |
| WhiteWater                       |   |            | 1.1    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| BPT                              |   |            | 0.3    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Aqwise                           |   |            | 0.3    |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Notal Vision                     |   |            | 0.3    |   |   |   | 0.4 |   |   |   | - |   |   |   | - |   |
|                             |   |            | 12.9   |   |   |   | 4.2 |   |   |   | - |   |   |   | - |   |
| Total investments                |   |            | 26.8   |   |   |   | 17.7 |   |   |   | 9.8 |   |   |   | 19.0 |   |

| 1 | These investments do not affect the cash included in the consolidated financial statements. Furthermore, we granted RDC loans in the amount of $3.3 and $6 million in 2011 and 2010, respectively. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2 | In 2011 – including the purchase of Starling shares from Elbit Systems Ltd. |
|---|-----------------------------------------------------------------------------------|

| 3 | Kyma is consolidated since January 2011 due to our obtaining control over it. The amounts exclude the consideration transferred from RDC following the transfer of the investment in Kyma to RDC. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4 | Navitrio is consolidated since its establishment in May 2011. Since being established, Navitrio has invested $0.5 million in Cloudyn. |
|---|---------------------------------------------------------------------------------------------------------------------------------------|

| 5 | Wavion was deconsolidated in November 2011 due to its sale. |
|---|-------------------------------------------------------------|

| 6 | SmartWave is consolidated since its establishment in November 2011. |
|---|---------------------------------------------------------------------|

| 7 | Medingo was deconsolidated in May 2010 due to its sale. |
|---|---------------------------------------------------------|

| 8 | Xsights was deconsolidated in December 2011 due to its liquidation. |
|---|---------------------------------------------------------------------|

| 9 | In 2011 – including the purchase of Pocared shares from another shareholder. |
|---|------------------------------------------------------------------------------------|

|                             |   | Elron           |   |   | RDC    |   |
|----------------------------------|--------|-----------------|--------|--------|--------|--------|
|                             |   | (millions of $) |   |
|                             |   | Audited         |   |
| Consolidated companies           |   |            |   |   |   |   |
| Kyma                             |   |            | -      |   |   |   | 0.5 |   |
| Associates and other investments |   |            |   |   |   |   |   |   |
| Brainsgate                       |   |            | 2.4    |   |   |   | - |   |
| NuLens                           |   |            | 1.5    |   |   |   | - |   |
| Total investments                |   |            | 3.9    |   |   |   | 0.5 |   |

----

|            |   | Cash flows from operating activities for the year ended December 31, |   |   | Cash balance as of December 31, |   |   | Note in "Item 18 – Financial Statements" |   |
|-----------------|--------|----------------------------------------------------------------------|--------|--------|---------------------------------|--------|--------|------------------------------------------------|--------|
|            |   | 2011                                                                 |   |   | 2010                            |   |   | 2011                                           |   |   | 2010 |   |   |   |
|            |   | (audited)                                                            |   |   |                            |
|            |   | (millions of $)                                                      |   |   |                            |
| BrainsGate 2    |   |                                                                 | (6.5   | )      |                            |   | (7.9   | )                                              |   |   | 5.1 |   |   |   | 5.6 |   |   |   | 3.C.1.g) |   |
| Given Imaging 2 |   |                                                                 | 19.9   |   |                            |   | 31.7   |                                           |   |   | 24.2 |   |   |   | 34.6 |   |   |   | 3.C.1.i) |   |
| Pocared 2       |   |                                                                 | (6.1   | )      |                            |   | (4.2   | )                                              |   |   | 6.3 |   |   |   | 1.7 |   |   |   | 3.C.1.a) |   |
| NuLens 3        |   |                                                                 | (4.4   | )      |                            |   | (4.2   | )                                              |   |   | 1.0 |   |   |   | 3.0 |   |   |   | 3.C.1.d) |   |
| Starling 3      |   |                                                                 | (10.0  | )      |                            |   | (13.5  | )                                              |   |   | 1.7 |   |   |   | 2.0 |   |   |   | 3.C.2.a) |   |

| 1 | See "Item 4B – Business Overview" for details on the criteria for classifying a group company as a main company. |
|---|------------------------------------------------------------------------------------------------------------------------|

| 2 | In accordance with U.S. GAAP. |
|---|-------------------------------|

| 3 | A main company solely in 2010. |
|---|--------------------------------|

----

|                                                                                              |   | December 31, 2011 |   |   | December 31, 2010 |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                                                                              |   | (audited)         |   |
|                                                                                              |   | (millions of $)   |   |
| Total assets in the consolidated statement of financial position                                  |   |              | 208.0  |   |              |   | 250.3 |   |
| Investments in associate companies and available for sale assets (including assets held for sale) |   |              | 132.1  |   |              |   | 146.8 |   |
| Other long-term receivables                                                                       |   |              | 5.3    |   |              |   | 28.2 |   |
| Current assets (excluding assets classified as held for sale)                                     |   |              | 65.5   |   |              |   | 69.6 |   |
| Intangible assets, net                                                                            |   |              | 4.9    |   |              |   | 3.6 |   |
| Current liabilities                                                                               |   |              | 4.9    |   |              |   | 14.8 |   |
| Long-term liabilities                                                                             |   |              | 9.3    |   |              |   | 16.0 |   |
| Total liabilities                                                                                 |   |              | 14.2   |   |              |   | 30.8 |   |
| Equity including non-controlling interest                                                         |   |              | 193.8  |   |              |   | 219.5 |   |

----

----

| Liabilities           |   | 2012                          |   |   | 2013   |   |   | 2014   |   |        | 2015   |   |   | No specific repay-ment date |   |   | Total  |   |   | Fair value |   |
|-----------------------|--------|-------------------------------|--------|--------|--------|--------|--------|--------|--------|-------------|--------|--------|--------|-----------------------------|--------|--------|--------|--------|--------|------------|--------|
|                  |   | (equivalent to millions of $) |   |
| Variable rate ($)     |   |                          | -      |   |   |   | -      |   |   |        | 3.5    |   |   |                        | -      |   |   |   | -      |       |   |   | 3.5 |   |   |   | 3.2 |   |
| Average interest rate |   |                          |   |   |   |   |   |   |   | LIBOR +3.3% |   |   |   |                        |   |   |   |   |   |       |   |   |   |   |   |   |   |
| Variable rate ($)     |   |                          | -      |   |   |   | -      |   |   |        | -      |   |   |                        | -      |   |   |   | 1.0    |       |   |   | 1.0 |   |   |   | 1.0 |   |
| Average interest rate |   |                          |   |   |   |   |   |   |   |        |   |   |   |                        |   |   |   | LIBOR  |   |       |   |   |   |   |   |   |   |

----

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

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

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

----

|                                                      |   |            | Gain (loss) from changes in dollar interest rates |   |
|-----------------------------------------------------------|--------|-----------------|---------------------------------------------------|--------|
|                                                      |   |            | Increase                                          |   |   | Decrease |   |
|                                                      |   | Fair value      |                                              |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |   | 2% Absolute value |   |   |   | 10% |   |   |   | 5% |   |
| Section                                                   |   | (millions of $) |                                              |
| Other long-term receivables                               |   |            | 2.6                                               |   |   |   | (0.1 | ) |   |   | (0.06 | ) |   |   | (0.03 | ) |   |   | 0.2 |   |   |   | 0.07 |   |   |   | 0.03 |   |
| Loans from banksand others (including current maturities) |   |            | (3.2                                              | )      |   |   | 0.1 |   |   |   | 0.03 |   |   |   | 0.02 |   |   |   | (0.2 | ) |   |   | (0.03 | ) |   |   | (0.02 | ) |
|                                                      |   |            | (0.6                                              | )      |   |   | - |   |   |   | (0.03 | ) |   |   | (0.01 | ) |   |   | - | * |   |   | 0.04 |   |   |   | 0.01 |   |

|                                            |   |            | Gain (loss) from changes in thedollar-NIS exchange rate |   |
|-------------------------------------------------|--------|-----------------|---------------------------------------------------------|--------|
|                                            |   |            | Increase                                                |   |   | Decrease |   |
|                                            |   | Fair value      |                                                    |   |   | 10% |   |   |   | 5% |   |   |   | 10% |   |   |   | 5% |   |
| Section                                         |   | (millions of $) |                                                    |
| Current Assets:                                 |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other accounts receivable and trades receivable |   |            | 0.2                                                     |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.02 | ) |   |   | (0.01 | ) |
| Cash and cash equivalents                       |   |            | 4.0                                                     |   |   |   | 0.4 |   |   |   | 0.2 |   |   |   | (0.4 | ) |   |   | (0.2 | ) |
| Non- Current Assets:                            |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other long term receivables                     |   |            | 0.5                                                     |   |   |   | 0.05 |   |   |   | 0.02 |   |   |   | (0.05 | ) |   |   | (0.02 | ) |
| Current liabilities:                            |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trades payable and other accounts payable       |   |            | (2.9                                                    | )      |   |   | (0.3 | ) |   |   | (0.2 | ) |   |   | (0.3 | ) |   |   | (0.2 | ) |
|                                            |   |            | 1.8                                                     |   |   |   | 0.2 |   |   |   | 0.1 |   |   |   | (0.2 | ) |   |   | (0.1 | ) |
|                                            |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                               |   |            | Gain (loss) from changes in theprice of shares |   |
|------------------------------------|--------|-----------------|------------------------------------------------|--------|
|                               |   |            | Increase                                       |   |   | Decrease |   |
|                               |   | Fair value      |                                           |   | 10% |   |   | 5% |   |   | 10% |   |   | 5% |   |
| Section                            |   | (millions of $) |                                           |
| Other investments                  |   |            | 17.5                                           |   |   |   | 1.8 |   |   |   | 0.9 |   |   |   | (1.8 | ) |   |   | (0.9 | ) |
| Assets classified as held for sale |   |            | 3.2                                            |   |   |   | 0.3 |   |   |   | 0.2 |   |   |   | (0.3 | ) |   |   | (0.2 | ) |
|                               |   |            | 20.7                                           |   |   |   | 2.1 |   |   |   | 1.1 |   |   |   | (2.1 | ) |   |   | (1.1 | ) |

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

----

|                                            |   |            | Gain (loss) from changes in thedollar-NIS exchange rate |   |
|-------------------------------------------------|--------|-----------------|---------------------------------------------------------|--------|
|                                            |   |            | Increase                                                |   |   | Decrease |   |
|                                            |   | Fair value      |                                                    |   | 10% |   |   | 5% |   |   | 10% |   |   | 5% |   |
| Section                                         |   | (millions of $) |                                                    |
| Current Assets:                                 |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Other accounts receivable and trades receivable |   |            | 1.1                                                     |   |   |   | 0.1 |   |   |   | 0.06 |   |   |   | (0.1 | ) |   |   | (0.06 | ) |
| Cash and cash equivalents                       |   |            | 3.8                                                     |   |   |   | 0.4 |   |   |   | 0.2 |   |   |   | (0.4 | ) |   |   | (0.2 | ) |
| Current liabilities:                            |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trades payable and other accounts payable       |   |            | 0.2                                                     |   |   |   | 0.02 |   |   |   | 0.01 |   |   |   | (0.02 | ) |   |   | (0.01 | ) |
| Non-current liabilities:                        |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans from shareholders                         |   |            | (6.9                                                    | )      |   |   | (0.7 | ) |   |   | (0.3 | ) |   |   | 0.7 |   |   |   | 0.3 |   |
|                                            |   |            | (1.8                                                    | )      |   |   | (0.2 | ) |   |   | (0.1 | ) |   |   | 0.2 |   |   |   | 0.03 |   |
|                                            |   |            |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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

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

----

| Type of Obligation         |   | 2012   |   |   | 2013   |   |   | 2014   |   |   | 2015   |   |   | 2016   |   |   | Total  |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan from banks and others |   |   | -      |   |   |   | -      |   |   |   | 3.5    |   |   |   | -      |   |   |   | - |   |   |   | 3.5 |   |
| Leases                     |   |   | 0.5    |   |   |   | 0.5    |   |   |   | 0.4    |   |   |   | 0.4    |   |   |   | 0.1 |   |   |   | 1.9 |   |

----

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

| Directors Name                            |   | Age    |   | Position                                     |
|------------------------------------------------|--------|--------|--------|----------------------------------------------|
|                                           |   |   |   |                                         |
| Arie Mientkavich(6) (5)                        |   | 69     |   | Chairman of the board of directors           |
|                                           |   |   |   |                                         |
| Avraham Asheri(1) (5)                          |   | 74     |   | Director                                     |
|                                           |   |   |   |                                         |
| Gad Arbel(1) (2)(3) (5)                        |   | 63     |   | External Director                            |
|                                           |   |   |   |                                         |
| Prof. Gabi Barbash                             |   | 62     |   | Director                                     |
|                                           |   |   |   |                                         |
| Rona Dankner(7)                                |   | 28     |   | Director                                     |
|                                           |   |   |   |                                         |
| Ami Erel(6) (5)                                |   | 64     |   | Director                                     |
|                                           |   |   |   |                                         |
| Hadar Udler(6)                                 |   | 39     |   | Director                                     |
|                                           |   |   |   |                                         |
| Ehud Rassabi (1) (2) (3) (5)                   |   | 58     |   | External Director                            |
|                                           |   |   |   |                                         |
| Shay Livnat(6) (7)                             |   | 53     |   | Director                                     |
|                                           |   |   |   |                                         |
| Dori Manor(5) (6) (7)                          |   | 44     |   | Director                                     |
|                                           |   |   |   |                                         |
| Arie Ovadia(1) (3) (4) (5)                     |   | 63     |   | Director                                     |
|  Executive Officers   Name |   | Age    |   | Position                                     |
|                                           |   |   |   |                                         |
| Ari Bronshtein                                 |   | 42     |   | Chief Executive Officer                      |
|                                           |   |   |   |                                         |
| Yaron Elad                                     |   | 34     |   | Vice-President & Chief Financial Officer |
|                                           |   |   |   |                                         |
| Gadi Veinrib                                   |   | 33     |   | Vice-President                               |

| (1) | Member of our audit committee. |
|-----|--------------------------------|

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

| (3) | Independent Director under the Israeli Companies Law. |
|-----|-------------------------------------------------------|

| (4) | Designated "financial expert" under the Sarbanes-Oxley Act of 2002. |
|-----|---------------------------------------------------------------------|

| (5) | Designated "financial expert" under the Israeli Companies Law. |
|-----|----------------------------------------------------------------|

| (6) | Director or officer of IDB Holding Corporation, or IDBH, IDBD and/or DIC. |
|-----|---------------------------------------------------------------------------|

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

----

----

----

----

----

|                                               |   | Cash and Cash-Equivalent Forms of Compensation(in thousands of U.S. $) |   |
|----------------------------------------------------|--------|------------------------------------------------------------------------|--------|
|                                               |   | Salaries, Fees, Directors'Fees, Commissions andBonuses                 |   |
| 2011(1) (2)                                        |   |                                                                   |   |
| All Directors as a group, consisting of 10 persons |   |                                                                   | 429    |   |
| All Officers as a group, consisting of 1 person    |   |                                                                   | 697    |   |

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

|   | (2) | See below –"Payments paid during the period of this Annual Report to the five highest salary recipients amongst our and our subsidiaries officers ". |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a. | The officer's contribution to our investments and exit transactions. |
|--------|----|----------------------------------------------------------------------|

|   | b. | Our business performance during the year. |
|--------|----|-------------------------------------------|

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

|   | d. | Our need to retain officers of unique qualifications, knowledge or expertise. |
|--------|----|-------------------------------------------------------------------------------|

----

|   | a. | The officer’s contribution to our investments and exit transactions. |
|--------|----|----------------------------------------------------------------------------|

|   | b. | Our business performance during the year. |
|--------|----|-------------------------------------------|

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

|   | d. | Our need to retain officers of unique qualifications, knowledge or expertise. |
|--------|----|-------------------------------------------------------------------------------|

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

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

|   | g. | Our satisfaction with the officer's performance (including our evaluation of the level of involvement and care demonstrated by the officer in fulfilling his/her position). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

| Information on recipient | Compensation for services (thousands of $)             | Total               |
|--------------------------|--------------------------------------------------------|---------------------|
| Name                     | Position                                               | Date of employ-ment | Type of Position | Share-holdings (Fully diluted) | Salary | Bonus | Share-based payments | Manage-ment fee |   |
| Nahum (Homi) Shamir      | Chief Executive Officer and President of Given Imaging | April, 2006         | 100% | - | 469 (1) | 718 (2) | 860 (3) | - | 2,047 |
| Tal Meirzon              | Chief Executive Officer of Wavion                      | January, 2008       | 100% | - | 202 (4) | - | 1,258 (5) | - | 1,460 |
| Yuval Yanay              | Chief Financial Officer of Given Imaging               | August, 2005        | 100% | - | 488 (6) | 353 (7) | 433 (8) | - | 1,274 |
| Kevin Rubey              | Chief Operating Officer at Given Imaging               | June, 2001          | 100% | - | 361 (9) | 367 (10) | 234 (11) | - | 962 |
| Mati Wax                 |  Chief Technology Officer at Wavion               |  April, 2000   |  100% | - |  168 (12) | - |  788 (13) | - | 956 |

| Information on recipient | Compensation for services (thousands of $) | Total               |
|--------------------------|--------------------------------------------|---------------------|
| Name                     | Position                                   | Date of employ-ment | Type of Position | Shareholdings (Fully diluted) | Salary | Bonus | Share-based payments | Manage-ment fee |   |
| Arie Mientkavich         | Chairman of the Board of the Company       | January ,2007       | 50% | 0.4% | 565 (14) | - (15) | 240 (15), (16), (17) | - | 741 |
| Ari Bronshtein           | Chief Executive Officer                    | May, 2009 (18)      | (18) | - | 471 (19) | - | - | - | 446 |
| Yaron Elad               | Vice President and Chief Financial Officer | May, 2009 (20)      | 100%(21) | - | 258 (22) | - | - | - | 244 |

----

|   | (1) | The amount paid by Given Imaging includes all of the following components: 12 monthly salaries of NIS 141,000 each (approximately $37,000), social benefits and related benefits, as customary in the United States, health insurance and car allowance. The engagement between the parties shall terminate 24 months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The amount of the bonus for 2011 (the “Annual Bonus”) was determined in accordance with the bonus plan for 2011 for the officer, which was approved at the beginning of the same year by the compensation committee, the audit committee and the board of directors of Given Imaging. According to the bonus plan, a target amount was predetermined for the officer in respect of 2011, which is equal to 150% of his total current salaries in this year. The Annual Bonus for the officer was dependent upon two components as specified below, the weight of each component being expressed as a certain percentage of the said target amount. Most of the Annual Bonus was dependent upon the component of achieving certain pre-determined sales and net profit targets for Given Imaging on a consolidated basis in 2011, which are expressed in a matrix method according to various possible combinations between sales and profit as aforesaid, and could range between 50% and 200% of the weight of such component in the bonus plan, according to the extent of achievement of such targets, whilst in the event that the sales level or net profit level is lower than a certain pre-determined minimum threshold, no bonus will be paid in respect of this component. The balance of the Annual Bonus was dependent upon the component of achieving certain predetermined personal targets for the officer in accordance with his areas of responsibility, some of which are measurable (such as fulfillment of certain predefined tasks) and some qualitative (such as general level of performance) according to the evaluation of Given Imaging’s board of directors. Based on all of the components of the said bonus plan, the Annual Bonus for the officer could reach up to a maximum sum of approximately 200% of the total current salaries of the officer in 2011. The calculation and amount of the actual Annual Bonus were also approved by the compensation committee, the audit committee and the board of directors of Given Imaging, and are subject to the approval of its general meeting, which is expected to be held in May 2012. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | In his capacity as President of Given Imaging, Given Imaging allotted to Mr. Shamir stock options as well as restricted share units under its option plan and restricted share unit grant plan, as follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In May 2006, Given Imaging allotted to Mr. Shamir options for the purchase of 300,000 ordinary shares of Given Imaging at an exercise price of $17.78 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of grant, and they are exercisable until May 2013. In addition, at the same time, Given Imaging allotted to Mr. Shamir 100,000 restricted share units of Given Imaging, exercisable under terms identical to the terms of the options which were granted on that date, 37,500 units of which were exercised in 2010 and 40,000 units of which were exercised in 2011. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

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

|   | (f) | In May 2011, Given Imaging allotted to Mr. Shamir 42,750 restricted share units, 50% of which are locked-up for up to two years and 25% for up to three and four years, respectively, from the allotment date. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | The amount paid by Wavion includes all of the following components: monthly salaries of NIS 55,000 each (approximately $15,000), social benefits and related benefits, as customary in Israel, and car allowance. The engagement between the parties shall terminate 3 months after the date on which either party shall provide the other written notice of its desire to terminate the engagement according to the employment agreement. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | In May 2011, the board of directors of Wavion approved a compensation plan for the employees and managers of Wavion (the “Plan”). In accordance with the provisions of the Plan, 17% of the total consideration to be received from the sale of Wavion, as defined in the Plan, less deduction of the expenses of the sale and repayment of shareholders loans in the amount of $1.4 million, shall be paid to the employees and officers of Wavion (the “Employees' Share of the Proceeds”). In addition, and in accordance with the provisions of the Plan, the distribution of the Employees' Share of the Proceeds will be distributed to the employees on a pro-rata basis, based on the employees’ total shareholdings and options which were granted to them in the past. In accordance with this calculation, Mr. Meirzon's pro rata share of the Employees' Share of the Proceeds is approximately 26%. The amount indicated in the column “share based payments” represents the expense which Wavion recorded in connection with Mr. Meirzon's pro rata share, in accordance with the Plan, of the  consideration for the sale of Wavion (of the immediate consideration which was paid in cash, of the consideration which has been held in escrow and of the contingent consideration). It should be noted that the options to purchase shares of Wavion granted to Mr. Meirzon in the past did not generate any consideration from the sale of Wavion (at the time of the sale of Wavion, the exercise price of the options were higher than the share price and therefore they weren't exercised). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (6) | The amount paid by Given Imaging includes all of the following components: 12 monthly salaries, 90% linked to the consumer price index (as of December 2011 – NIS 116,000 (approximately $30,000)), social benefits and related benefits, as customary, and loss of earning capacity insurance. The engagement between the parties shall terminate 12 months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (7) | The amount of the bonus for 2011 (the “Annual Bonus”) was determined in accordance with the bonus plan for 2011 for the officer, which was approved at the beginning of the same year by the compensation committee, the audit committee and the board of directors of Given Imaging. According to the bonus plan, a target amount was predetermined for the officer in respect of 2011, which is equal to 100% of his total current salaries in this year. The Annual Bonus for the officer was dependent upon two components as specified below, the weight of each component being expressed as a certain percentage of the target amount. Most of the Annual Bonus was dependent upon the component of achieving certain pre-determined sales and net profit targets for Given Imaging on a consolidated basis in 2011, which were expressed in a matrix method according to various possible combinations between sales and profit as aforesaid, and could range between 50% and 200% of the weight of such component in the bonus plan, according to the extent of achievement of such targets, while in the event that the sales level or net profit level were lower than a certain pre-determined minimum threshold, no bonus would be paid in respect of this component. The balance of the Annual Bonus was dependent upon the component of achieving certain personal targets predetermined for the officer in accordance with his areas of responsibility, some of which are measurable (such as fulfillment of certain predefined tasks) and some qualitative (such as general level of performance) according to the evaluation of Given Imaging’s CEO. Based on all of the components of the said bonus plan, the Annual Bonus for the officer could reach up to a maximum sum of approximately 170% of the total current salaries of the officer in 2011. The calculation and amount of the actual Annual Bonus were also approved by the compensation committee, the audit committee and the board of directors of Given Imaging. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (8) | In his capacity as CFO of Given Imaging, Given Imaging allotted to Mr. Yanai stock options as well as restricted share units under its option plan and restricted share unit grant plan, as follows: |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In May 2006, Given Imaging allotted to Mr. Yanai options for the purchase of 30,000 ordinary shares of Given Imaging at an exercise price of $21.77 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they were exercisable until May 2011. These options expired without being exercised. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | (c) | In February 2008, Given Imaging allotted to Mr. Yanai options for the purchase of 65,000 ordinary shares of Given Imaging at an exercise price of $16.04 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until February 2015 out of which 30,000 options were exercised during 2011. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | (f) | In May 2011, Given Imaging allotted to Mr. Yanai 24,000 restricted share units, 50% of which are locked-up for up to two years and 25% for up to three and four years, respectively, from the allotment date. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | The amount includes all of the following components: 12 monthly salaries of NIS 108,000 each (approximately $28,000), social benefits and related benefits as customary in the United States, health insurance and car allowance. The engagement between the parties shall terminate 6 months after the date on which either party shall provide the other written notice of its desire to terminate the engagement according to the employment agreement. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (10) | The amount of the bonus for 2011 (the “Annual Bonus”) was determined in accordance with the bonus plan for 2011 for the officer, which was approved at the beginning of the same year by the compensation committee, the audit committee and the board of directors of Given Imaging. According to the bonus plan, a target amount was predetermined for the officer in respect of 2011, which is equal to 100% of his total current salaries in this year. The Annual Bonus for the officer was dependent upon two components as specified below, the weight of each component being expressed as a certain percentage of the said target amount. Most of the Annual Bonus was dependent upon the component of achieving certain pre-determined sales and net profit targets for Given Imaging on a consolidated basis in 2011, which are expressed in a matrix method according to various possible combinations between sales and profit as aforesaid, and could range between 50% and 200% of the weight of such component in the bonus plan, according to the extent of achievement of such targets, whilst in the event that the sales level or net profit level is lower than a certain pre-determined minimum threshold, no bonus will be paid in respect of this component. Most of the Annual Bonus was dependent upon the component of achieving certain predetermined personal targets for the officer in accordance with his areas of responsibility, some of which are measurable (such as fulfillment of certain predefined tasks) and some qualitative (such as general level of performance) according to the evaluation of Given Imaging’s board of directors. Based on all of the components of the said bonus plan, the Annual Bonus for the officer could reach up to a maximum sum of approximately 200% of the total current salaries of the officer in 2011. The calculation and amount of the actual Annual Bonus were also approved by the compensation committee, the audit committee and the board of directors of Given Imaging, and are subject to the approval of its general meeting, which is expected to be held in May 2012. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (11) | In his capacity as COO of Given Imaging, Given Imaging allotted to Mr. Rubey stock options as well as restricted share units under its option plan and restricted share unit grant plan, as follows: |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | In May 2006, Given Imaging allotted to Mr. Rubey options for the purchase of 40,000 ordinary shares of Given Imaging at an exercise price of $21.77 per share, exercisable in 4 equal annual installments starting from the first, second, third and fourth anniversary, respectively, of the date of allotment thereof, and they are exercisable until May 2011. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

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

|   | (i) | In February 2010, Given Imaging allotted to Mr. Rubey 15,000 restricted share units, 50% of which are locked-up for up to two years and 25% for up to three and four years, respectively, from the date of allotment thereof. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (j) | In February 2011, Given Imaging allotted to Mr. Rubey 10,000 restricted share units, 50% of which are locked-up for two years and 25% for up to three and four years, respectively from the allotment date. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (12) | The amount paid by Wavion includes all of the following components: monthly salaries of NIS 42,000 each (approximately $11,000), social benefits and related benefits as customary in Israel, and car allowance. The engagement between the parties shall terminate 2 months after the date on which either party shall provide the other written notice of its desire to terminate the engagement according to the employment agreement. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (13) | As specified above, in reference to the Plan for employees and management of Wavion, Mr. Wax’s pro-rata share in the Employees' Share of the Proceeds, is approximately 17%. The amount stipulated in the column “share based payments” represents the expenses which Wavion recorded in connection with Mr. Wax’s holdings, as set forth in the Plan, in consideration for the sale of Wavion (of the immediate consideration which was paid in cash, of the consideration which has been held in escrow and of the contingent consideration). For additional details, see Note 3.C.2.c in the December 31, 2011 Consolidated Financial Statements. It should be noted that the Wavion options which were granted to Mr. Wax in the past did not generate compensation in the sale of Wavion (at the date of the sale of Wavion, the exercise price of the options were higher than the share price and therefore they weren't exercised). |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (14) | The amount includes all of the following components: 12 monthly salaries, such that the salary is linked to the consumer price index and is updated accordingly once every 3 months (as of December 2011 – NIS 126,000 per monthly salary (approximately $33,000)), social benefits and related benefits, as customary, loss of earning capacity insurance and accommodation expenses. In May 2007, our shareholders approved (following approval by our audit committee and board of directors) the engagement in an agreement with Mr. Arie Mientkavich for his employment as the Chairman of the board commencing January 8, 2007. According to the agreement, Mr. Mientkavich will be employed on a part-time (50%) basis. The engagement between the parties shall terminate 3 months after the date on which either party shall provide the other written notice of his desire to terminate the engagement according to the employment agreement. According to the employment agreement, the grant of an annual bonus as well as options of ours to the Chairman is at the discretion of the board of directors, in an amount to be determined by the board of directors, and subject to the approval of our shareholders. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (15) | On March 10, 2011, our board of directors approved (following approval by our audit committee) a payment of a bonus to Mr. Mientkavich of NIS 1,200,000 (approximately $334,000) for the year 2010. This bonus was not presented to the general meeting of the shareholders for approval, and has not been paid. Due to the fact that the bonus was not ultimately paid, despite having been approved, the Chairman approached us and proposed that the bonus will be a performance bonus in lieu of the cash bonus, such that the value of the performance bonus will be only approximately 45% of the value of the cash bonus that was previously approved but not paid, and will include an option component that is directly linked to our performance or to significant challenges facing us. Due to the importance of Pocared to us and to our holdings, it was proposed that in lieu of the aforementioned cash bonus, we approve the grant of (phantom) options of Pocared to the Chairman from our Pocared shares, which shall only be cash exercisable. On February 1, 2012, our shareholders (following approval of our audit committee and board of directors), approved the granting of phantom options to purchase 375,722 Preferred F Shares of Pocared to the Chairman, representing 2% of our holdings in Pocared’s Preferred F Shares (approximately 0.5% of Pocared’s share capital). The exercise price per share of each option shall be $0.605, exercisable until the fourth anniversary of the date of approval by our shareholders. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (16) | In May 2007, we allotted to Mr. Mientkavich, under our option plan, 120,000 options for the purchase of ordinary shares of ours at an exercise price of $15.53 per option (subject to adjustments), exercisable in 4 equal annual portions starting from the first, second, third and fourth anniversary, respectively, of the allotment date, and until May 2012, all subject to the terms and conditions of the aforesaid plan. For a description of the provisions of our option plan, under which the options were granted, see "Item 6E". |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (17) | In his capacity as a director at Given Imaging, Given Imaging allotted to Mr. Mientkavich stock options as well as restricted share units under its option plan and restricted share unit grant plan, as follows: |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

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

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

|   | (e) | In May 2011 Given Imaging allotted to Mr. Mientkavich 4,545 restricted share units, that are locked-up until the date of Given Imaging's next general shareholders meeting which is expected to take place at the end of May 2012. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (18) | Mr. Bronshtein is not employed by us, but by DIC, and in his capacity as Vice President of DIC he also serves as our CEO, in accordance with the Service Agreement with DIC. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (19) | The amount includes all of the following components that are paid by DIC and not by us: 12 monthly salaries linked to the consumer price index (as of December 2011 – NIS 92,000 per monthly salary (approximately $24,000)), social benefits and related benefits as customary, car allowance (including gross-up) and loss of earning capacity insurance. The engagement between Mr. Bronshtein and DIC shall terminate three months after the date on which either party shall provide the other written notice of its desire to terminate the engagement according to the employment agreement. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (20) | Mr. Elad is not employed by us, but by DIC. Mr. Elad dedicates 100% of his time to fulfilling his capacity of Vice President and Chief Financial Officer. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (21) | The amount includes all of the following components that are paid by DIC and not by us: 12 monthly salaries linked to the consumer price index (as of December 2011 – NIS 50,000 per monthly salary (approximately $13,000)), social benefits and related benefits as customary, car allowance and loss of earning capacity insurance. The engagement between Mr. Elad and DIC shall terminate one month after the date on which either party shall provide the other written notice of its desire to terminate the engagement according to the employment agreement. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 1. | Terms of Employment of Chairman of the board of directors. |
|--------|----|------------------------------------------------------------|

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

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----

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

|   | · | a business or professional relationship maintained on a regular basis, subject to certain exclusions; |
|--------|--------|-------------------------------------------------------------------------------------------------------|

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

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

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|   | · | The majority of shares voted at the meeting, including at least a majority of the shares held by non-controlling shareholders, or by disinterested shareholders (unless the personal interest does not derive from relationships with the controlling shareholder), which voted at the meeting, vote in favor of appointment of the director, without taking abstentions into account. According to the Israeli Companies Law, a "controlling shareholder" is a person who has the ability to direct the activities of a company, other than if this power derives solely from his/her position on the board of directors or any other position with the company. A person is presumed to be a controlling shareholder if he or she holds half or more of the following: (i) voting rights in the general meeting, or (ii) rights to appoint directors or the chief executive officer; or |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The total number of shares held by the shareholders mentioned above, which voted against the election of the director, does not exceed two percent of the aggregate voting rights in the company. The Minister of Justice may amend this proportion. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The majority of shares voted at the meeting exclude shares held by controlling shareholders, shares held by interested shareholders (unless the personal interest does not derive from relationship with the controlling shareholder), and abstentions. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The total number of shares which voted for the election of the director which are held by non-controlling shareholders, or by disinterested shareholders (excluding interest that does not derive from a relationship with the controlling shareholder), exceeds two percent of the aggregate voting rights in the company. The Minister of Justice may amend this proportion. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| As of December 31,            |   | 2011   |   | 2010   |   | 2009   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                          |   |   |   |   |   |   |   |
| Management and Administration |   | 1*     |   | 1*     |   | 1*     |   |

| Director                                                         |   | Ordinary Shares |    |
|------------------------------------------------------------------|--------|-----------------|---------|
| Arie Mientkavich, Chairman(1)                               |   |            | 120,000 |   |
| Ami Erel(1)                                                 |   |            | 0       |   |
| Gad Arbel                                                        |   |            | 0       |   |
| Avraham Asheri                                                   |   |            | 0       |   |
| Prof. Gabi Barbash                                               |   |            | 0       |   |
| Rona Dankner                                                     |   |            | 0       |   |
| Yaacov Goldman                                                   |   |            | 0       |   |
| Shay Livnat(1)                                              |   |            | 0       |   |
| Dori Manor(1)                                               |   |            | 0       |   |
| Arie Ovadia                                                      |   |            | 0       |   |
| Hadar Udler(1)                                              |   |            | 0       |   |
|                                                             |   |            |    |   |
| All officers and directors as a group (consisting of 14 persons) |   |            | 120,000 | (2) |

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

| (2) | Options to purchase 120,000 of our ordinary shares currently exercisable or exercisable within 60 days of March 1, 2011. |
|-----|--------------------------------------------------------------------------------------------------------------------------|

----

----

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

| Type    |   | Number |   | Expiry |        | Exercise Price |   |   | Fair Value of Aggregate Grant in $000 |   |
|---------|--------|--------|--------|--------|-------------|----------------|--------|--------|---------------------------------------|--------|
| Options |   |   | 35,000 |   | July 2014   |           | $      | 29.42  |                                  |   | $ | 373 |   |
| Options |   |   | 10,000 |   | June 2015   |           | $      | 16     |                                  |   | $ | 45 |   |
| Options |   |   | 10,000 |   | August 2014 |           | $      | 11.55  |                                  |   | $ | 44 |   |
| RSUs    |   |   | 4,545  |   |        |           |   |   |                                  |   | $ | 80 |   |
| RSUs    |   |   | 4,545  | (*)    |        |           |   |   |                                  |   | $ | 92 |   |

----

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

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

| Name and Address                                         |   | Number of Ordinary Shares |       |   | Percent of Outstanding Ordinary Shares |   |   | Percent of Ordinary Shares on a fully diluted basis |   |
|----------------------------------------------------------|--------|---------------------------|------------|--------|----------------------------------------|--------|--------|-----------------------------------------------------|--------|
| Discount Investment Corporation Ltd. (1)Tel Aviv, Israel |   |                      | 14,966,339 |   |                                   |   | 50.46  | %                                                   |   |   | 50.06 |   |
| All Officers and Directors as a group (2)                |   |                      | 120,000    |   |                                   |   | 0.4    | %                                                   |   |   | 0.4 | % |

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| (1)    | The coverage under the Policy was limited to $30 million per claim and in the aggregate during the policy period. |
|--------|-------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                              |
| (2)    | The premium amounts to $184,275 for a period of 18 months (i.e. an annual premium of approximately $122,850).     |

----

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

----

----

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

|                                |   | U.S.         |   |   | U.S.        |   |   | TASE      |   |   | TASE      |   |
|-------------------------------------|--------|--------------|--------|--------|-------------|--------|--------|-----------|--------|--------|-----------|--------|
| Period                              |   | High(U.S. $) |   |   | Low(U.S. $) |   |   | High(NIS) |   |   | Low (NIS) |   |
|                                |   |         |   |   |        |   |   |      |   |   |      |   |
| Annually                            |   |         |   |   |        |   |   |      |   |   |      |   |
| 2006                                |   |         | 12.80  |   |        |   | 8.75   |      |   |   | 55.79     |   |   |   | 40.81 |   |
| 2007                                |   |         | 17.41  |   |        |   | 10.27  |      |   |   | 68.66     |   |   |   | 39.50 |   |
| 2008                                |   |         | 12.37  |   |        |   | 1.07   |      |   |   | 45.50     |   |   |   | 4.45 |   |
| 2009                                |   |         | 8.43   |   |        |   | 1.36   |      |   |   | 29.69     |   |   |   | 5.00 |   |
| 2010                                |   |         | 8.67   |   |        |   | 4.66   |      |   |   | 32.25     |   |   |   | 16.98 |   |
| 2011                                |   |         | 6.02   |   |        |   | 3.4    |      |   |   | 20.72     |   |   |   | 12.89 |   |
| Quarterly                           |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| First Quarter 2010                  |   |         | 8.67   |   |        |   | 7.1    |      |   |   | 32.25     |   |   |   | 27.1 |   |
| Second Quarter 2010                 |   |         | 8.46   |   |        |   | 5.2    |      |   |   | 31.9      |   |   |   | 19.9 |   |
| Third Quarter 2010                  |   |         | 6.1    |   |        |   | 4.7    |      |   |   | 23.71     |   |   |   | 18.26 |   |
| Fourth Quarter 2010                 |   |         | 6.05   |   |        |   | 4.66   |      |   |   | 21.6      |   |   |   | 16.98 |   |
| First Quarter 2011                  |   |         | 5.77   |   |        |   | 4.93   |      |   |   | 20.72     |   |   |   | 18.12 |   |
| Second Quarter 2011                 |   |         | 6.02   |   |        |   | 4.86   |      |   |   | 20.39     |   |   |   | 16.80 |   |
| Third Quarter 2011                  |   |         | 5.51   |   |        |   | 3.4    |      |   |   | 18.81     |   |   |   | 12.89 |   |
| Fourth Quarter 2011                 |   |         | 4.54   |   |        |   | 3.74   |      |   |   | 16.95     |   |   |   | 13.60 |   |
|                                |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| Most recent six months              |   |         |   |   |        |   |   |      |   |   |      |   |   |   |   |   |
| October 2011                        |   |         | 4.25   |   |        |   | 3.74   |      |   |   | 15.51     |   |   |   | 14.20 |   |
| November 2011                       |   |         | 4.5    |   |        |   | 3.8    |      |   |   | 16.95     |   |   |   | 13.60 |   |
| December 2011                       |   |         | 4.54   |   |        |   | 3.93   |      |   |   | 16.71     |   |   |   | 15.11 |   |
| January 2012                        |   |         | 4.3    |   |        |   | 4.08   |      |   |   | 16.43     |   |   |   | 15.58 |   |
| February 2012                       |   |         | 4.48   |   |        |   | 4.1    |      |   |   | 16.4      |   |   |   | 15.28 |   |
| March 1, 2012 through March 9, 2012 |   |         | 4.3    |   |        |   | 4.17   |      |   |   | 16.23     |   |   |   | 15.90 |   |

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

----

|   | 1. | On November 9, 2011, our board of directors approved an outline for an internal enforcement program to be adopted by us, and appointed Mr. Yaron Elad, CFO, and Mr. Paul Weinberg, Corporate Secretary, as the parties responsible for our internal enforcement, and authorized them to carry out the necessary measures for adopting our internal enforcement program. As of the date of filing this Annual Report, we have completed the majority of the stages of this plan, and expect to complete the entire process in the coming months. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | On February 1, 2012, following approval by our shareholders, we amended our Articles of Association, namely Sections 1, 19, 52, 97, 104, 111, 138-142 (inclusive), which mainly concern adaptation of the current language of our Articles to the Legislative Amendments, expansion of the provisions of the Articles that pertain to indemnification and insurance of officers, as permitted in accordance with the changes in the Israel Companies Law and with other legislation on matters pertaining to indemnification and insurance, as well as adaptation of the provisions of the Articles to additional changes that have occurred in the Israel Companies Law. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

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

----

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

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

----

----

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

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

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

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

|   | A. | Percentage of assets – the assets purchased or sold divided by our total assets presented in our most recent financial reports published by us; |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Percentage of gain – the actual or forecasted gain or loss related to such event or matter divided by the average annual amount calculated according to the profit or loss (in absolute terms) for the preceding 12 quarters as presented in our reviewed or audited financial statements that were published by us; |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | C.  | Percentage of equity – increase or decrease in our equity due to such event or matter divided by our equity presented in our most recent financial reports published by us prior to that event or matter; |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Percentage of liability – the liability being the subject of such event or matter divided by our total equity presented in our most recent financial reports published by us prior to that event or matter. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1. | Without derogating from the need to decide for each such event or matter, the materiality of which is being evaluated, which of the criteria stipulated in Section 1 above, are relevant, the following criteria will be considered relevant for the transactions identified: A. Purchase of assets – percentage of total assets; B. Sale of assets – percentage of gain, percentage of total assets; C. Taking a loan – percentage of liability. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | In the absence of special qualitative considerations as discussed below, an event or matter shall be considered to be material if one of the relevant criteria exceeds 10%. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3. | In the absence of qualitative considerations, an event or matter will be deemed not material if all the relevant criteria are less than 5%. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | Events or matters that are not classified under Sections 3 or 4 may be considered material and must be reviewed in qualitative terms with all of the relevant information and circumstances. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | In examining the materiality of an event or matter that is supposed to take place in the future, the probability of that event or matter materializing is to be determined as well as its expected importance and impact should it materialize. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6. | If dealing with an event or matter relating to a subsidiary or associate company of ours, our relative share of the impact of that event or matter is to be examined, in other words, relative to our percentage holding in that subsidiary or associate company, using the aforementioned materiality tests. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7. | If the event or matter is not an investment in securities, such as an engagement through financing agreements, engagement through agreements for the receipt of services and the like, the impacts of that event or matter on us must also be examined in terms of other relevant accounting items related to the nature of the subject event or matter. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1. | The event or matter involves material opportunities or risks and exposures. When examining this aspect, it is important to consider whether and to what extent the risk involved in that event or matter was not reflected in risk factors included in our previous public reports. The question of whether the event or matter is the realization of a risk factor reported to the public of investors prior to the occurrence of that event or matter is to be considered as well; |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2. | As part of the event or matter, we enter a new and important area of activity or exit an existing important area of activity; |
|----|-------------------------------------------------------------------------------------------------------------------------------|

| 3. | The disclosure of the event or matter may bring about, with reasonable certainty and based on past experience, and evaluation models generally used by investors and analysts, a significant change in the price of our ordinary shares; |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | The event or matter may have a special impact on our financial statements such as the reclassification of specific items, etc.; |
|----|---------------------------------------------------------------------------------------------------------------------------------|

| 5. | The event or matter may impact on our compliance with significant regulatory requirements, significant financial standards that may cause significant difficulty for us, or other significant contractual requirements; |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6. | The event or matter may significantly influence analysts and/or investors when they analyze our activity and results; |
|----|-----------------------------------------------------------------------------------------------------------------------|

| 7. | The event or matter is perceived as a significant event by our management and used as the basis for making management decisions. |
|----|----------------------------------------------------------------------------------------------------------------------------------|

| 1. | If our controlling shareholder is required to file an immediate report on an event or matter concerning us or a subsidiary or associate company of ours, we shall also file an immediate report on the same event or matter, even if the aforementioned quantitative rules do not require us to do so. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | With respect to lawsuits (including class action suits) – in an event regarding the filing of a lawsuit, including a class action, against us or any subsidiary or associate company of ours, the materiality of the event shall be examined as follows: A. Quantitative review – will be conducted according to the amount of the claim or class action, multiplied by our percentage holding in the company being sued, if this relates to subsidiary or associate company. If there is an assessment as to the chances of success when materiality is being examined, these chances shall be considered and the expectancy of the claim from our perspective will be calculated. The relevant quantitative criterion to examine the materiality of the lawsuits will be the percentage of gain. The percentage received after performing the calculation will be examined in light of the regular quantitative review procedures specified in Section 1 above. B. Qualitative examination – the question of whether the filing of the claim or the threat of a lawsuit has a significant impact on all the information used in investment decisions by the public of investors for our ordinary shares will be examined. In this criteria, relevant considerations such as the following will be taken into account: the identity of the plaintiff; group of plaintiffs; the anticipated effects should the claim be certified as a class action and if it is accepted by court; the existence of similar lawsuits against the company being sued about similar material and the extent of the impact of the additional claim on all the information in the possession of investors; the reference to the class action in our financial statements. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 3. | With respect to administrative or criminal proceedings – in an event relating to a criminal investigation conducted by enforcement agencies, the Israeli Securities Authority or other regulatory authority, against us and/or any of our officers about a matter significant to us, and with respect to events regarding a criminal and/or administrative proceeding against us and/or our officers on a matter significant to us, the qualitative examination of materiality will be given additional weight, and specifically, the manner in which the Event may impact  investors and/or analysts when they analyze our activities and results and how investors relate to the manner in which we and/or our officers conduct our business. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

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

----

----

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

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

----

----

----

----

----

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

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

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

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

----

----

----

----

----

----

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

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

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

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

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

----

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

| Item16A. | Audit Committee Financial Expert |
|----------|----------------------------------|

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

----

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

|                             |   | 2010                     |   |   | 2011   |   |
|----------------------------------|--------|--------------------------|--------|--------|--------|--------|
|                             |   | (in thousands of U.S. $) |   |
|                             |   |                     |   |
| Audit Fees (1)                   |   |                     | 406    |   |   |   | 424 |   |
| Tax Fees (2)                     |   |                     | 37     |   |   |   | 48 |   |
| Audit-Related  Fees(3) |   |                     | 36     |   |   |   | 20 |   |
| All Other Fees (4)               |   |                     | 13     |   |   |   | 15 |   |
|    Total          |   |                     | 492    |   |   |   | 507 |   |

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

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

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

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

----

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

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

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

| Exhibit No. | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 1.1         | Articles of Association (English translation), consolidated version including amendments approved by the Company's shareholders on February 1, 2012.                                                                                                                                                                                                                                                                     |
| 1.2         | Memorandum of Association of Elron Electronic Industries Ltd., incorporated by reference to Exhibit 1.2 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000, filed with the SEC on June 8, 2001.                                                                                                                                                                                      |
| 4.1         | Services Agreement dated as of March 19, 2009 by and between the registrant and Discount Investment Corporation Ltd. incorporated by reference to Exhibit 99.2 to Form 6-K, filed with the SEC on March 24, 2009.                                                                                                                                                                                                        |
| 4.2         | Joint Venture Agreement, dated as of April 1993, among Discount Investment Corporation Ltd., PEC Israel Economic Corporation, Rafael Armament Development Authority Ltd. and Galram Technology Industries Limited (“Joint Venture Agreement”), incorporated by reference to Exhibit 10.4 to Amendment No. 5 to the Company’s Registration Statement on Form F-4, filed with the SEC on March 14, 2002. |
| 4.3         | Amendment to Joint Venture Agreement, dated December 30, 2007, incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 20F for the year ended December 31, 2007 filed with the SEC on June 30, 2008.                                                                                                                                                                                             |
| 4.4         | Loan Agreement dated November 9, 2011 between the Company and Silicon Valley Bank incorporated by reference to Exhibit 2 to the Company's Schedule 13D/A filed with the SEC on March 8, 2012.                                                                                                                                                                                                                            |
| 8.1         | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                    |
| 11.1        | Code of Ethics, incorporated by reference to Exhibit 11.1 to the Company’s Annual Report on Form 20-F, filed with the SEC on June 29, 2004.                                                                                                                                                                                                                                                                        |
| 12.1        | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                  |
| 12.2        | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                  |
| 13.1        | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                 |
| 13.2        | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                 |
| 15.1        | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for Elron Electronic Industries Ltd., dated March 13, 2012.                                                                                                                                                                                                                                                                           |
| 15.2        | Consent of Somekh Chaikin, a Member firm of KPMG International for Given Imaging Ltd., dated March 13, 2012.                                                                                                                                                                                                                                                                                                             |

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

----

| Dated: March 13, 2012 | ELRON ELECTRONIC INDUSTRIES LTD. |                                                                                                                             |
|-----------------------|----------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                  |  By:                   |  /s/ Ari Bronshtein                                                                                                         |   |
|                  | Name:                       | Ari Bronshtein                                                                                                                   |   |
|                  | Title:                      | Chief Executive Officer                                                                                                          |   |
|                  |                             |                                                                                                                             |   |
|                  | By:                         | /s/ Yaron Elad                    |   |
|                  | Name:                       | Yaron Elad                                                                                                                       |   |
|                  | Title:                      | Vice President & Chief Financial Officer                                                                                     |   |

----

| Elron Electronic Industries Ltd. Consolidated Financial Statements For the Year EndedDecember 31, 2011 |
|------------------------------------------------------------------------------------------------------------------|

----

----

| Reports of Independent Registered Public Accounting Firm            | F - 2   |
|---------------------------------------------------------------------|---------|
|                                                                |    |
| Consolidated Statements of Financial Position                       | F - 4   |
|                                                                |    |
| Consolidated Statements of Income                                   | F - 6   |
|                                                                |    |
| Consolidated Statements of Comprehensive Income                     | F - 7   |
|                                                                |    |
| Consolidated Statements of Changes in Equity                        | F - 8   |
|                                                                |    |
| Consolidated Statements of Cash Flows                               | F - 11  |
|                                                                |    |
| Notes to the Consolidated Financial Statements                      | F - 13  |
|                                                                |    |
| Annex to the Consolidated Financial Statements -                    |    |
|   Details relating to Investments as of December 31, 2011 | F - 126 |

----

NDENT

| Tel-Aviv, Israel    | KOST FORER GABBAY & KASIERER     |
|---------------------|--------------------------------------|
| March 13, 2012 | A Member of Ernst & Young Global |

----

| Tel-Aviv, Israel    | KOST FORER GABBAY & KASIERER     |
|---------------------|--------------------------------------|
| March 13, 2012 | A Member of Ernst & Young Global |

----

an

----

|                                                |   |   |   |   | December 31 |   |    | December 31 |   |
|-----------------------------------------------------|--------|--------|--------|--------|-------------|--------|---------|-------------|--------|
|                                                |   |   |   |   | 2011        |   |    | 2010        |   |
|                                                |   | Note   |   |   | $ thousands |   |
|                                                |   |   |   |   |        |   |    |        |   |
| Current assets                                      |   |   |   |   |        |   |    |        |   |
| Cash and cash equivalents                           |   |   | 4      |   |        |   | 40,062  |        |   |   | 56,539 |   |
| Restricted cash                                     |   |   |   |   |        |   | 16      |        |   |   | 365 |   |
| Trade receivables                                   |   |   | 5      |   |        |   | -       |        |   |   | 3,061 |   |
| Other accounts receivable                           |   |   | 6      |   |        |   | 25,318  |        |   |   | 4,324 |   |
| Inventories                                         |   |   | 7      |   |        |   | 98      |        |   |   | 5,356 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |   |   |
|                                                |   |   |   |   |        |   | 65,494  |        |   |   | 69,645 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |   |   |
| Assets held for sale                                |   |   | 8      |   |        |   | 3,155   |        |   |   | 17,211 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |   |   |
| Non-current assets                                  |   |   |   |   |        |   |    |        |   |   |   |   |
| Investments in associates                           |   |   | 3      |   |        |   | 111,405 |        |   |   | 109,369 |   |
| Other investments (accounted as available for sale) |   |   | 8      |   |        |   | 17,524  |        |   |   | 20,221 |   |
| Other long-term receivables                         |   |   | 10     |   |        |   | 5,308   |        |   |   | 28,218 |   |
| Property, plant and equipment, net                  |   |   | 11     |   |        |   | 246     |        |   |   | 2,079 |   |
| Intangible assets, net                              |   |   | 12     |   |        |   | 4,922   |        |   |   | 3,595 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |   |   |
|                                                |   |   |   |   |        |   | 139,405 |        |   |   | 163,482 |   |
|                                                |   |   |   |   |        |   |    |        |   |   |   |   |
| Total assets                                        |   |   |   |   |        |   | 208,054 |        |   |   | 250,338 |   |

----

----

|                                              |   |   |   |   | December 31 |   |    | December 31 |   |
|---------------------------------------------------|--------|--------|--------|--------|-------------|--------|---------|-------------|--------|
|                                              |   |   |   |   | 2011        |   |    | 2010        |   |
|                                              |   | Note   |   |   | $ thousands |   |
|                                              |   |   |   |   |        |   |    |        |   |
| Current liabilities                               |   |   |   |   |        |   |    |        |   |
| Short term credit and loans from banks and others |   |   | 15     |   |        |   | -       |        |   |   | 850 |   |
| Trade payables                                    |   |   | 13     |   |        |   | 656     |        |   |   | 3,856 |   |
| Other accounts payable                            |   |   | 14     |   |        |   | 4,337   |        |   |   | 8,801 |   |
| Current maturities of convertible debentures      |   |   | 15     |   |        |   | -       |        |   |   | 1,275 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
|                                              |   |   |   |   |        |   | 4,993   |        |   |   | 14,782 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
| Long-term liabilities                             |   |   |   |   |        |   |    |        |   |   |   |   |
| Long term loans from banks and others             |   |   | 15     |   |        |   | 3,288   |        |   |   | 535 |   |
| Convertible debentures                            |   |   | 15     |   |        |   | -       |        |   |   | 2,110 |   |
| Royalty bearing government grants                 |   |   | 16     |   |        |   | 954     |        |   |   | 8,385 |   |
| Employee benefits                                 |   |   |   |   |        |   | 1       |        |   |   | 134 |   |
| Other long term liabilities                       |   |   |   |   |        |   | -       |        |   |   | 153 |   |
| Deferred taxes                                    |   |   | 21     |   |        |   | 5,010   |        |   |   | 4,746 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
|                                              |   |   |   |   |        |   | 9,253   |        |   |   | 16,063 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
| Equity attributable to the Company's shareholders |   |   | 17     |   |        |   |    |        |   |   |   |   |
| Issued capital                                    |   |   |   |   |        |   | 9,573   |        |   |   | 9,573 |   |
| Share premium                                     |   |   |   |   |        |   | 190,378 |        |   |   | 190,378 |   |
| Capital reserves                                  |   |   |   |   |        |   | 9,022   |        |   |   | 14,855 |   |
| Accumulated Deficit                               |   |   |   |   |        |   | (35,600 | )           |   |   | (18,885 | ) |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
|                                              |   |   |   |   |        |   | 173,373 |        |   |   | 195,921 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
| Non-controlling interests                         |   |   |   |   |        |   | 20,435  |        |   |   | 23,572 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
| Total equity                                      |   |   |   |   |        |   | 193,808 |        |   |   | 219,493 |   |
|                                              |   |   |   |   |        |   |    |        |   |   |   |   |
| Total liabilities and equity                      |   |   |   |   |        |   | 208,054 |        |   |   | 250,338 |   |

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

----

of Income

----

|                                                                          |   |   |   |   | For the                                       |   |    | For the     |   |   | For the     |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|-----------------------------------------------|--------|---------|-------------|--------|--------|-------------|--------|
|                                                                          |   |   |   |   | year ended                                    |   |    | year ended  |   |   | year ended  |   |
|                                                                          |   |   |   |   | December 31                                   |   |    | December 31 |   |   | December 31 |   |
|                                                                          |   |   |   |   | 2011                                          |   |    | 2010        |   |   | 2009        |   |
|                                                                          |   |   |   |   | $ thousands                                   |   |
|                                                                          |   | Note   |   |   | (except for net income (loss) per share data) |   |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |
| Income                                                                        |   |   |   |   |                                          |   |    |        |   |   |        |   |
| Income from sales                                                             |   |   |   |   |                                          | 14,103 |    |        |   | 9,608  |        |   |   | 9,904 |   |
| Gain from disposal of investee companies and changes in holdings, net         |   |   | 20.A   |   |                                          |   | 35,815  |        |   |   | 160,010     |   |   |   | 31,802 |   |
| Financial income                                                              |   |   | 20.F   |   |                                          |   | 1,504   |        |   |   | 2,739       |   |   |   | 1,413 |   |
|                                                                          |   |   |   |   |                                          |   | 51,422  |        |   |   | 172,357     |   |   |   | 43,119 |   |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Expenses                                                                      |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Cost of sales                                                                 |   |   | 20.B   |   |                                          |   | 5,823   |        |   |   | 3,948       |   |   |   | 4,824 |   |
| Research and development expenses, net                                        |   |   | 20.C   |   |                                          |   | 18,184  |        |   |   | 18,209      |   |   |   | 25,699 |   |
| Selling and marketing expenses                                                |   |   | 20.D   |   |                                          |   | 5,672   |        |   |   | 6,551       |   |   |   | 8,985 |   |
| General and administrative expenses                                           |   |   | 20.E   |   |                                          |   | 10,474  |        |   |   | 13,577      |   |   |   | 15,865 |   |
| Equity in losses of associates, net                                           |   |   | 20.G   |   |                                          |   | 10,374  |        |   |   | 10,863      |   |   |   | 10,514 |   |
| Amortization of intangible assets                                             |   |   |   |   |                                          |   | 313     |        |   |   | 1,484       |   |   |   | 1,416 |   |
| Financial expenses                                                            |   |   | 20.F   |   |                                          |   | 3,859   |        |   |   | 3,031       |   |   |   | 5,434 |   |
| Other expenses, net                                                           |   |   | 20.H   |   |                                          |   | 19,434  |        |   |   | 3,136       |   |   |   | 2,230 |   |
|                                                                          |   |   |   |   |                                          |   | 74,133  |        |   |   | 60,799      |   |   |   | 74,967 |   |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Income (loss) before taxes on income                                          |   |   |   |   |                                          |   | (22,711 | )           |   |   | 111,558     |   |   |   | (31,848 | ) |
| Taxes on income (tax benefit)                                                 |   |   | 21     |   |                                          |   | 602     |        |   |   | 6,112       |   |   |   | (2,453 | ) |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Net income (loss)                                                             |   |   |   |   |                                          |   | (23,313 | )           |   |   | 105,446     |   |   |   | (29,395 | ) |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Attributable to:                                                              |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| The Company's shareholders                                                    |   |   |   |   |                                          |   | (17,021 | )           |   |   | 60,678      |   |   |   | (14,304 | ) |
| Non-controlling interests                                                     |   |   |   |   |                                          |   | (6,292  | )           |   |   | 44,768      |   |   |   | (15,091 | ) |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
|                                                                          |   |   |   |   |                                          |   | (23,313 | )           |   |   | 105,446     |   |   |   | (29,395 | ) |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Net income (loss) per share attributable to the Company's shareholders (in $) |   |   | 22     |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Basic net income (loss) per share                                             |   |   |   |   |                                          |   | (0.63   | )           |   |   | 1.98        |   |   |   | (0.48 | ) |
|                                                                          |   |   |   |   |                                          |   |    |        |   |   |        |   |   |   |   |   |
| Diluted net income (loss) per share                                           |   |   |   |   |                                          |   | (0.63   | )           |   |   | 1.98        |   |   |   | (0.49 | ) |

----

Compre

----

|                                                                                                            |   | For the     |    |   | For the     |   |    | For the     |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|---------|-------------|--------|
|                                                                                                            |   | year ended  |    |   | year ended  |   |    | year ended  |   |
|                                                                                                            |   | December 31 |    |   | December 31 |   |    | December 31 |   |
|                                                                                                            |   | 2011        |    |   | 2010        |   |    | 2009        |   |
|                                                                                                            |   | $ thousands |    |
|                                                                                                            |   |        |    |   |        |   |    |        |   |
| Net income (loss)                                                                                               |   |        | (23,313 | )      |        |   | 105,446 |        |   |   | (29,395 | ) |
|                                                                                                            |   |        |    |   |        |   |    |        |   |   |   |   |
| Other comprehensive income (loss) (net of tax):                                                                 |   |        |    |   |        |   |    |        |   |   |   |   |
| Gain (loss) from available for sale financial assets                                                            |   |        | (7,542  | )      |        |   | 9,585   |        |   |   | 5,001 |   |
| Available-for-sale financial assets classified to the statement of income                                       |   |        | 782     |   |        |   | -       |        |   |   | (84 | ) |
| Foreign currency translation differences of foreign operations                                                  |   |        | 1,904   |   |        |   | (1,269  | )           |   |   | (45 | ) |
| Foreign currency translation differences charged to the statement of income upon disposal of foreign operations |   |        | (1,200  | )      |        |   | -       |        |   |   | (4,330 | ) |
| Actuarial gains (losses) on defined benefit plan                                                                |   |        | (81     | )      |        |   | (57     | )           |   |   | 15 |   |
| Group's share of other comprehensive income (loss) of companies accounted for under the equity method           |   |        | (61     | )      |        |   | (204    | )           |   |   | 455 |   |
|                                                                                                            |   |        |    |   |        |   |    |        |   |   |   |   |
| Total other comprehensive income (loss)                                                                         |   |        | (6,198  | )      |        |   | 8,055   |        |   |   | 1,012 |   |
|                                                                                                            |   |        |    |   |        |   |    |        |   |   |   |   |
| Total comprehensive income (loss)                                                                               |   |        | (29,511 | )      |        |   | 113,501 |        |   |   | (28,383 | ) |
|                                                                                                            |   |        |    |   |        |   |    |        |   |   |   |   |
| Attributable to:                                                                                                |   |        |    |   |        |   |    |        |   |   |   |   |
| Company's shareholders                                                                                          |   |        | (23,689 | )      |        |   | 69,100  |        |   |   | (13,381 | ) |
| Non-controlling interests                                                                                       |   |        | (5,822  | )      |        |   | 44,401  |        |   |   | (15,002 | ) |
|                                                                                                            |   |        |    |   |        |   |    |        |   |   |   |   |
|                                                                                                            |   |        | (29,511 | )      |        |   | 113,501 |        |   |   | (28,383 | ) |

----

in Equity

----

|                                                                                               |   | Attributable to the Company's shareholders |   |   |         |   |    |                                                 |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------|--------------|--------|---------|------------------------------------------------------|--------|
|                                                                                               |   |                                       |   |   |         |   |    | Capitalreservefortransactionwithcontrollinginterests |   |   |   |   |   | Capitalreserveforavailablefor salefinancialassets |   |   |   |   |   | Capitalreservefromtransactionswith non-controllinginterests |   |   | Capitalreserve foravailablefor saleFinancialassets held forSale |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   | Capitalreservefromtranslationdifferences |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   | Revaluationreserve fromconsolidationof subsidiaries |   |   |   |   |   |   |   |   |   |   | Accumulateddeficit fromshare basedpayments |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Non-controllinginterests |   |   |   |   |
|                                                                                               |   | Issuedcapital                              |   |   | SharePremium |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   | Accumulateddeficit |   |   |   |   |   |   |   | Totalequity |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   | Total |   |   |   |   |   |
|                                                                                               |   | $ thousands                                |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2011                                                                         |   |                                       | 9,573  |   |         |   | 190,378 |                                                 |   |   | 351 |   |   |   | 150 |   |   |   | 10,293 |   |   |   | (228 | ) |   |   | 80 |   |   |   | 4,209 |   |   |   | 1,194 |   |   |   | (20,079 | ) |   |   | 195,921 |   |   |   | 23,572 |   |   |   | 219,493 |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                  |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | (2,749 | ) |   |   | 199 |   |   |   | - |   |   |   | (4,274 | ) |   |   | - |   |   |   | (16,865 | ) |   |   | (23,689 | ) |   |   | (5,822 | ) |   |   | (29,511 | ) |
| Share-based payments in respect of awards issued by subsidiaries                                   |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 115 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 115 |   |   |   | 600 |   |   |   | 715 |   |
| Expiration of share-based payments in respect of awards issued by subsidiaries                     |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,026 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,026 |   |   |   | (1,026 | ) |   |   | - |   |
| Share based payments                                                                               |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (19 | ) |   |   | 19 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary achieved in stages |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | (150 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 150 |   |   |   |   - |   |   |   |   - |   |   |   |   - |   |
| Increase in non-controlling interest due to additional investment in subsidiary                    |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   |   - |   |   |   |   - |   |   |   |   469 |   |   |   |   469 |   |
| Change in non-controlling interests due to sale of a subsidiary                                    |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   |   - |   |   |   |   - |   |   |   |   1,378 |   |   |   |   1,378 |   |
| Classification of non-current assets as held for sale (*)                                          |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | (254 | ) |   |   | - |   |   |   | - |   |   |   | 254 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Non-controlling interests created  due to initially consolidated companies (**)          |   |                                       | -      |   |         |   | -       |                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   |       - |   |   |   |       - |   |   |   |       1,264 |   |   |   |       1,264 |   |
|                                                                                               |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at                                                                                         |   |                                       |   |   |         |   |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2011                                                                                  |   |                                       | 9,573  |   |         |   | 190,378 |                                                 |   |   | 351 |   |   |   | - |   |   |   | 7,290 |   |   |   | (29 | ) |   |   | 1,221 |   |   |   | 189 |   |   |   | 1,175 |   |   |   | (36,775 | ) |   |   | 173,373 |   |   |   | 20,435 |   |   |   | 193,808 |   |

----

----

|                                                                                                    |   | Attributable to the Company's shareholders |   |   |         |   |    |                                                    |   |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------|--------------|--------|---------|---------------------------------------------------------|--------|
|                                                                                                    |   |                                       |   |   |         |   |    | Capitalreservefortransactionwithcontrollingshareholders |   |   |   |   |   | Capitalreservefor availablefor salefinancialassets |   |   |   |   |   | Capitalreservefromtransactionswith non-controllinginterests |   |   | Capitalreserve fromclassificationof availablefor sale assetsas held forSale |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   | Capitalreservefrom translationdifferences |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   | Revaluationreserve fromconsolidationof subsidiaries |   |   |   |   |   |   |   |   |   |   | Accumulateddeficit from share basedpayments |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Non-controllinginterests |   |   |   |   |
|                                                                                                    |   | Issuedcapital                              |   |   | SharePremium |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | Accumulateddeficit |   |   |   |   |   |   |   | Totalequity |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | Total |   |   |   |   |   |
|                                                                                                    |   | $ thousands                                |   |
| Balance at January 1, 2010                                                                              |   |                                       | 9,573  |   |         |   | 190,328 |                                                    |   |   | 217 |   |   |   | 4,127 |   |   |   | 5,000 |   |   |   | 723 |   |   |   | - |   |   |   | - |   |   |   | 1,180 |   |   |   | (84,679 | ) |   |   | 126,469 |   |   |   | (4,376 | ) |   |   | 122,093 |   |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                       |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | 9,502 |   |   |   | (951 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 60,549 |   |   |   | 69,100 |   |   |   | 44,401 |   |   |   | 113,501 |   |
| Share-based payments in respect of awards issued by subsidiaries                                        |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,039 |   |   |   | 1,039 |   |
| Expiration of share-based payments in respect of awards issued by subsidiaries                          |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 80 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 80 |   |   |   | (80 | ) |   |   | - |   |
| Share based payments                                                                                    |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 88 |   |   |   | - |   |   |   | 88 |   |   |   | - |   |   |   | 88 |   |
| Exercise of options into shares                                                                         |   |                                       | -      |   |         |   | 50      |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (74 | ) |   |   | 74 |   |   |   | 50 |   |   |   | - |   |   |   | 50 |   |
| Purchase of options from non-controlling interests                                                      |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (255 | ) |   |   | (255 | ) |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary achieved in stages |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | (3,977 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,977 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Increase in the non-controlling interest due to additional investment in subsidiary                     |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 641 |   |   |   | 641 |   |
| Dividend to non-controlling interests                                                                   |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (14,997 | ) |   |   | (14,997 | ) |
| Capital reserve from transaction with controlling interests (*)                                         |   |                                       | -      |   |         |   | -       |                                                    |   |   | 134 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 134 |   |   |   | - |   |   |   | 134 |   |
| Classification of non-current assets as held for sale (**)                                              |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | (4,209 | ) |   |   | - |   |   |   | - |   |   |   | 4,209 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Change in non-controlling interests due to sale of a subsidiary                                         |   |                                       | -      |   |         |   | -       |                                                    |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (2,801 | ) |   |   | (2,801 | ) |
|                                                                                                    |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at                                                                                              |   |                                       |   |   |         |   |    |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2010                                                                                       |   |                                       | 9,573  |   |         |   | 190,378 |                                                    |   |   | 351 |   |   |   | 150 |   |   |   | 10,293 |   |   |   | (228 | ) |   |   | 80 |   |   |   | 4,209 |   |   |   | 1,194 |   |   |   | (20,079 | ) |   |   | 195,921 |   |   |   | 23,572 |   |   |   | 219,493 |   |

----

----

|                                                                                                  |   | Attributable to the Company's shareholders |   |   |         |   |    |                                                     |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------|--------------|--------|---------|----------------------------------------------------------|--------|
|                                                                                                  |   |                                       |   |   |         |   |    | Capitalreservefromtransactionwithcontrollingshareholders |   |   |   |   |   | Capitalreservefor availablefor salefinancialassets |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   | Capitalreservefromtranslationdifferences |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   | Revaluationreserve fromconsolidationof subsidiaries |   |   |   |   |   |   | Accumulateddeficit fromshare basedpayments |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Non-controllinginterests |   |   |   |   |
|                                                                                                  |   | Issuedcapital                              |   |   | SharePremium |   |    |                                                     |   |   |   |   |   |   |   |   |   | Accumulateddeficit |   |   |   |   |   |   |   | Totalequity |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   | Total |   |   |   |   |   |
|                                                                                                  |   | $ thousands                                |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2009                                                                            |   |                                       | 9,573  |   |         |   | 190,328 |                                                     |   |   | - |   |   |   | 4,751 |   |   |   | (211 | ) |   |   | 5,117 |   |   |   | 1,053 |   |   |   | (71,105 | ) |   |   | 139,506 |   |   |   | 6,545 |   |   |   | 146,051 |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                     |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | - |   |   |   | 5,211 |   |   |   | (4,394 | ) |   |   | - |   |   |   | (14,198 | ) |   |   | (13,381 | ) |   |   | (15,002 | ) |   |   | (28,383 | ) |
| Share-based payments in respect of awards issued by subsidiaries                                      |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,395 |   |   |   | 2,395 |   |
| Share based payments                                                                                  |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 127 |   |   |   | - |   |   |   | 127 |   |   |   | - |   |   |   | 127 |   |
| Reclassification of revaluation reserve in respect of acquisition of subsidiary achievedin stages     |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | (624 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 624 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Change in non-controlling     interests due to sale     of a subsidiary |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,625 | ) |   |   | (1,625 | ) |
| Increase in the non-controlling interest due to additional investment in subsidiary                   |   |                                       | -      |   |         |   | -       |                                                     |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,528 |   |   |   | 3,528 |   |
| Transaction with non-controlling interests                                                            |   |                                       | -      |   |         |   | -       |                                                     |   |   | 217 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 217 |   |   |   | (217 | ) |   |   | - |   |
|                                                                                                  |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at                                                                                            |   |                                       |   |   |         |   |    |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                                                                                     |   |                                       | 9,573  |   |         |   | 190,328 |                                                     |   |   | 217 |   |   |   | 4,127 |   |   |   | 5,000 |   |   |   | 723 |   |   |   | 1,180 |   |   |   | (84,679 | ) |   |   | 126,469 |   |   |   | (4,376 | ) |   |   | 122,093 |   |

----

Cash Flows
 

----

|                                                                                 |   | For the     |    |   | For the     |   |     | For the     |   |
|--------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|----------|-------------|--------|
|                                                                                 |   | year ended  |    |   | year ended  |   |     | year ended  |   |
|                                                                                 |   | December 31 |    |   | December 31 |   |     | December 31 |   |
|                                                                                 |   | 2011        |    |   | 2010        |   |     | 2009        |   |
|                                                                                 |   | $ thousands |    |
|                                                                                 |   |        |    |   |        |   |     |        |   |
| Cash flows from operating activities                                                 |   |        |    |   |        |   |     |        |   |
| Net income (loss)                                                                    |   |        | (23,313 | )      |        |   | 105,446  |        |   |   | (29,395 | ) |
|                                                                                 |   |        |    |   |        |   |     |        |   |   |   |   |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: |   |        |    |   |        |   |     |        |   |   |   |   |
| Adjustment to the profit or loss items:                                              |   |        |    |   |        |   |     |        |   |   |   |   |
| Depreciation and amortization                                                        |   |        | 1,334   |   |        |   | 2,412    |        |   |   | 2,958 |   |
| Financial expenses (income), net                                                     |   |        | (186    | )      |        |   | 1,777    |        |   |   | 949 |   |
| Stock based compensation and changes in liability in respect of options              |   |        | 1,009   |   |        |   | 1,131    |        |   |   | 2,398 |   |
|     Accrued interest on loans from shareholders                       |   |        | -       |   |        |   | 742      |        |   |   | 1,561 |   |
| Gain from sale of investments in available for sale financial assets                 |   |        | (543    | )      |        |   | (28      | )           |   |   | (85 | ) |
| Reevaluation of restricted cash                                                      |   |        | -       |   |        |   | -        |        |   |   | 83 |   |
| Loss from sale of property and equipment                                             |   |        | 1       |   |        |   | 66       |        |   |   | 64 |   |
| Loss from impairment of investments and financial assets                             |   |        | 15,720  |   |        |   | 1,780    |        |   |   | 1,853 |   |
| Loss from impairment of intangible assets                                            |   |        | -       |   |        |   | 2,421    |        |   |   | - |   |
| Loss from write down of inventory                                                    |   |        | 3,953   |   |        |   | 1,075    |        |   |   | - |   |
| Change in fair value of convertible debentures                                       |   |        | 669     |   |        |   | 1,331    |        |   |   | 921 |   |
| Gain from disposal of investee companies and changes in holdings, net                |   |        | (35,815 | )      |        |   | (160,010 | )           |   |   | (31,802 | ) |
| Equity in  losses of associates, net                                       |   |        | 10,374  |   |        |   | 10,863   |        |   |   | 10,514 |   |
| Taxes on income                                                                      |   |        | 602     |   |        |   | 6,112    |        |   |   | - |   |
| Other                                                                                |   |        | 849     |   |        |   | (2,637   | )           |   |   | 323 |   |
|                                                                                 |   |        | (2,033  | )      |        |   | (132,965 | )           |   |   | (10,263 | ) |
|                                                                                 |   |        |    |   |        |   |     |        |   |   |   |   |
| Changes in Assets and Liabilities:                                                   |   |        |    |   |        |   |     |        |   |   |   |   |
| Increase in trade receivables                                                        |   |        | (699    | )      |        |   | (977     | )           |   |   | (1,103 | ) |
|     Decrease (increase) in other accounts receivable                  |   |        | 2,058   |   |        |   | (591     | )           |   |   | 62 |   |
| Increase in inventories                                                              |   |        | (1,310  | )      |        |   | (3,576   | )           |   |   | (2,634 | ) |
| Increase (decrease) in liabilities in respect of government grants                   |   |        | 89      |   |        |   | (1,282   | )           |   |   | (589 | ) |
|     Increase in trade payables                                        |   |        | 217     |   |        |   | 371      |        |   |   | 307 |   |
| Increase (decrease) in other accounts payable                                        |   |        | (1,859  | )      |        |   | 651      |        |   |   | (1,444 | ) |
|                                                                                 |   |        | (1,504  | )      |        |   | (5,404   | )           |   |   | (5,401 | ) |
|                                                                                 |   |        |    |   |        |   |     |        |   |   |   |   |
| Cash paid and received during the year for:                                          |   |        |    |   |        |   |     |        |   |   |   |   |
| Taxes received                                                                       |   |        | -       |   |        |   | 770      |        |   |   | - |   |
| Taxes paid                                                                           |   |        | -       |   |        |   | (1,734   | )           |   |   | - |   |
| Interest paid                                                                        |   |        | (468    | )      |        |   | (2,708   | )           |   |   | (1,542 | ) |
| Interest received                                                                    |   |        | 654     |   |        |   | 931      |        |   |   | 593 |   |
|                                                                                 |   |        | 186     |   |        |   | (2,741   | )           |   |   | (949 | ) |
|                                                                                 |   |        |    |   |        |   |     |        |   |   |   |   |
| Net cash used in operating activities                                                |   |        | (26,664 | )      |        |   | (35,664  | )           |   |   | (46,008 | ) |

----

----

|                                                                                             |   | For the     |    |    | For the     |   |    | For the     |   |
|--------------------------------------------------------------------------------------------------|--------|-------------|---------|---------|-------------|--------|---------|-------------|--------|
|                                                                                             |   | year ended  |    |    | year ended  |   |    | year ended  |   |
|                                                                                             |   | December 31 |    |    | December 31 |   |    | December 31 |   |
|                                                                                             |   | 2011        |    |    | 2010        |   |    | 2009        |   |
|                                                                                             |   | $ thousands |    |
|                                                                                             |   |        |    |    |        |   |    |        |   |
| Cash flows from investment activities                                                            |   |        |    |    |        |   |    |        |   |
| Purchase of property and equipment                                                               |   |        | (958    | )       |        |   | (1,267  | )           |   |   | (1,293 | ) |
| Investment in associates and other companies                                                     |   |        | (12,899 | )       |        |   | (5,155  | )           |   |   | (8,630 | ) |
| Purchase of intangible assets                                                                    |   |        | (9      | )       |        |   | (216    | )           |   |   | (172 | ) |
| Proceeds from sale of property and equipment                                                     |   |        | 27      |    |        |   | 78      |        |   |   | 105 |   |
| Proceeds from sale of investments in subsidiaries net of cash disposed of due to deconsolidation |   |        | 13,139  |    |        |   | 107,395 |        |   |   | (1,044 | ) |
| Proceeds from sale of Starling's operation (see also Note 3.C.2.a)                               |   |        | 8,201   |    |        |   | -       |        |   |   | - |   |
| Proceeds from sale of associates and other companies                                             |   |        | 286     |    |        |   | 5,062   |        |   |   | 66,290 |   |
| Dividend received from associates                                                                |   |        | 230     |    |        |   | -       |        |   |   | 9,553 |   |
| Proceeds from sale of available for sale assets                                                  |   |        | 1,562   |    |        |   | 157     |        |   |   | 728 |   |
| Acquisition of investments in subsidiaries less cash acquired                                    |   |        | 668     |    |        |   | -       |        |   |   | - |   |
| Investments in deposits                                                                          |   |        | (26     | )       |        |   | (285    | )           |   |   | (430 | ) |
| Proceeds from long term deposits                                                                 |   |        | 398     |    |        |   | -       |        |   |   | 430 |   |
|                                                                                             |   |        |    |    |        |   |    |        |   |   |   |   |
| Net cash provided by investment activities                                                       |   |        | 10,619  |    |        |   | 105,769 |        |   |   | 65,537 |   |
|                                                                                             |   |        |    |    |        |   |    |        |   |   |   |   |
| Cash flows from financing activities                                                             |   |        |    |    |        |   |    |        |   |   |   |   |
| Receipt of government grants                                                                     |   |        | 1,518   |    |        |   | 1,499   |        |   |   | 3,250 |   |
| Repayment of government grants                                                                   |   |        | (4,943  | )       |        |   | (314    | )           |   |   | (266 | ) |
| Proceeds from exercise of options                                                                |   |        | -       |    |        |   | 50      |        |   |   | - |   |
| Investment of non-controlling interests in subsidiaries                                          |   |        | 469     |    |        |   | 641     |        |   |   | 3,528 |   |
| Award paid to CEO by controlling shareholders                                                    |   |        | -       |    |        |   | 134     |        |   |   | - |   |
| Dividend paid to non-controlling interests                                                       |   |        | -       |    |        |   | (14,997 | )           |   |   | - |   |
| Purchase of options from non-controlling interests                                               |   |        | -       |    |        |   | (255    | )           |   |   | - |   |
| Receipt of long-term loans from shareholders                                                     |   |        | -       |    |        |   | -       |        |   |   | 9,000 |   |
| Repayment of long-term loans from shareholders                                                   |   |        | -       |    |        |   | (16,279 | )           |   |   | - |   |
| Receipt of long-term loans from banks and others (*)                                             |   |        | 3,250   |    |        |   | 6,750   |        |   |   | 13,500 |   |
| Repayment of other long-term loans and liabilities                                               |   |        | (224    | )       |        |   | (52,500 | )           |   |   | (565 | ) |
| Repayment of convertible debentures (**)                                                         |   |        | (3,877  | )       |        |   | (1,150  | )           |   |   | - |   |
|     Short-term credit from banks and others, net                                  |   |        | 1,858   |    |        |   | (264    | )           |   |   | (593 | ) |
| Net cash provided by (used in) financing activities                                              |   |        | (1,949  | )  |        |   | (76,685 | )           |   |   | 27,854 |   |
| Exchange rate differences in respect of cash and cash equivalents                                |   |        | 1,517   |    |        |   | (1,628  | )           |   |   | - |   |
| Increase (decrease) in cash and cash equivalents                                                 |   |        | (16,477 | )       |        |   | (8,208  | )           |   |   | 47,383 |   |
|                                                                                             |   |        |    |    |        |   |    |        |   |   |   |   |
| Cash and cash equivalents as of beginning of the year                                            |   |        | 56,539  |    |        |   | 64,747  |        |   |   | 17,364 |   |
|                                                                                             |   |        |    |    |        |   |    |        |   |   |   |   |
| Cash and cash equivalents as of end of the year                                                  |   |        | 40,062  |    |        |   | 56,539  |        |   |   | 64,747 |   |

----

Financi

----

|   | Elron Electronic Industries Ltd. ("Elron" or "the Company") is a high technology operational holding company with holdings in private and public companies in various technology fields such as medical devices and other fields. The Company is an Israeli-resident company incorporated in Israel, traded on the Tel-Aviv Stock Exchange and the Over-The-Counter market in the United States. Its registered address is 3 Azrieli Center, Triangle Tower, 42nd floor, Tel Aviv, Israel. The Company's parent company is Discount Investment Corporation Ltd. ("DIC"), an Israeli-resident company, traded on the Tel-Aviv Stock Exchange. DIC holds an approximately 50.46% interest in the Company as of December 31, 2011.DIC's parent company is IDB Development Corporation Ltd. ("IDB"), which is wholly-owned by IDB Holding Corporation Ltd. The control nucleus of Elron is comprised of Ganden Holdings Ltd., Manor Holdings B.A. Ltd. and Avraham Livnat Ltd., which have a voting agreement between their subsidiaries regarding their main holdings and join control of IDB Holding Corporation Ltd.  Mr. Nochi Dankner is the ultimate controlling shareholder, through Ganden Holdings Ltd.Pursuant to the decision of the Company's Board of Directors from November 12, 2009, on January 6, 2010, the Company voluntarily delisted its ordinary shares from the NASDAQ Global Select Market. At this stage, the Company intends to terminate the registration of its ordinary shares under the Securities Exchange Act of 1934, as amended, as soon as possible under Security and Exchange Commission ("SEC") rules, thereby releasing Elron from its obligation to file reports with the SEC. Deregistration will be possible depending on the number of the Company's holders of record resident in the U.S., or the average daily trading volume ("ADTV") of the Company's shares in the U.S. out of the worldwide ADTV of the Company's shares. The Company cannot project when and if such deregistration will take place.As a result, in the preparation of its financial statements as of December 31, 2009, the Company is now required to comply with reporting requirements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") instead of generally accepted accounting principles in the United States ("U.S. GAAP"). Elron's consolidated financial statements for the year ended December 31, 2009 were the Company's initial annual financial statements prepared in conformity with IFRS. Accordingly, January 1, 2008 was the Company's date of transition to IFRS.In the first quarter of 2010 Elron commenced reporting in accordance with the reporting obligations under Chapter F of the Israel Securities Law (1968) applicable to reporting companies in Israel. Up until January 2010, the Company reported in accordance with the reporting obligations under Chapter E3 of the Israel Securities Law (1968) applicable to reporting companies in Israel which are dual-listed.As aforementioned, Elron's ordinary shares continue to be registered in the U.S. under SEC rules, and as such, in addition to the reporting requirements under Chapter F of the Israel Securities Law as aforementioned, the Company continues to comply with reporting requirements in accordance with U.S. applicable securities laws and regulations, as long as those apply to Elron.These financial statements were approved by the Company's Board of Directors on March 13, 2012. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   A. | Basis of presentation of the financial statements |
|-----------|---------------------------------------------------|

|   | 1. | Measurement basis |
|--------|----|-------------------|

----

----

|   | 2. | The preparation format of the financial statements |
|--------|----|----------------------------------------------------|

|   | 3. | Consistent accounting policies |
|--------|----|--------------------------------|

|   | 4. | Changes in accounting policies in view of the adoption of new standards |
|--------|----|-------------------------------------------------------------------------|

|   B. | Significant accounting judgments, estimates and assumptions used in the preparation of the financial statements |
|-----------|-----------------------------------------------------------------------------------------------------------------|

----

----

|   | Legal claims |
|--------|--------------|

|   | Impairment of non-financial assets |
|--------|------------------------------------|

|   | Valuation of intangible assets |
|--------|--------------------------------|

----

----

|   | Deferred tax assets |
|--------|---------------------|

|   | Determining the fair value of unquoted financial assets and non-controlling interests |
|--------|---------------------------------------------------------------------------------------|

|   | Impairment of available-for-sale financial assets |
|--------|---------------------------------------------------|

|   | Fair value of contingent consideration upon occurrence of certain events |
|--------|--------------------------------------------------------------------------|

|   C. | The operating cycle |
|-----------|---------------------|

|   D. | Basis of consolidation |
|-----------|------------------------|

----

----

----

----

|   E. | Functional currency and foreign currency |
|-----------|------------------------------------------|

|   | 1. | Functional currency and presentation currency |
|--------|----|-----------------------------------------------|

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

----

----

|   | b) | Income and expenses for each period presented in the statement of income (including comparative data) are translated at average exchange rates for the presented periods; however, if exchange rates fluctuate significantly, income and expenses are translated at the exchange rates at the date of the transactions. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Share capital, capital reserves and other changes in capital are translated at the exchange rate prevailing at the date of incurrence. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | Retained earnings are translated based on the opening balance translated at the exchange rate at that date and other relevant transactions (such as dividend) during the period are translated as described in b) and c) above. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e) | All resulting translation differences are recognized as a separate component of other comprehensive income (loss) in equity in a foreign currency translation reserve. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Transactions in foreign currency |
|--------|----|----------------------------------|

|   | 3. | Index-linked monetary items |
|--------|----|-----------------------------|

----

----

|   F. | Financial instruments |
|-----------|-----------------------|

|   | Non-derivative financial instruments |
|--------|--------------------------------------|

----

----

|   | Financial assets and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The fair value of financial assets measured at fair value through profit or loss and of available-for-sale financial assets is determined with reference to their quoted closing bid price as of the reporting date, and in the absence of such a quoted price, by other appropriate valuation methods. (see Note 2.B). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   G. | Issuance of a unit of securities |
|-----------|----------------------------------|

|   H. | Share capital |
|-----------|---------------|

|   I. | Inventories |
|-----------|-------------|

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

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

----

----

|   K. | Property, plant and equipment |
|-----------|-------------------------------|

----

----

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

|   L. | Intangible assets |
|-----------|-------------------|

|   | 1. | Research and development |
|--------|----|--------------------------|

----

----

|   | 2. | Other intangible assets |
|--------|----|-------------------------|

|   | a. | Intangible assets acquired in a business combination are included at the fair value at the acquisition date. After initial recognition, intangible assets are carried at their cost less any accumulated amortization (other than intangible assets having an indefinite useful life) and any accumulated impairment losses. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Separately acquired intangible assets are measured on initial recognition at cost with the addition of costs directly attributable to the acquisition. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | d. | The amortization period of intangible assets having a finite useful life is determined according to the expected future economic benefits from the assets in each period, on the basis of estimated useful life of each group of assets. As for the testing of impairment, see Note 2.M.4 below. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                             | Technology and development in process * | Agreement with Rafael** | Other***       |
|----------------------------------|-----------------------------------------|-------------------------|----------------|
| Useful lives                     | Not yet determined                      | Indefinite              | Finite         |
| Amortization period              | ****                                    | Not amortized           | Mainly 3 years |
| Internally generated or acquired | Acquired                                | Acquired                | Acquired       |

----

----

|   M. | Impairment |
|-----------|------------|

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

|   | 2. | Financial assets carried at amortized cost |
|--------|----|--------------------------------------------|

----

----

|   | 3. | Available for sale financial assets |
|--------|----|-------------------------------------|

|   | 4. | Non-financial assets |
|--------|----|----------------------|

----

----

|   N. | Non-current assets held for sale |
|-----------|----------------------------------|

|   O. | Employee benefits |
|-----------|-------------------|

|   | 1. | Post-employment benefits |
|--------|----|--------------------------|

|   | a) | Defined contribution plans |
|--------|----|----------------------------|

----

----

|   | b) | Defined benefit plans |
|--------|----|-----------------------|

|   | 2. | Short-term benefits |
|--------|----|---------------------|

|   P. | Share-based payment transactions |
|-----------|----------------------------------|

----

----

|   Q. | Provisions |
|-----------|------------|

|   R. | Revenues |
|-----------|----------|

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

|   S. | Cost of sales |
|-----------|---------------|

|   | 1. | Cost of sales includes expenses for loss, storage and conveyance of inventories to the end point of sale. |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|   | 2. | Supplier discounts - The Group deducts discounts received from its suppliers from cost of purchase. Certain of the discounts in respect of that portion of the purchases that are added to closing inventories are attributed to inventories and the balance reduces the cost of sales. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   T. | Leases |
|-----------|--------|

----

----

|   U. | Financial income and expenses |
|-----------|-------------------------------|

|   V. | Taxes on income |
|-----------|-----------------|

|   | 1. | Current taxes |
|--------|----|---------------|

|   | 2. | Deferred taxes |
|--------|----|----------------|

----

----

|   W. | Government grants |
|-----------|-------------------|

----

----

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

|   Y. | Transactions with controlling shareholder |
|-----------|-------------------------------------------|

|   Z. | Presentation of financial statements |
|-----------|--------------------------------------|

|   AA. | Significant Evaluations of assets for Disclosure or attachment |
|------------|----------------------------------------------------------------|

----

----

|   AB. | Disclosure of new IFRS standards in the period prior to their adoption |
|------------|------------------------------------------------------------------------|

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

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----

|   | IFRS 9 - Financial Instruments |
|--------|--------------------------------|

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

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

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

|   | b. | In October 2010, the IASB issued certain amendments to IFRS 9 regarding derecognition and financial liabilities. According to the provisions of these amendments, the provisions of IAS 39 will continue to apply to derecognition and financial liabilities for which the fair value option had not been chosen (designated at fair value through profit or loss). Namely, the classification and measurement provisions of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at amortized cost. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

|   | c. | In December 2011, the Company's Board of Directors resolved to early adopt IFRS 9 (2009), without early adoption of the amendments. The early adoption will apply to the Company's financial statements for the period commencing January 1, 2012 and subsequently. The Company decided to designate its investment in Enablence Technologies Inc. ("Enablence") shares and additional immaterial investments as permitted pursuant to the provisions of the Standard, such that changes in the fair value of these investments will be presented in the Company's aforementioned financial statements in other comprehensive income. Furthermore, it was resolved to designate investments in certain financial instruments, as permitted by the provisions of the Standard, such that changes in the fair value of these instruments will be presented in the Company's aforementioned financial statements in profit or loss. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                                                                                                               |   | December 31, 2011                                |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                                                                                                               |   | Attributable to the Company’s shareholders |    |   |   |   |   |   |   |
|                                                                                                                                                               |   | Accumulated deficit                              |    |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for financial assets through other comprehensive income |   |   | Issued capital, share premium and other capital reserves |   |   | Total |   |   | Non- controlling interests |   |   | Total |   |
|                                                                                                                                                               |   | $ thousands                                      |    |
| Balance before impact of the change in accounting policy                                                                                                           |   |                                             | (35,600 | ) |   |   | 7,479 |   |   |   | - |   |   |   | 201,494 |   |   |   | 173,373 |   |   |   | 20,435 |   |   |   | 193,808 |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impact of the change in accounting policy:                                                                                                                         |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in bonds which was accounted for as available for sale financial asset and now measured at amortized cost                                               |   |                                             | -       |   |   |   | 236 |   |   |   | - |   |   |   | - |   |   |   | 236 |   |   |   | 39 |   |   |   | 275 |   |
| Investment in equity instruments which was accounted for as available for sale financial asset and now measured in fair value through profit and loss              |   |                                             | 7,853   |   |   |   | (7,853 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Investment in equity instruments which was accounted for as available for sale financial asset and now designated to fair value through other comprehensive income |   |                                             | 9,874   |   |   |   | 138 |   |   |   | (10,012 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance after impact of the change in accounting policy                                                                                                            |   |                                             | (14,973 | ) |   |   | - |   |   |   | (10,012 | ) |   |   | 201,494 |   |   |   | 173,609 |   |   |   | 20,474 |   |   |   | 194,083 |   |

----

----

|                                                                                                                                                               |   | December 31, 2010                                |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                                                                                                               |   | Attributable to the Company’s shareholders |    |   |   |   |   |   |   |
|                                                                                                                                                               |   | Accumulated deficit                              |    |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for financial assets through other comprehensive income |   |   | Issued capital, share premium and other capital reserves |   |   | Total |   |   | Non- controlling interests |   |   | Total |   |
|                                                                                                                                                               |   | $ thousands                                      |    |
| Balance before impact of the change in accounting policy                                                                                                           |   |                                             | (18,885 | ) |   |   | 14,502 |   |   |   | - |   |   |   | 200,304 |   |   |   | 195,921 |   |   |   | 23,572 |   |   |   | 219,493 |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impact of the change in accounting policy:                                                                                                                         |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in bonds which was accounted for as available for sale financial asset and now measured at amortized cost                                               |   |                                             | -       |   |   |   | (20 | ) |   |   | - |   |   |   | - |   |   |   | (20 | ) |   |   | (3 | ) |   |   | (23 | ) |
| Investment in equity instruments which was accounted for as available for sale financial asset and now measured in fair value through profit and loss              |   |                                             | 9,124   |   |   |   | (9,124 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Investment in equity instruments which was accounted for as available for sale financial asset and now designated to fair value through other comprehensive income |   |                                             | -       |   |   |   | (3,720 | ) |   |   | 3,720 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance after impact of the change in accounting policy                                                                                                            |   |                                             | (9,761  | ) |   |   | 1,638 |   |   |   | 3,720 |   |   |   | 200,304 |   |   |   | 195,901 |   |   |   | 23,569 |   |   |   | 219,470 |   |

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----

|                                                                                                                                                               |   | December 31, 2009                                |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                                                                                                               |   | Attributable to the Company’s shareholders |    |   |   |   |   |   |   |
|                                                                                                                                                               |   | Accumulated deficit                              |    |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for financial assets through other comprehensive income |   |   | Issued capital, share premium and other capital reserves |   |   | Total |   |   | Non- controlling interests |   |   | Total |   |
|                                                                                                                                                               |   | $ thousands                                      |    |
| Balance before impact of the change in accounting policy                                                                                                           |   |                                             | (83,499 | ) |   |   | 5,000 |   |   |   | - |   |   |   | 204,968 |   |   |   | 126,469 |   |   |   | (4,376 | ) |   |   | 122,093 |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impact of the change in accounting policy:                                                                                                                         |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in bonds which was accounted for as available for sale financial asset and now measured at amortized cost                                               |   |                                             | -       |   |   |   | (13 | ) |   |   | - |   |   |   | - |   |   |   | (13 | ) |   |   | (2 | ) |   |   | (15 | ) |
| Investment in equity instruments which was accounted for as available for sale financial asset and now measured in fair value through profit and loss              |   |                                             | 3,469   |   |   |   | (3,469 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Investment in equity instruments which was accounted for as available for sale financial asset and now designated to fair value through other comprehensive income |   |                                             | -       |   |   |   | (122 | ) |   |   | 122 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                                                                                                                               |   |                                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance after impact of the change in accounting policy                                                                                                            |   |                                             | (80,030 | ) |   |   | 1,396 |   |   |   | 122 |   |   |   | 204,968 |   |   |   | 126,456 |   |   |   | (4,378 | ) |   |   | 122,078 |   |

|                                                                                                                                    |   | For the year ended December 31, 2011 |    |   | For the year ended December 31, 2010 |   |   | For the year ended December 31, 2009 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|--------|--------------------------------------|--------|--------|--------------------------------------|--------|
|                                                                                                                                    |   | $ thousands                          |    |
| Net income (loss) for the year attributable to shareholders of the Company as    previously reported                          |   |                                 | (17,021 | )      |                                 |   | 60,678 |                                 |   |   | (14,304 | ) |
| Impact of the change in accounting policy                                                                                               |   |                                 | 8,604   |   |                                 |   | 5,655  |                                 |   |   | 3,469 |   |
| Net income (loss) for the year attributable to shareholders of the Company    after impact of the change in accounting policy |   |                                 | (8,417  | )      |                                 |   | 66,333 |                                 |   |   | (10,835 | ) |
|                                                                                                                                    |   |                                 |    |   |                                 |   |   |                                 |   |   |   |   |
| Net income (loss) for the year attributable to non- controlling interests as previously reported                                        |   |                                 | (6,292  | )      |                                 |   | 44,768 |                                 |   |   | (15,091 | ) |
| Impact of the change in accounting policy                                                                                               |   |                                 | -       |   |                                 |   | -      |                                 |   |   | - |   |
| Net income (loss) for the year attributable to non- controlling interests after    impact of the change in accounting policy  |   |                                 | (6,292  | )      |                                 |   | 44,768 |                                 |   |   | (15,091 | ) |

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----

|                                                                                                                                              |   | For the year ended December 31, 2011 |    |   | For the year ended December 31, 2010 |   |   | For the year ended December 31, 2009 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|--------|--------------------------------------|--------|--------|--------------------------------------|--------|
|                                                                                                                                              |   | $ thousands                          |    |
| Comprehensive income (loss) for the year attributable to shareholders of the    Company as previously reported                          |   |                                 | (23,689 | )      |                                 |   | 69,100 |                                 |   |   | (13,381 | ) |
| Impact of the change in accounting policy                                                                                                         |   |                                 | 256     |   |                                 |   | (7     | )                                    |   |   | (13 | ) |
| Comprehensive income (loss) for the year attributable to shareholders of the    Company after impact of the change in accounting policy |   |                                 | (23,433 | )      |                                 |   | 69,093 |                                 |   |   | (13,394 | ) |
|                                                                                                                                              |   |                                 |    |   |                                 |   |   |                                 |   |   |   |   |
| Comprehensive income (loss) for the year attributable to non- controlling interests    as previously reported                           |   |                                 | (5,822  | )      |                                 |   | 44,401 |                                 |   |   | (15,002 | ) |
| Impact of the change in accounting policy                                                                                                         |   |                                 | 42      |   |                                 |   | (1     | )                                    |   |   | (2 | ) |
| Comprehensive income (loss) for the year attributable to non- controlling interests    after impact of the change in accounting policy  |   |                                 | (5,780  | )      |                                 |   | 44,400 |                                 |   |   | (15,004 | ) |

|   1.   | IFRS 10 Consolidated Financial Statements ("IFRS 10") - IFRS 10 replaces the requirements of IAS 27 Consolidated and Separate Financial Statements and the requirements of SIC-12 Consolidation – Special Purpose Entities with respect to the consolidation of financial statements, so that the requirements of IAS 27 will continue to be valid only for separate financial statements (IAS 27R (Revised 2011), Separate Financial Statements). IFRS 10 introduces a new single control model for determining whether an investor controls an investee and should therefore consolidate it, (this model is implemented with respect to all investees, including investees that currently fall into the requirements of SIC 12). According to the model, an investor controls an investee when it is (1) exposed, or has rights, to variable returns from its involvement with that investee, (2) has the ability to affect those returns through its power over that investee and (3) there is a link between the investor's power and the return. In addition, IFRS 10 states that 'De facto' power should be considered when assessing control. This means that the existence of De facto control could require consolidation. When assessing control, all substantive potential voting rights will be taken into account. The structure, reasons for existence and conditions of potential voting rights should be considered. IFRS 10 is applicable retrospectively for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided and that the entire consolidation suite is early adopted, meaning also the two additional standards that were issued– IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Involvement with Other Entities. |
|-----------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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----

|   2.   | IFRS 11 Joint Arrangements ("IFRS 11") - IFRS 11 replaces the requirements of IAS 31 Interests in Joint Ventures and amends part of the requirements in IAS 28 Investments in Associates. IFRS 11 is applicable retrospectively for annual periods beginning on or after January 1, 2013, but there are specific requirements for retrospective implementation in certain cases. Early adoption is permitted providing that disclosure is provided and that the entire consolidation suite is adopted at the same time, meaning also the two additional standards published – IFRS 10 consolidated financial statements and IFRS 12 disclosure of involvement with other entities. |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   3.   | IAS 28R, Investments in Associates and Joint Ventures ("IAS 28R") - IAS 28R replaces the requirements of IAS 28 Investments in Associates, as a result of the publication of IFRS 11, as mentioned above. IAS 28R states, among other things, that IFRS 5 applies on an investment, or a portion of an investment, in an associate or a joint venture, that meets the criteria to be classified as held for sale. Until the disposal of the portion of the investment that has been classified as held for sale, the equity method continues to be applied on the portion of the investment that has not been classified as held for sale. Early adoption is permitted providing that disclosure is provided and that the entire consolidation suite is adopted at the same time, meaning also the additional standards published – IFRS 10 consolidated financial statements, IFRS 11 Joint Arrangements and IFRS 12 disclosure of involvement with other entities. |
|-----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   4.   | IFRS 12 Disclosure of Involvement with Other Entities ("IFRS 12") - IFRS 12 contains extensive disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and unconsolidated structured entities. IFRS 12 is applicable for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that the entire consolidation suite is adopted at the same time, meaning also the two additional standards published – IFRS 10 consolidated financial statements and IFRS 11 joint arrangements. Nevertheless, it is permitted to voluntarily provide the additional disclosures required by IFRS 12 prior to its adoption without early adopting the other standards. The Company is evaluating the standards' adoption's expected effects on the financial statements. |
|-----------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | 1. | Composition |
|--------|----|-------------|

|                                                                               |   | December 31 |    |   | December 31 |   |
|------------------------------------------------------------------------------------|--------|-------------|---------|--------|-------------|--------|
|                                                                               |   | 2011        |    |   | 2010        |   |
|                                                                               |   | $ thousands |    |
| Carrying amount of the shares and loans in the statement of financial position (1) |   |        | 112,448 |   |        |   | 110,412 |   |
| Less - provision for impairment                                                    |   |        | 1,043   |   |        |   | 1,043 |   |
| Total                                                                              |   |        | 111,405 |   |        |   | 109,369 |   |
| (1) The carrying amount of the shares and loans includes:                          |   |        |    |   |        |   |   |   |
| Allocated excess of cost                                                           |   |        | 38,900  |   |        |   | 43,039 |   |
| Goodwill                                                                           |   |        | 20,569  |   |        |   | 20,996 |   |
|                                                                               |   |        | 59,469  |   |        |   | 64,035 |   |

----

----

|   | 2. | Summarized data of the financial statements of associates, unadjusted to the Group's rate of holdings (*) |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|                     |   | Current assets |    |   | Non-current assets |   |   | Total assets |   |   | Current liabilities |   |   | Non-current liabilities |   |   | Total liabilities |   |   | Equity attributable to shareholders of the company |   |   | Equity attributable to non-controlling interests |   |
|--------------------------|--------|----------------|---------|--------|--------------------|--------|--------|--------------|--------|--------|---------------------|--------|--------|-------------------------|--------|--------|-------------------|--------|--------|----------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|                     |   | $ thousands    |    |
| As of December 31, 2011  |   |           |    |   |               |   |   |         |   |   |                |   |   |                    |   |   |              |   |   |                                               |   |   |                                             |   |
| Given Imaging Ltd.       |   |           | 152,213 |   |               |   | 95,533 |         |   |   | 247,746             |   |   |                    | 37,138 |   |              |   | 6,689  |                                               |   |   | 43,827                                           |   |   |   | 203,628 |   |   |   | 291 |   |
| Pocared Diagnostics Ltd. |   |           | 9,861   |   |               |   | 820    |         |   |   | 10,681              |   |   |                    | 725    |   |              |   | -      |                                               |   |   | 725                                              |   |   |   | 9,956 |   |   |   | - |   |
| NuLens Ltd.              |   |           | 1,034   |   |               |   | 999    |         |   |   | 2,033               |   |   |                    | 734    |   |              |   | 936    |                                               |   |   | 1,670                                            |   |   |   | 363 |   |   |   | - |   |
| BrainsGate Ltd.          |   |           | 8,079   |   |               |   | 274    |         |   |   | 8,353               |   |   |                    | 2,290  |   |              |   | 621    |                                               |   |   | 2,911                                            |   |   |   | 5,442 |   |   |   | - |   |
| Other companies          |   |           | 13,601  |   |               |   | 1,814  |         |   |   | 15,415              |   |   |                    | 9,111  |   |              |   | 19,928 |                                               |   |   | 29,039                                           |   |   |   | (13,624 | ) |   |   | - |   |
|                     |   |           |    |   |               |   |   |         |   |   |                |   |   |                    |   |   |              |   |   |                                               |   |   |                                             |   |   |   |   |   |   |   |   |   |
| As of December 31, 2010  |   |           |    |   |               |   |   |         |   |   |                |   |   |                    |   |   |              |   |   |                                               |   |   |                                             |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd.       |   |           | 139,847 |   |               |   | 86,701 |         |   |   | 226,548             |   |   |                    | 36,146 |   |              |   | 8,046  |                                               |   |   | 44,192                                           |   |   |   | 182,256 |   |   |   | 100 |   |
| Pocared Diagnostics Ltd. |   |           | 2,052   |   |               |   | 517    |         |   |   | 2,569               |   |   |                    | 9,469  |   |              |   | -      |                                               |   |   | 9,469                                            |   |   |   | (6,900 | ) |   |   | - |   |
| NuLens Ltd.              |   |           | 3,085   |   |               |   | 1,232  |         |   |   | 4,317               |   |   |                    | 1,164  |   |              |   | 364    |                                               |   |   | 1,528                                            |   |   |   | 2,789 |   |   |   | - |   |
| BrainsGate Ltd.          |   |           | 7,782   |   |               |   | 373    |         |   |   | 8,155               |   |   |                    | 2,216  |   |              |   | 20     |                                               |   |   | 2,236                                            |   |   |   | 5,919 |   |   |   | - |   |
| Other companies          |   |           | 13,776  |   |               |   | 2,291  |         |   |   | 16,067              |   |   |                    | 10,151 |   |              |   | 14,425 |                                               |   |   | 24,576                                           |   |   |   | (8,509 | ) |   |   | - |   |

|                     |   | Revenues    |    |   | Gross profit |   |    | Operating profit (loss) |   |   | Profit (loss) from continuing operations |   |   | Profit (loss) for the year |    |   | Profit (loss) attributable to shareholders of the company |   |    | Profit (loss) attributable to non-controlling interests |   |
|--------------------------|--------|-------------|---------|--------|--------------|--------|---------|-------------------------|--------|--------|------------------------------------------|--------|--------|----------------------------|---------|--------|-----------------------------------------------------------|--------|---------|---------------------------------------------------------|--------|
|                     |   | $ thousands |    |
| 2011                     |   |        |    |   |         |   |    |                    |   |   |                                     |   |   |                       |    |   |                                                      |   |    |                                                    |   |
| Given Imaging Ltd.       |   |        | 177,955 |   |         |   | 136,506 |                    |   |   | 12,293                                   |   |   |                       | 7,632   |   |                                                      |   | 7,632   |                                                    |   |   | 7,441 |   |   |   | 191 |   |
| Pocared Diagnostics Ltd. |   |        | -       |   |         |   | -       |                    |   |   | (5,566                                   | )      |   |                       | (5,556  | )      |                                                      |   | (5,556  | )                                                       |   |   | (5,556 | ) |   |   | - |   |
| NuLens Ltd.              |   |        | -       |   |         |   | -       |                    |   |   | (4,409                                   | )      |   |                       | (5,030  | )      |                                                      |   | (5,030  | )                                                       |   |   | (5,030 | ) |   |   | - |   |
| BrainsGate Ltd.          |   |        | -       |   |         |   | -       |                    |   |   | (7,536                                   | )      |   |                       | (7,605  | )      |                                                      |   | (7,605  | )                                                       |   |   | (7,605 | ) |   |   | - |   |
| Other companies          |   |        | 26,062  |   |         |   | 12,261  |                    |   |   | (7,678                                   | )      |   |                       | (8,823  | )      |                                                      |   | (8,823  | )                                                       |   |   | (8,823 | ) |   |   | - |   |
|                     |   |        |    |   |         |   |    |                    |   |   |                                     |   |   |                       |    |   |                                                      |   |    |                                                    |   |   |   |   |   |   |   |   |
| 2010                     |   |        |    |   |         |   |    |                    |   |   |                                     |   |   |                       |    |   |                                                      |   |    |                                                    |   |   |   |   |   |   |   |   |
| Given Imaging Ltd.       |   |        | 157,809 |   |         |   | 120,149 |                    |   |   | 7,718                                    |   |   |                       | 12,789  |   |                                                      |   | 12,789  |                                                    |   |   | 13,079 |   |   |   | (290 | ) |
| Pocared Diagnostics Ltd. |   |        | -       |   |         |   | -       |                    |   |   | (3,929                                   | )      |   |                       | (3,679  | )      |                                                      |   | (3,679  | )                                                       |   |   | (3,679 | ) |   |   | - |   |
| NuLens Ltd.              |   |        | -       |   |         |   | -       |                    |   |   | (5,256                                   | )      |   |                       | (5,247  | )      |                                                      |   | (5,247  | )                                                       |   |   | (5,247 | ) |   |   | - |   |
| BrainsGate Ltd.          |   |        | -       |   |         |   | -       |                    |   |   | (9,263                                   | )      |   |                       | (9,485  | )      |                                                      |   | (9,485  | )                                                       |   |   | (9,485 | ) |   |   | - |   |
| Other companies          |   |        | 43,386  |   |         |   | 19,580  |                    |   |   | (25,652                                  | )      |   |                       | (27,009 | )      |                                                      |   | (27,009 | )                                                       |   |   | (27,009 | ) |   |   | - |   |
|                     |   |        |    |   |         |   |    |                    |   |   |                                     |   |   |                       |    |   |                                                      |   |    |                                                    |   |   |   |   |   |   |   |   |
| 2009                     |   |        |    |   |         |   |    |                    |   |   |                                     |   |   |                       |    |   |                                                      |   |    |                                                    |   |   |   |   |   |   |   |   |
| Given Imaging Ltd.       |   |        | 141,763 |   |         |   | 108,448 |                    |   |   | 10,688                                   |   |   |                       | 16,559  |   |                                                      |   | 16,559  |                                                    |   |   | 17,450 |   |   |   | (891 | ) |
| Pocared Diagnostics Ltd. |   |        | -       |   |         |   | -       |                    |   |   | (10,446                                  | )      |   |                       | (10,446 | )      |                                                      |   | (13,533 | )                                                       |   |   | (13,533 | ) |   |   | - |   |
| NuLens Ltd.              |   |        | -       |   |         |   | -       |                    |   |   | (4,035                                   | )      |   |                       | (3,996  | )      |                                                      |   | (3,996  | )                                                       |   |   | (3,996 | ) |   |   | - |   |
| BrainsGate Ltd.          |   |        | -       |   |         |   | -       |                    |   |   | (9,176                                   | )      |   |                       | (9,005  | )      |                                                      |   | (9,005  | )                                                       |   |   | (9,005 | ) |   |   | - |   |
| Other companies          |   |        | 85,708  |   |         |   | 45,057  |                    |   |   | (29,328                                  | )      |   |                       | (31,243 | )      |                                                      |   | (25,743 | )                                                       |   |   | (25,743 | ) |   |   | - |   |

|   | (*) | Condensed financial-statement data of associates having a functional currency other than the dollar were translated based on the relevant exchange rates (assets and liabilities at each reporting date are translated at the closing rate at each reporting date, income and expenses for all periods presented in the statement of income are translated at average exchange rates for all the presented periods). The information presented does not include excess cost and goodwill. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 3. | Information about goodwill in respect of the acquisition of investments in associates and information about the total impairment loss recorded in respect of investments in conformity with the Israeli Securities Regulations (Annual Financial Statements), 2010 |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                   |   | December 31                     |   |
|------------------------|--------|---------------------------------|--------|
|                   |   | 2011                            |   |   | 2010 |   |
|                   |   | Goodwill included in investment |   |   | Goodwill included in investment |   |
|                   |   | $ thousands                     |   |
| Given Imaging Ltd. (*) |   |                            | 20,569 |   |   |   | 20,996 |   |

|   | (*) | No impairments were recorded in respect of this investment. |
|--------|-----|-------------------------------------------------------------|

|   | 4. | Additional information about associates that are held directly by the Company in conformity with the Israeli Securities Regulations (Annual Financial Statements), 2010 |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                        | Country of    |   | Equity interestand voting |   |   | Amounts made available to the associate |   |   | Total amount invested in associate |   |   | Stock  |   |   | Fair     |    |
|---------------------------------------------|---------------|--------|---------------------------|--------|--------|-----------------------------------------|--------|--------|------------------------------------|--------|--------|--------|--------|--------|----------|---------|
|                                        | incorporation |   | rights (1)                |   |   | Loans                                   |   |   | Guarantees                         |   |   | (4)    |   |   | exchange |    |   | value |   |
|                                        |          |   | %                         |   |   | $ thousands                             |   |
| As of December 31, 2011:                    |          |   |                      |   |   |                                    |   |   |                               |   |   |   |   |   |     |    |   |   |   |   |
| Given Imaging Ltd. (2)                      | Israel        |   |                      | 22.34  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 104,090 |   |   |   | (5) |   |   |   | 164,972 | (6) |
| Aqwise – Wise Water Technologies Ltd. | Israel        |   |                      | 34.03  |   |                                    |   | 341    |                               |   |   | -      |   |   |     | 2,629   |   |   | unquoted |   |   | unquoted |   |
| NuLens Ltd.                                 | Israel        |   |                      | 34.72  |   |                                    |   | 1,042  |                               |   |   | -      |   |   |     | (724    | ) |   | unquoted |   |   | unquoted |   |
| BrainsGate Ltd.                             | Israel        |   |                      | 27.26  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 421     |   |   | unquoted |   |   | unquoted |   |
| Pocared Diagnostics Ltd. (7)                | Israel        |   |                      | 40.84  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 4,989   |   |   | unquoted |   |   | unquoted |   |
| PLYmedia Inc.                               | United States |   |                      | 27.96  |   |                                    |   | -      |                               |   |   | -      |   |   |     | -       |   |   | not listed |   |   | unquoted |   |
| Atlantium Technologies Inc.                 | United States |   |                      | 23.44  |   |                                    |   | -      |                               |   |   | -      |   |   |     | -       |   |   | unquoted |   |   | unquoted |   |
|                                        |          |   |                      |   |   |                                    |   |   |                               |   |   |   |   |   |     |    |   |   |   |   |   |   |   |   |   |
|                                        |          |   |                      |   |   |                                    |   | 1,383  |                               |   |   |   |   |   |     | 111,405 |   |   |   |   |   |   |   | 164,972 |   |
|                                        |          |   |                      |   |   |                                    |   |   |                               |   |   |   |   |   |     |    |   |   |   |   |   |   |   |   |   |
| As of December 31, 2010:                    |          |   |                      |   |   |                                    |   |   |                               |   |   |   |   |   |     |    |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd. (2)                      | Israel        |   |                      | 22.81  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 104,121 |   |   |   | (5) |   |   |   | 138,565 | (6) |
| Aqwise – Wise Water Technologies Ltd. | Israel        |   |                      | 34.03  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 2,837   |   |   | unquoted |   |   | unquoted |   |
| NuLens Ltd.                                 | Israel        |   |                      | 34.74  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 680     |   |   | unquoted |   |   | unquoted |   |
| BrainsGate Ltd.                             | Israel        |   |                      | 23.28  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 477     |   |   | unquoted |   |   | unquoted |   |
| Safend Ltd. (3)                             | Israel        |   |                      | 25.61  |   |                                    |   | -      |                               |   |   | -      |   |   |     | -       |   |   | unquoted |   |   | unquoted |   |
| Pocared Diagnostics Ltd. (7)                | Israel        |   |                      | 31.51  |   |                                    |   | 4,100  |                               |   |   | -      |   |   |     | 651     |   |   | unquoted |   |   | unquoted |   |
| PLYmedia Inc.                               | United States |   |                      | 27.55  |   |                                    |   | -      |                               |   |   | -      |   |   |     | -       |   |   | not listed |   |   | unquoted |   |
| Kyma Medical Technologies Ltd. (8)          | Israel        |   |                      | 27.32  |   |                                    |   | -      |                               |   |   | -      |   |   |     | 603     |   |   | unquoted |   |   | unquoted |   |
| Atlantium Technologies Inc.                 | United States |   |                      | 23.44  |   |                                    |   | -      |                               |   |   | -      |   |   |     | -       |   |   | unquoted |   |   | unquoted |   |
|                                        |          |   |                      |   |   |                                    |   |   |                               |   |   |   |   |   |     |    |   |   |   |   |   |   |   |   |   |
|                                        |          |   |                      |   |   |                                    |   | 4,100  |                               |   |   | -      |   |   |     | 109,369 |   |   |   |   |   |   |   | 138,565 |   |

|   | (1) | Reflects the Company's ownership interests in the ordinary shares and the preferred shares of the investee companies on an as-converted-basis, and does not take full dilution into account. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Elron's direct holding. As of December 31, 2011, Elron additionally holds 8.74% of Given Imaging Ltd. ("Given") through RDC, such that Elron's effective holding including RDC's holding is 26.72% (as of December 31, 2010, 27.28%). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Sold during 2011. See Note 3.C.1.e) below. |
|--------|-----|--------------------------------------------|

|   | (4) | The Company's investment is calculated based on the consolidated financial statements as the net aggregate amount attributable to the Company's shareholders of total assets less total liabilities, including goodwill, excess cost allocated and loans. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | (5) | Publicly traded in Israel (TASE) and on the NASDAQ in the United States. |
|--------|-----|--------------------------------------------------------------------------|

|   | (6) | Represents the consolidated value of Elron and RDC's investment in Given. |
|--------|-----|---------------------------------------------------------------------------|

|   | (7) | During 2011, the loan balance was converted into shares and a finance round was completed. As a result Elron's holding in Pocared Diagnostics Ltd. ("Pocared") increased to approximately 41%. For further details, see Note 3.C.1.a). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | In January 2011 the company became a subsidiary, see also Note 3.C.2.f). |
|--------|-----|--------------------------------------------------------------------------|

|   | b) | Information about the convertible securities of associates that are held directly by the Company (*) Certain of the Company's associates have issued warrants and/or share options to employees and others. The following data details the warrants' and share options' possible impact on Elron's holdings in these companies as of December 31, 2011: |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                 |   | Vesting period |   |   | Before exercise in share capital |   |   | After exercise in share capital |   |
|------------------------------------------------------|--------|----------------|--------|--------|----------------------------------|--------|--------|---------------------------------|--------|
|                                                 |   |           |   |   | %                                |   |   | %                               |   |
| Given Imaging Ltd. (1)                               |   | 2012-2015      |   |   |                             | 22.34  |   |                            |   | 18.72 |   |
| Aqwise – Wise Water Technologies Ltd. (2) |   | 2011-2020      |   |   |                             | 34.03  |   |                            |   | 29.95 |   |
| NuLens Ltd.(2)                                       |   | 2012-2021      |   |   |                             | 34.72  |   |                            |   | 29.84 |   |
| BrainsGate Ltd.                                      |   | 2012-2021      |   |   |                             | 27.26  |   |                            |   | 22.86 |   |
| Pocared Diagnostics Ltd.                             |   | 2011-2018      |   |   |                             | 40.84  |   |                            |   | 36.97 |   |
| PLYmedia Inc.                                        |   | 2012-2021      |   |   |                             | 27.96  |   |                            |   | 21.84 |   |
| Atlantium Technologies Inc.                          |   | 2012-2021      |   |   |                             | 23.44  |   |                            |   | 20.22 |   |

|   | (1) | Elron's direct holding. Elron's effective holding including RDC's holding after exercise is 22.38%. |
|--------|-----|-----------------------------------------------------------------------------------------------------|

|   | (2) | NuLens Ltd. ("NuLens") and Aqwise – Wise Water Technologies Ltd. ("Aqwise") have convertible loans which may be repaid or converted into shares if certain conditions are met. Since the amount of the shares issuable upon conversion is determined only at the time of actual conversion, these convertible loans were not taken into account in determining the holding rate after exercise. See SectionC.1.d below. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (*) | Not including companies under liquidation proceedings. |
|--------|-----|--------------------------------------------------------|

|   | c) | Dividend received or receivable from associates |
|--------|----|-------------------------------------------------|

|               |   | Year ended December 31, |
|--------------------|--------|-------------------------|
|               |   | 2011                    |   |   | 2010 |   |   | 2009 |
|               |   | $ thousands             |
| NetVision Ltd.     |   |                    | - |   |   |   | - |   |   |   | 4,442 | (1) |
| Given Imaging Ltd. |   |                    | - |   |   |   | - |   |   |   | 3,675 | (2) |
|               |   |                    |   |   |   |   |   |   |   |   |   |   |
|               |   |                    | - |   |   |   | - |   |   |   | 8,117 |   |

|   | (1) | For further information about the dividend received from NetVision Ltd. ("NetVision"), see C.1.j below. |
|--------|-----|---------------------------------------------------------------------------------------------------------|

|   | (2) | Amounts received by Elron only. For further information about the dividend distributed by Given and RDC's share in the dividend received, see C.1.i below. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | d) | Inclusion of the financial statements of associates accounted for under the equity method of accounting |
|--------|----|---------------------------------------------------------------------------------------------------------|

|   B. | Subsidiaries |
|-----------|--------------|

|   | 1. | Additional information about subsidiaries that are held directly by the Company |
|--------|----|---------------------------------------------------------------------------------|

|   | a) | Directly held subsidiaries (including through fully owned corporate companies) |
|--------|----|--------------------------------------------------------------------------------|

|                                        | Country of    |   | Equity interestof Group |          |   | Direct equity interestof the Company |   |   | Amounts made available to the subsidiary |   |   | Total amount invested in subsidiary |   | Stock      |   | Fair   |   |
|---------------------------------------------|---------------|--------|-------------------------|---------------|--------|--------------------------------------|--------|--------|------------------------------------------|--------|--------|-------------------------------------|--------|------------|--------|--------|--------|
|                                        | incorporation |   |                    | (1)  (2) |   |                                 |   | (1)    |                                     |   | Loans  |                                |   | Guarantees |   |   |   | (5) |   | exchange |   | Value (5) |   |
|                                        |          |   | %                       |          |   | $ thousands                          |   |   |                                     |   |   |
|                                        |          |   |                    |          |   |                                 |   |   |                                     |   |   |                                |   |       |   |   |   |   |   |   |   |   |   |
| As of December 31, 2011:                    |          |   |                    |          |   |                                 |   |   |                                     |   |   |                                |   |       |   |   |   |   |   |   |   |   |   |
| RDC Rafael Development Corporation Ltd. (3) | Israel        |   |                    | 50.1          |   |                                 |   | -      |                                     |   |   | 3,288                               |   |       |   | -      |   |   |   | 17,276 |   | unquoted |   |   | - |   |
| Starling Advanced Communications Ltd.       | Israel        |   |                    | 82.98         |   |                                 |   | 38.55  |                                     |   |   | 43,084                              |   |       |   | -      |   |   |   | 3,197 |   | Tel Aviv Stock Exchange |   |   | 1,754 |   |
| NaviTrio Ltd.                               | Israel        |   |                    | 80.00         |   |                                 |   | 80.00  |                                     |   |   | -                                   |   |       |   | -      |   |   |   | 796 |   | unquoted |   |   | - |   |
|                                        |          |   |                    |          |   |                                 |   |   |                                     |   |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As of December 31, 2010:                    |          |   |                    |          |   |                                 |   |   |                                     |   |   |                                |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RDC Rafael Development Corporation Ltd. (3) | Israel        |   |                    | 50.1          |   |                                 |   | -      |                                     |   |   | -                                   |   |       |   | -      |   |   |   | 21,136 |   | unquoted |   |   | - |   |
| Starling Advanced Communications Ltd.       | Israel        |   |                    | 68.05         |   |                                 |   | 31.61  |                                     |   |   | 25,573                              |   |       |   | -      |   |   |   | (2,339 | ) | Tel Aviv Stock Exchange |   |   | 2,884 |   |
| Wavion Inc. (4)                             | United States |   |                    | 66.96         |   |                                 |   | 66.96  |                                     |   |   | 2,000                               |   |       |   | -      |   |   |   | (2,353 | ) | unquoted |   |   | - |   |

|   | (1) | Reflects the Company's ownership interests in the ordinary shares and the preferred shares of the investee companies on an as-converted-basis, and does not take into account full dilution. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Includes holding through RDC, unadjusted to account for Elron's holding in RDC (see also Annex to the Financial Statements - Details relating to investments as of December 31, 2011). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Held through fully owned corporate company, DEP Holding Technology Ltd. |
|--------|-----|-------------------------------------------------------------------------|

|   | (4) | Sold during 2011. See Section C.2.c below. |
|--------|-----|--------------------------------------------|

|   | (5) | Elron's share in addition to RDC's share in Starling's equity, not including Elron's and RDC's share in the convertible debentures issued by Starling. For further details see Section C.2.a. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | b) | Wholly-owned corporate companies |
|--------|----|----------------------------------|

|                                  | Country of    |   | Equity interest |   |   | Direct equity interest |   |   | Total amount invested in |   | Stock    |
|---------------------------------------|---------------|--------|-----------------|--------|--------|------------------------|--------|--------|--------------------------|--------|----------|
|                                  | incorporation |   | of Group        |   |   | of the Company         |   |   | subsidiary               |   | exchange |
|                                  |          |   | %               |   |   | $ thousands            |   |   |
|                                  |          |   |            |   |   |                   |   |   |                     |   |     |
| As of December 31, 2011               |          |   |            |   |   |                   |   |   |                     |   |     |
| DEP Technology Holdings Ltd.          | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | 1,017 |   | unquoted |
| Elbit Ltd.                            | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | 74,812 |   | unquoted |
| Israel Commerce Community I.C.C. Ltd. | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (391 | ) | unquoted |
| Dealigence Technologies Ltd.          | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (16 | ) | unquoted |
| Mediagate Ltd. (in liquidation)       | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (860 | ) | unquoted |
|                                  |          |   |            |   |   |                   |   |   |                     |   |     |   |   |   |
| As of December 31, 2010               |          |   |            |   |   |                   |   |   |                     |   |     |   |   |   |
| DEP Technology Holdings Ltd.          | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | 23,839 |   | unquoted |
| Elbit Ltd.                            | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | 81,683 |   | unquoted |
| Israel Commerce Community I.C.C. Ltd. | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (391 | ) | unquoted |
| Dealigence Technologies Ltd.          | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (16 | ) | unquoted |
| Mediagate Ltd. (in liquidation)       | Israel        |   |            | 100    |   |                   |   | 100    |                     |   |     | (860 | ) | unquoted |

|   | c) | Information about convertible securities of subsidiaries that are held directly by the Company |
|--------|----|------------------------------------------------------------------------------------------------|

|   | The following data details the warrants' and share options' possible impact on Elron's holdings in these subsidiaries as of December 31, 2011: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|                                     |   | Vesting period |   |   | Before exercise in share capital |   |   | After exercise in share capital (1) |   |
|------------------------------------------|--------|----------------|--------|--------|----------------------------------|--------|--------|-------------------------------------|--------|
|                                     |   |           |   |   | %                                |   |   | %                                   |   |
| Starling Advanced Communications Ltd.(2) |   | 2012-2021      |   |   |                             | 60.81  | (*)    |                                |   | 59.29 | (*) |

|   |  (*) | The holding rate includes Elron's holding plus 50.1% of RDC's holding. |
|--------|-----------|------------------------------------------------------------------------|

|   | 2. | Dividend received or receivable from subsidiaries (including through corporate companies): |
|--------|----|--------------------------------------------------------------------------------------------|

|                             |   | Year ended December 31, |   |
|----------------------------------|--------|-------------------------|--------|
|                             |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|                             |   | $ thousands             |   |
|                             |   |                    |   |   |   |   |   |   |   |
| RDC (1)                          |   |                    | -      |   |   |   | 15,003 |   |   |   | - |   |
| Elbit Ltd. (2)                   |   |                    | 1,108  |   |   |   | 278 |   |   |   | 14,819 |   |
| DEP Technology Holdings Ltd. (3) |   |                    | 16,958 |   |   |   | - |   |   |   | - |   |
|                             |   |                    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                    | 18,066 |   |   |   | 15,281 |   |   |   | 14,819 |   |

----

----

|   | (1) | For further information about the dividend received from RDC, see Section C.2.d below. |
|--------|-----|----------------------------------------------------------------------------------------|

|   | (2) | On December 31, 2009, Elbit Ltd. ("Elbit") distributed a dividend to Elron in the amount of approximately $14,819, which was partly used to repay one of the capital notes issued by Elron to Elbit in the amount of approximately $12,000. On December 22, 2010, Elbit distributed an additional dividend to Elron in the amount of approximately $278 against an outstanding debt balance. On December 31, 2011, Elbit distributed an additional dividend to Elron in the amount of approximately $1,108 against an outstanding debt balance. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | On December 31, 2011, DEP distributed a dividend to Elron in the amount of approximately $16,958, against an outstanding debt balance, which mostly resulted from the dividend distributed by RDC and received by Elron, subsequent to the sale of Medingo. For additional details see Section C.2.d).below. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   C. | Significant changes in investments during the reporting period |
|-----------|----------------------------------------------------------------|

|   | 1. | Associates |
|--------|----|------------|

|   | a) | Pocared |
|--------|----|---------|

|   | Pocared, an Israeli company, is developing a real-time and automated system for infectious diseases diagnosis using optical technology. As of the reporting date, Elron holds approximately 41% of Pocared's outstanding shares and Pocared is accounted for under the equity method of accounting. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In September 2009, the shareholders of Pocared, including Elron, invested an aggregate amount of $2,200 in Pocared. Elron's share in this amount was approximately $1,093. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2009, the shareholders of Pocared, including Elron, invested an aggregate amount of approximately $3,600 in Pocared. Elron's share in this amount was approximately $1,500. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In June 2010, the shareholders of Pocared, including Elron, invested an aggregate amount of approximately $3,200 in Pocared. Elron's share in this amount was approximately $1,400. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2011 Pocared completed a financing round of approximately $5,800 in consideration for 9,586,777 Preferred F shares. Elron's share in this amount was approximately $2,600. In addition, convertible loans in the amount of approximately $9,200 were converted into 15,244,457 Preferred F shares. Elron's share in these loans was approximately $4,100 (see above). Pursuant to the loan agreement, the shareholders of Pocared, including Elron, had the option at their discretion to invest up to an additional approximately $11,200 in three additional financing rounds, pro rata to their holdings of Pocared. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In June and September 2011, the first two installments (out of the additional three installments) were completed in an aggregate amount of approximately $7,400 in consideration for 12,341,598 Preferred F shares. Elron's share in these installments is approximately $3,400. The fourth installment, in the amount of additional $3,400, is expected to be advanced during the second half of 2012. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In August 2011, Elron together with other shareholders of Pocared, purchased the holdings of another shareholder in Pocared, which then constituted approximately 5% of Pocared's outstanding shares, in consideration for approximately $2,000 (NIS 7,000 thousand). Elron's share in this amount is approximately $900. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Following completion of the financing round in January 2011, the transfer of two of the three additional installments in June and September 2011, the conversion of the loans, and the purchase of Pocared shares, Elron's holding in Pocared increased from approximately 32% to 41% of Pocared's outstanding share capital. After the fourth installment is advanced, Elron's holding in Pocared is not expected to change. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In February 2012, subsequent to the reporting date, the Company approved the grant of phantom options to purchase Pocared shares from the Company to the chairman of the board of directors and to another employee, representing approximately 1.4% of Pocared's outstanding share capital. See also Note 23.D.1. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Teledata |
|--------|----|----------|

|   | Teledata Networks Ltd. ("Teledata") provides access products and solutions for both traditional and Next Generation Networks, or NGN, to telecom operators and service providers. Elron held approximately 21% of Teledata's outstanding shares prior to its sale (see below). Teledata was accounted for under the equity method of accounting. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, Teledata received a guarantee from certain of its shareholders in the aggregate amount of $3,000. Elron's share in the guarantee was approximately $1,500. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2010, Teledata received a commitment to provide a guarantee from certain of its shareholders in the aggregate amount of $3,000. Elron's share in this guarantee was approximately $1,500. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Elron's share in Teledata's losses included its share in the aforementioned guarantees. |
|--------|-----------------------------------------------------------------------------------------|

|   | In April 2010, a definitive merger agreement was executed between Teledata, its principal shareholders, including the Company ("Major Shareholders") and Enablence Technologies Inc. (the "Acquirer" or "Enablence"), a foreign company publicly traded on the TSX Venture Exchange who manufactures and sells optical components and systems to a global customer base, for the sale, by way of merger, of all of the outstanding shares of Teledata to the Acquirer, the principal terms of which include, inter alia, the following terms: (i) upon completion of the transaction, consideration was received in the aggregate amount of $50,000, including $10,000 in cash, $10,000 payable in non-tradable debentures of the Acquirer and $30,000 payable in publicly tradable shares of the Acquirer, based on their price on the TSX Venture Exchange on the closing date of the transaction. Of this consideration, shares of the Acquirer equivalent to $5,000 (based on their price on the TSX Venture Exchange on the closing date of the transaction) were deposited in escrow for a period of up to 12 months to cover, mainly, possible indemnification which may become due to the Acquirer in connection with breaches, if any, of the merger agreement by any of the other parties thereto and possible future claims relating to Teledata, if any, (ii) upon completion of the transaction all outstanding shareholders' loans granted to Teledata by Elron (in the aggregate amount of approximately $800, and which are convertible into Teledata shares) were assigned to the Acquirer. The abovementioned consideration includes the consideration for such assignment, (iii) each of the major shareholders shall only be liable for part of the indemnification amounts that may become due to the Acquirer, each according to its share of the consideration, and will not be liable for any breaches of the merger agreement by any other Major Shareholders. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The liability of each Major Shareholder's liability for its representations and obligations towards the Acquirer will be limited to its share of the aggregate consideration, while its liability for representations and obligations relating to Teledata shall be limited (except in certain matters) to each Major Shareholder's share of the consideration held in escrow described above, (iv) any shares of the Acquirer received as part of the consideration were subject to a lock-up period of 6 to 12 months commencing from the closing date of the transaction, (v) on the closing date of the transaction, all shareholders' guarantees granted by the MajorSshareholders to Teledata, and all obligations of the Major Shareholders to grant shareholders guarantees or collaterals for loans to Teledata were cancelled. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On June 23, 2010 the transaction was completed. As a result, in respect of the transaction: |
|--------|---------------------------------------------------------------------------------------------|

|   | 1. | In accordance with Teledata's capital structure and the shareholders' rights to Teledata's capital, Elron received aggregate proceeds of approximately $23,200, including approximately $3,000 payable in cash, approximately $3,800 payable in debentures of the Acquirer (for further information regarding the impairment recognized in 2011 in respect with these debentures, see Note 8.C below) and approximately $16,400 payable in shares of the Acquirer based on their price on the TSX Venture Exchange on the closing date of the sale (of which shares of the Acquirer in an amount equivalent to approximately $2,300 were held in escrow, based on their share price on the TSX Venture Exchange on the closing date of the sale). |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Pursuant to the terms of the transaction, guarantees and obligations to grant guarantees which were granted in the past by Elron to Teledata in the aggregate amount of approximately $4,200 were cancelled. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Elron recorded a net gain in the second quarter of 2010 in the amount of approximately $22,364. The said gain is included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In accordance with the aforementioned, the consideration held in escrow was recognized as a financial asset. The consideration held in escrow is included under available for sale financial assets (as of December 31, 2010, it was classified under financial assets held for sale) in the statement of financial position (for additional information see Note 8.B). Accordingly, the aforementioned net gain includes recognition of the gain in respect of this element of the consideration. In addition, the net gain amount was calculated after the deduction of the discount element (the "Discount") in respect of the lock-up period that was on the Acquirer's shares. The Discount's fair value was estimated by the Company on the closing date of the transaction at approximately $5,000. The Discount was estimated based on the Option Pricing Model method and was determined on the closing date of the transaction at a rate of 30% for the shares that were not held in escrow, and 35% for the shares that were held in escrow. The difference between the Discount rate of shares held and not held in escrow derives from the difference in their respective lock-up periods. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The main parameters used in the said valuation at the closing date of the transaction are as follows: |
|--------|-------------------------------------------------------------------------------------------------------|

|   | The Valuation Model- PUT Option Analysis based on the Black and Scholes Option Pricing Model. |
|--------|-----------------------------------------------------------------------------------------------|

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

|   | For additional information about the shares received in the transaction, an impairment recognized in 2011 in respect of these shares, their classification under available for sale financial assets, and their value as of December 31, 2011, see Note 8. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Galil |
|--------|----|-------|

|   | Galil Medical Ltd. ("Galil") develops, manufactures and markets a cryotherapy platform of minimally invasive treatments for various clinical applications. Elron directly held approximately 12% of Galil's outstanding shares, and approximately 17% indirectly through RDC prior to its sale (see below). Galil was accounted for under the equity method of accounting. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In March 2010, pursuant to the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760 - 2000, the Company's Audit Committee and Board of Directors approved a transaction whereby the Company, together with RDC and DIC (who together held approximately 42% in Galil) and certain other shareholders of Galil (the "Sellers") sold all their respective holdings in Galil to certain other Galil shareholders (the "Acquirers") for an immediate payment in the aggregate amount of approximately $1,300 and for an additional contingent future payment, conditional upon certain future events occurring within 24 months from the consummation of the above transaction, which period ends in March 2012. The consideration was allocated between the Sellers proportionally to the number of Galil shares sold by each of them from among the total shares sold, irrespective of their class and liquidation preference. Accordingly, Elron's and RDC's portion in the immediate payment was approximately $400 and approximately $500, respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2010, subsequent to the receipt of all required approvals, the transaction was completed. As a result of the sale, in the second quarter of 2010, Elron recorded a gain (attributable to the Company's shareholders), included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net, in the amount of approximately $500 (a consolidated net gain of approximately $773). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | NuLens |
|--------|----|--------|

|   | NuLens is developing intra-ocular lenses, or IOLs, designed to provide accommodation for all distances. Elron holds approximately 35% of NuLens's outstanding shares. NuLens is accounted for under the equity method of accounting. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, NuLens completed a financing round of approximately $4,600 in consideration for 512,049 Preferred C1 shares. Elron's share in this amount was $2,000. The investment did not result in any material change to Elron's holdings of NuLens's outstanding shares. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In June 2011, Elron together with other shareholders of NuLens signed an agreement to invest an aggregate amount of $4,000 in NuLens in two payments, of which Elron's share is approximately $2,500. The first payment in the amount of approximately $2,400 took place immediately, of which Elron's share was approximately $1,000. The second installment was advanced in January 2012, subsequent to the reporting date, of which Elron's share was approximately $1,480. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e) | Safend |
|--------|----|--------|

|   | Safend Ltd. ("Safend") provides endpoint data protection solutions for corporations. Elron held approximately 25% of Safend's outstanding shares prior to its sale (see below). Safend was accounted for under the equity method of accounting. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In September 2011, all the shares of Safend were sold to Wave Systems Corp., a supplier of data protection solutions whose shares are publicly traded on the NASDAQ (the "Acquirer" or "Wave"), in consideration for approximately $12,800, consisting mostly of shares of the Acquirer, based on their 10-day average closing price on the NASDAQ prior to the closing date of the sale. Of this consideration, shares of the Acquirer equivalent to approximately $1,300 were deposited in escrow for a period of 12-18 months to cover, mainly, possible indemnification which may become due to the Acquirer in connection with breaches, if any, of the merger agreement by any of the other parties thereto and possible future claims relating to Safend, if any. Each of the major shareholders shall only be liable for part of the indemnification amounts that may become due to the Acquirer, each according to its share of the consideration, and will not be liable for any breaches of the merger agreement by any other major shareholders. Each major shareholder's liability for its representations and obligations towards the Acquirer will be limited to its share of the consideration. Shares of the Acquirer received as part of the consideration were registered for trading in January 2012, subsequent to the reporting date. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In accordance with Safend's capital structure and the shareholders' rights to Safend's capital, Elron received aggregate proceeds equivalent to approximately $2,700, in shares of the Acquirer based on their 10-day average closing price on the NASDAQ prior to the closing date of the sale (of which shares of the Acquirer in an amount equivalent to approximately $350 are held in escrow for a period of 12-18 months). Following the sale, Elron recorded a net gain in the third quarter of 2011 in the amount of approximately $2,300. The said gain is included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of the reporting date shares of the Acquirer received in the transaction are included under financial assets held for sale in the statement of financial position, see also Note 9. The shares' fair value was determined based on their quoted market price less the discount element (the "Discount"), in respect of the period during which the shares were restricted from being sold pursuant to the terms of the sale agreement. Accordingly, the aforementioned net gain was calculated after the deduction of the Discount. The Discount's fair value was estimated by the Company on the closing date of the transaction at approximately $350. As of December 31, 2011 the Discount's fair value was estimated at approximately $105. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | f) | Impliant |
|--------|----|----------|

|   | Impliant Inc. ("Impliant") developed spinal implants for motion preservation. Impliant was consolidated in Elron's consolidated financial statements from March 2008. In September 2009, Impliant completed a financing round, as a result of which Elron's holding in Impliant's outstanding shares decreased to 48%. As a result, and due to the loss of control over Impliant, Elron recognized a gain from changes in holdings in the fourth quarter of 2009 in the amount of approximately $459, included in gain from disposal of investee companies and changes in holdings, net in the statement of income, and the investment in Impliant began to be accounted for under the equity method of accounting, until the cessation of its operations and the transfer of its shares to a liquidator (see below). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During the second quarter of 2010, an impairment provision was recognized in respect of the investment in Impliant in the amount of approximately $1,600 due to the decision of Impliant's Board of Directors to cease its operations. Expenses in respect of this impairment were included under other expenses, net, in the statement of income. In November 2011, Elron and the other major shareholders of Impliant transferred their respective shares in Impliant to a liquidator. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | For further information regarding the de-consolidation of Impliant in 2009, see Note 3.C.2.i). |
|--------|------------------------------------------------------------------------------------------------|

|   | g) | BrainsGate |
|--------|----|------------|

|   | BrainsGate Ltd. ("BrainsGate") is developing a minimally invasive treatment platform for patients suffering from Central Nervous System diseases. As of the reporting date, Elron holds approximately 27% of BrainsGate's outstanding shares. BrainsGate is accounted for under the equity method of accounting. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In July 2011, BrainsGate signed an investment agreement with its major shareholders, including Elron ("the Major Shareholders"), whereby approximately $20,000 is to be advanced in three installments in consideration for Preferred D shares and warrants for Preferred D shares. The first installment in the amount of approximately $6,700 was advanced immediately in consideration for 8,743,525 preferred D shares and 2,185,884 warrants to Preferred D shares. Elron's share in this amount was approximately $2,400. Following the first installment, Elron's holding in BrainsGate increased from approximately 23% to 27% of BrainsGate's outstanding share capital. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2012, subsequent to the reporting date, the second installment in the amount of approximately $6,700 was advanced to BrainsGate in consideration for 8,743,525 preferred D shares and 2,185,884 warrants to Preferred D shares. Elron's share in this amount was approximately $2,400. Following the second installment, Elron's holding in BrainsGate did not materially change. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | According to the agreement, the major shareholders committed to advance the third installment in July 2012. Following the third installment in July 2012, Elron's holding in BrainsGate is expected to be approximately 30% of BrainsGate's outstanding shares and 27% on a fully diluted basis. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | h) | Notal |
|--------|----|-------|

|   | Notal Vision Inc. ("Notal") provides a system and services for remote monitoring from home of AMD patients at risk of vision loss, for the early detection of important visual changes. As of the reporting date, Elron holds approximately 20% of Notal's outstanding shares and approximately 15% on a fully diluted basis. Notal was accounted for under the equity method of accounting prior to the investment round that took place in the fourth quarter of 2010, following which the Company lost its significant influence in Notal and began to account for the investment as an available for sale financial asset (see below). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In October 2010, Notal signed an investment agreement with its major shareholders, including Elron, and new investors, whereby approximately $8,000 is to be advanced in two installments in consideration for Preferred C shares and warrants. In November 2010, the first installment in the amount of $5,000 was advanced in consideration for 3,952,832 Preferred C shares and 988,209 warrants to Preferred C shares. Elron's share in this amount was approximately $400. In addition, convertible loans in the amount of approximately $710 were converted into 236,457 Preferred B shares. Elron's share in these loans was approximately $700. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Following the first installment and the loans conversion, Elron's holding in Notal's outstanding shares decreased to approximately 22.63%. However, Elron's holding including voting rights immediately exercisable or convertible decreased to approximately 17.8%. As a result, as of the fourth quarter of 2010 Elron no longer retains significant influence over Notal. Accordingly, in the fourth quarter of 2010, a gain from the decrease in the Company's interest in Notal in the amount of approximately $1,610 was recognized and included  in gain from disposal of investee companies and changes in holdings, net in the statement of income. Notal began to be accounted for as an available-for-sale investment. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In October 2011, the second installment in the amount of $3,000 was advanced in consideration for 3,558,820 Preferred C shares and 889,705 warrants to Preferred C shares. Elron's share in this amount was approximately $300. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Following the second installment, the Company's holding in Notal's outstanding shares is approximately 20% and the Company's holding including voting rights immediately exercisable or convertible is approximately 15%. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | i) | Given |
|--------|----|-------|

|   | Given provides minimally invasive diagnostic products for visualization and detection of disorders of the gastrointestinal tract, and is traded on Nasdaq and the Tel-Aviv Stock Exchange (symbol: GIVN). Given is accounted for under the equity method of accounting. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In May 2007 and June 2008 Elron purchased, in a series of open market transactions and by way of tender offer, 717,366 and 1,462,640 ordinary shares of Given, respectively, for an aggregate purchase consideration of approximately $18,700 and $24,500, respectively. As a result of these transactions, Elron's direct and indirect ownership interest in Given's outstanding ordinary shares on the transaction dates increased to approximately 23% and 28%, respectively. As of December 31, 2011, Elron directly holds approximately 22% of Given (DIC and RDC hold approximately 16% and 9% of Given, respectively). Therefore, the Company together with DIC and RDC hold approximately 47% of the issued and outstanding shares of Given as of December 31, 2011. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The total excess of the said purchase prices over the Company's share in Given's total equity acquired amounted to approximately $16,100 and $18,500, respectively, and was allocated as follows: approximately $9,700 and $13,500, respectively, to intangible assets other than goodwill such as technology, customer relationships, and in process research and development ("IPR&D") and the residual amounts of approximately $6,400 and $5,000, respectively, to goodwill. The amounts allocated to intangible assets are amortized on a straight-line basis over their weighted average expected useful life of 10 and 15 years, respectively. Goodwill is not amortized and is subject to impairment assessment, and IPR&D will be amortized when the respective technology will be available for sale. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On March 11, 2009, Given distributed a special cash dividend of approximately $0.54 per share ($16,000 in the aggregate), of which Elron's and RDC's share was approximately $3,700 and $1,400, respectively. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | See Note 15 (1), (3) and (4) regarding a pledge placed on Given shares in favor of banks, which was subsequently removed during 2010, and regarding a binding agreement to receive a credit line from Silicon Valley Bank. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | j) | NetVision |
|--------|----|-----------|

|   | Elron held approximately 15% of NetVision's outstanding shares prior to its sale (see below). NetVision was accounted for under the equity method of accounting. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April and September 2009, NetVision distributed a special cash dividend of approximately NIS 3.08 and NIS 0.86 per share, respectively (approximately $0.73 and $0.23 per share, respectively), or NIS 90 million and NIS 26 million, respectively (approximately $21,200 and $7,000, respectively), in the aggregate. Elron's share in these dividends was approximately NIS 14.2 million and NIS 4 million, respectively (approximately $3,400 and $1,050, respectively). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On August 19, 2009, Elron signed an agreement with DIC and Clal Industries and Investments Ltd. ("CII"), according to which DIC and CII agreed to acquire from Elron its holdings in NetVision, in consideration of NIS 228.7 million (approximately $60,700 according to the exchange rate on October 29, 2009, the closing date of the transaction, see below). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | DIC and CII are both controlled by the IDB group and are related parties of Elron (as defined in IAS 24). Prior to the sale, DIC and CII held 31% and 25%, respectively, of NetVision's ordinary shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | On October 29, 2009, following the approval of the shareholders of each of Elron, DIC and CII, the abovementioned sale was completed. As a result, in the fourth quarter of 2009, Elron recorded a gain of approximately $21,900, which was included in the statement of income under line item gain from disposal of investee companies and changes in holdings, net. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | k) | 3DV |
|--------|----|-----|

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

|   | On June 2, 2009, 3DV completed the sale of substantially all of its assets to a third party and declared voluntary liquidation. During June and July 2009, 3DV repaid all of its outstanding loans and distributed some of the liquidation proceeds, in the aggregate amount of approximately $21,800, of which an amount of approximately $3,000 was deposited in escrow. Elron's and RDC's share in these payments (not including the amount in escrow) was approximately $3,100 and $3,700, respectively. As a result of the sale of 3DV's assets, the Company recorded a consolidated gain of approximately $6,090 on the sale date (in 2009) under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. During the third quarter of 2010, 3DV advanced the proceeds held in escrow to its shareholders, in the aggregate amount of approximately $3,000. Elron's and RDC's share in this payment amounted to approximately $400 and $600, respectively. Upon receipt of the proceeds held in escrow, the Company recorded a consolidated gain of approximately $1,034 under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | l) | ChipX |
|--------|----|-------|

|   | On November 9, 2009, ChipX Inc. ("ChipX") completed a merger with GigOptix Inc. "GigOptix"), a U.S. company traded over-the-counter in the United States, pursuant to which the former shareholders of ChipX, including Elron, received 40% of the shares of the merged company. Elron's share in the issued and outstanding shares of the merged company was approximately 8.7%. As a result of the merger, in the fourth quarter of 2009, Elron recorded a gain of approximately $1,548 in the statement of income under line item gain from disposal of investee companies and changes in holdings, net. The Company accounts for its investment in the merged company as an available-for-sale investment under other investments, as it does not have significant influence over the merged company. The investment in GigOptix is included in assets held for sale in the statement of financial position. For further information see Note 9. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Subsidiaries |
|--------|----|--------------|

|   | a) | Starling |
|--------|----|----------|

|   | Starling, a subsidiary, provided mobile SATCOM broadband connectivity solutions for aircraft and ground vehicles prior to selling its assets and ceasing the remainder of its operations (see below). As of the reporting date, Starling is traded on the Tel Aviv Stock Exchange (symbol: STLG), and Elron directly holds approximately 39% of Starling's outstanding shares, and approximately 44% indirectly through RDC. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During the months of May 2009 through August 2011, eight loan agreements were signed between Starling, Elron and RDC pursuant to which loans in the aggregate amount of $35,000 were advanced to Starling. Elron's share in this amount is approximately $16,300 (as for the consolidation of seven of the abovementioned loans, see below). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In September 2011, an agreement for the sale of Starling's assets was completed and came into effect according to which Starling sold its entire business in the field of non-military satellite communication systems (as defined in the agreement), including, inter alia, intellectual property assets, tangible assets (including inventory and equipment), and rights and undertakings pursuant to certain agreements, to an international company in the communications market (the "Purchaser"), in consideration for payment in the aggregate amount of approximately $13,100 (the "Transaction"). The first installment of approximately $8,600 was paid on the closing date. According to the agreement, the balance of the consideration shall be paid in three installments on the sixth, seventh and eight anniversaries of the Transaction closing or, at Starling's discretion, in one installment of approximately $3,400 42 months after the Transaction closing. Accordingly, Starling elected to receive the remaining proceeds 42 months after the Transaction closing. Simultaneously with the Transaction closing and as a condition thereto, an amount of approximately $4,400 out of the total purchase consideration was paid directly by the purchaser to the Chief Scientist at Israel's Ministry of Industry, Trade and Labor, in order to fully repay Starling's debt to the Chief Scientist. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As part of the terms of the asset sale agreement, the Company and RDC, Starling's main shareholders, undertook, severally, to guarantee to the purchaser, Starling's intellectual property representations and certain additional undertakings, including non-competition, in an aggregate amount not to exceed $2,700 for the duration of the periods set forth for Starling's undertakings on these matters. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Upon the Transaction closing, Starling commenced an orderly process of ceasing its remaining operations, following the decision of Starling's board of directors on August 25, 2011, to cease Starling's operations. Accordingly, Starling recognized a provision in respect of an inventory write-down in the amount of approximately $2,300 (in addition to an inventory write-down in the amount of approximately $950 recognized in the first half of 2011), which was charged to other expenses, net, in the statement of income, as Starling had not yet recognized sales income. In addition, Starling recognized expenses in respect of provisions for repairs and the termination of agreements with customers and suppliers in the amount of approximately $1,000, which were charged to research and development, net, in the statement of income. Starling's management is of the opinion that the provisions recorded in Starling's financial statements, are sufficient to cover any potential exposures that may arise as a result of the termination of agreements with customers. These provisions are included in the consolidated financial statements as of December 31, 2011. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As part of the Transaction, several ancillary agreements were completed, including an agreement to terminate Starling's collaboration with EMS Technologies, Inc. ("EMS"), according to which Starling received additional payment in the sum of approximately $1,400, for which the parties agreed to mutually waive all claims and demands relating to agreements between Starling and EMS, and an agreement to cancel the commercial engagement between Starling and Elbit Systems Land & ICT Ltd. ("Elbit Land"), whereby Starling refunded Elbit Land the advance it paid Starling in the sum of approximately $300, and paid Elbit Land an aggregate sum of approximately $400 for expenses Elbit Land incurred in respect of the project until its cancellation. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Furthermore, as part of the Transaction closing, and the conditions precedent for its execution, two know-how transfer and license agreements between Starling and Elbit Systems Ltd. ("Elbit Systems"), a related party of Starling, and between Starling, RDC and Rafael, were amended in order to enable Starling to transfer the areas of business defined in these licenses to the Purchaser upon the Transaction closing, in accordance with the terms of the asset sale agreement. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In addition, simultaneously with the Transaction closing, the Company and RDC completed the purchase of Elbit Systems' entire holding in Starling (approximately 16% of Starling's outstanding shares), pro rata between them, in consideration of an aggregate sum of approximately $128 and approximately $147, respectively. Following the purchase, the Company's holding (including indirectly through RDC) in Starling increased from approximately 67% to approximately 83% (its direct holding increased from approximately 31% to approximately 39%, and RDC's direct holding increased from approximately 36% to approximately 44%). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The assets and liabilities, capital reserves from translation differences in the consolidated statements of financial position as of the Transaction date and the consolidated gain accrued were as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                   |   | Carrying amount as of Transaction date |   |
|--------------------------------------------------------|--------|----------------------------------------|--------|
|                                                   |   | $ thousands                            |   |
|                                                   |   |                                   |   |
| Other accounts receivables                             |   |                                   | 57     |   |
| Inventories                                            |   |                                   | 1,147  |   |
| Property, plant and equipment, net                     |   |                                   | 548    |   |
| Intangible assets                                      |   |                                   | 82     |   |
| Other long-term receivables                            |   |                                   | 77     |   |
|                                                   |   |                                   | 1,911  |   |
|                                                   |   |                                   |   |   |
| Capital reserves from translation differences          |   |                                   | (1,200 | ) |
|                                                   |   |                                   |   |   |
| Decrease in net assets, as a result of the Transaction |   |                                   | 711    |   |
| Sale consideration (1)                                 |   |                                   | 10,313 |   |
|                                                   |   |                                   |   |   |
| Total consolidated gain from business sale before tax  |   |                                   | 9,602  |   |

| (1) Sale Consideration                                                                                         |   |        |   |
|----------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
|                                                                                                           |   | $ thousands |   |
|                                                                                                           |   |        |   |
| Cash received                                                                                                  |   |        | 8,663  |   |
| Consideration to be received 42 months after the Transaction closing (included in other long-term receivables) |   |        | 2,566  |   |
| Less  transaction costs                                                                              |   |        | (916   | ) |
|                                                                                                           |   |        |   |   |
|                                                                                                           |   |        | 10,313 |   |

----

----

| Aggregate cash flows received by the Group as a result of the sale:                                    |   |        |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------|--------|
|                                                                                                   |   | $ thousands |   |
|                                                                                                   |   |        |   |
| Cash received less transaction costs paid in cash                                                      |   |        | 8,201  |   |
| Less: full repayment of Starling's debt to the Chief Scientist Officer, paid directly by the purchaser |   |        | (4,435 | ) |
|                                                                                                   |   |        |   |   |
| Net cash                                                                                               |   |        | 3,766  |   |

|   | As a result of the Transaction, Elron recognized a net gain (attributable to the Company's shareholders) in 2011 in the amount of approximately $7,351 (a consolidated net gain of approximately $9,602 was recorded under line item gain from disposal of investee companies and changes in holdings, net in the statement of income). This gain was offset by an inventory write-down loss and expenses in respect of provisions for repairs and the termination of agreements with customers and suppliers following the decision of Starling's board of directors to cease Starling's operations, as aforementioned, so that the Transaction's impact on the net gain (attributable to the Company's shareholders) amounted to approximately $4,700. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In order to enable Starling to execute the Transaction and to fully and timely settle all of its commitments, including its commitments to the holders of the Series A debentures it issued on the Tel Aviv Stock Exchange in June 2007 (the "Debentures"), on the closing date of the Transaction, the Company and RDC made available to Starling a credit facility in an aggregate amount of $11,000 on the terms determined by the parties. In addition, the repayment and interest terms of the seven loans that existed as of the closing date of the Transaction in the aggregate amount of $35,500 (principal and accrued interest) were amended, such that they were consolidated under a single loan agreement (the "Loan Consolidation Agreement"), under which it was determined, inter alia, that the loan balance will be repaid only when Starling achieves a cash balance of at least $50,000, and in any event not prior to May 28, 2013, which is the latest repayment date according to the terms of the existing loan agreements. In addition, the Loan Consolidation Agreement decreased the interest rate (as compared with the existing loan agreements), such that the debt balance shall bear interest at a rate equal to the interest rate on bonds issued by the Unites States, with the same principal repayment and interest terms. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2011, Elron and RDC advanced to Starling $4,500 out of the credit facility. Elron's share in this amount was approximately $2,100. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2011, Elron and RDC advanced to Starling $900 out of the credit facility. Elron's share in this amount was approximately $418. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | Following the Transaction closing, on September 23, 2011, the Debenture holders approved the full prepayment of the Debentures. The Debentures were convertible, Israeli CPI linked, and bore an annual 6% interest. Elron and RDC held 26,453,578 out of a total of 42,364,000 Debentures, representing approximately 62% of the Debentures. In June 2010 and June 2011, Starling paid the first and second (of four) principal and interest payments in the amounts of approximately $3,100 and $3,600, respectively. (For additional information regarding the Debenture terms, see Note 15(6). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In November 2011, Starling fully prepaid the Debentures (in the amount of approximately $6,900), such that each holder of par value NIS 1 of the Debentures was paid an amount equal to the par value of the Debentures as of the prepayment date (that is, principal, accrued interest and linkage up to the prepayment date). Elron's and RDC's share in the prepayment was approximately $2,750 and approximately $1,550, respectively. It should be noted that the Debentures held by the Company and RDC, and the Debentures held by the Clal Finance Ltd. Group, a company controlled by indirect controlling shareholders of the Company, were prepaid according to the same terms as those which applied to the rest of the Debenture holders (see also Note 15(6)). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2011, Elron and RDC approached Starling's shareholders with a full tender offer to purchase all the shares held by them. The tender offer was not successful. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In February 2012, subsequent to the reporting date, Elron and RDC and Starling signed a merger agreement with Starling ("the Agreement") according to which a wholly owned subsidiary of Elron and RDC will be merged with and into Starling. According to the Agreement, an Israeli private company, wholly owned by Elron and RDC, which was founded shortly before the agreement was signed and which has no business activity, will be merged with and into Starling, in accordance with the eighth section of the Israeli companies law. The registered shareholders of Starling's shares on the record date, apart from Elron and RDC, will transfer their Starling shares to Elron and RDC in consideration for NIS0.87 (approximately $0.23) for each ordinary share (the "Merger Consideration"). Upon completion of the merger, Starling's shares will be delisted from trading on the TASE and Starling will become a private company held 46.45% and 53.55% by Elron and RDC, respectively. The Merger Consideration is expected to amount to approximately NIS1,600 (approximately $420) which will be paid by Elron and RDC in proportion to each party's respective holdings in Starling post-merger. The completion of the merger is subject to the fulfillment of various conditions precedent including, inter alia, receipt of approval of the shareholders of Starling expected to convene in April 2012 and receipt of other approvals required by law. There is no assurance as to the completion of the merger transaction and the timing thereof. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Medingo |
|--------|----|---------|

|   | Medingo Ltd. ("Medingo") is engaged in the development of an insulin micro-pump for people with diabetes. In July 2009, Medingo received FDA clearance to market the insulin micro-pump in the U.S. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Prior to its sale (see below) Elron held approximately 92% of Medingo's outstanding shares, including approximately 84% held by RDC. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, the shareholders of Medingo, including Elron and RDC, agreed to extend an investment in the aggregate amount of $5,500 to Medingo, of which Elron's and RDC's share was approximately $500 and $4,600, respectively. During the first quarter of 2010, a payment in respect of the investment in the amount of $3,500 was advanced, of which Elron's and RDC's share was approximately $300 and $2,900, respectively. During the second quarter of 2010, an additional payment in the amount of $1,500 was advanced, of which Elron's and RDC's share was approximately $130 and $1,300, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | On April 13, 2010, a definitive sale agreement was executed for the acquisition of all of Medingo's shares by F. Hoffman-La Roche Ltd. (the "Acquirer"), the principal terms of which include, inter alia, the following terms: (i) upon completion of the transaction, the selling shareholders received consideration in the aggregate amount of $160,000, subject to certain adjustments, of which an amount of $29,000 is held in escrow for a period of up to 24 months to cover mainly potential indemnification payments which may be due from the selling shareholders in connection with breaches, if any, of the sale agreement and certain potential future claims relating to Medingo, if any, (ii) the selling shareholders will receive gradual payments of additional contingent consideration of up to $40,000 conditional upon Medingo achieving, gradually, over a certain period, certain operational milestones including, inter alia, the establishment of a production line with certain operational characteristics, ("Contingent Consideration"), (iii) Elron's and RDC's maximum potential indemnification obligations under the sale agreement are limited to approximately 110% of their respective parts of the total consideration amount, except - with respect to each of them separately - in case of fraud or willful misconduct by it. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On May 28, 2010, the sale was completed. As a result, in respect of the aforementioned sale: |
|--------|----------------------------------------------------------------------------------------------|

|   | 1. | In accordance with Medingo's capital structure and the shareholders' rights to Medingo's capital, Elron and RDC received approximately $13,700 and approximately $93,500, respectively, upon completion of the transaction. During the third quarter of 2010, Elron and RDC additionally received, in respect of adjustments to the initial consideration, approximately $200 and approximately $1,500, respectively, from a short-term deposit held in escrow, and may receive in the future additional amounts of up to approximately $2,700 and up to approximately $20,000, respectively, from the amount held in escrow in connection with the transaction for a period of 24 months, and up to approximately $3,000 and up to approximately $29,200, respectively, out of the Contingent Consideration. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Elron recorded a net gain (attributable to the Company's shareholders) in the second quarter of 2010 of approximately $70,800 (a consolidated net gain of approximately $124,700). An additional net gain (attributable to the Company's shareholders), currently estimated at an aggregate amount of up to approximately $13,900 (a consolidated net gain of up to approximately $24,900) may be recorded at later stages, taking into consideration certain future events which affect the amounts Elron and RDC may receive from the Contingent Consideration. The net gain amounts include Elron's share of the net gain recorded by RDC in respect of this sale. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In accordance with the aforementioned, the consideration held in escrow was recognized as a financial asset, and accordingly, the aforementioned net gain includes recognition of the gain in respect of this element of the consideration. The consideration held in escrow was included under other long-term receivables in the statement of financial position as of December 31, 2010 (see also Note 10). This net gain amount does not include recognition of the contingent consideration element, as in management's estimation, in light of the significant uncertainty as to the achievement of the aforementioned milestones and the timing thereof, the fair value measurement of this element cannot be reliably estimated, for the reason, among others, that the Company does not have control over Medingo's success in meeting the aforementioned milestones, which is under the control of the Acquirer and is dependent upon additional factors, and also for the reason that pursuant to the sale agreement, the Company does not at this stage have access to information which would enable it to establish a reliable range of reasonable fair value estimates. The Company examines and shall examine at every financial report date whether there is any change in the circumstances or in the information to which Elron has access, which would enable the Company to reliably measure the cash receivables' value in respect of the Contingent Consideration. The gain recognized as aforementioned is presented under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income for 2010. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Presented below is a breakdown of the consideration and cash flows resulting from the sale: |
|--------|---------------------------------------------------------------------------------------------|

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

|   | For further details regarding the de-consolidation of Medingo, see Note 3.C.2.i). |
|--------|-----------------------------------------------------------------------------------|

|   | Pursuant to the sale agreement, on March 31, 2011, the Company received a report from the Acquirer according to which, at that stage: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | There are certain operational risks, outlined in the said report from the Acquirer, which may lead to delays or prevent the achievement of the milestones, including inter alia, due to the unsuitability of the required operational characteristics. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | It can reasonably be assumed that Medingo is expected to achieve some of the said operational milestones. However, there are operational risks as detailed in paragraph 1 above. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 3. | It is not possible to provide information as to the possibility of the fourth milestone being achieved. |
|--------|----|---------------------------------------------------------------------------------------------------------|

|   | On September, 2011, the Company received an additional report from the Acquirer according to which no material changes had occurred since the aforementioned report (similar to the reports received on June 30, 2011). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company considered the aforementioned information and the combination of circumstances following the said reports from the Acquirer, and in management's estimation, at this stage, it is unable to estimate and to substantiate reliable probabilities of achieving the relevant milestones. Since Medingo's achievement of the abovementioned operational milestones is not under the control of the Company, but rather under the control of the Acquirer, and is dependent upon additional factors, the Company has no access, at this stage, to sufficient information to enable the substantiation of the range of reasonable fair value estimates. Therefore, as of the reporting date, it is still not possible to reliably estimate the fair value of this element, and a gain has not yet been recognized in respect of the Contingent Consideration. Furthermore, there is no certainty that such gain will be recorded in the future. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The achievement of the portion of the milestones in respect of which certain information was received will entitle Elron to an additional consideration of up to $2,600, and will entitle RDC to an additional consideration of up to $25,300, out of the total Contingent Consideration. A net gain (attributable to the Company's shareholders) in the aggregate amount of up to approximately $12,000 (a consolidated net gain of up to approximately $21,500) may be recorded at later stages in respect of these milestones. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The achievement of the last milestone in respect of which no information was received will entitle Elron to an additional consideration of up to $400, and will entitle RDC to an additional consideration of up to $4,100, out of the total Contingent Consideration. A net gain (attributable to the Company's shareholders) in the aggregate amount of up to approximately $2,000 (a consolidated net gain of up to approximately $3,000) may be recorded at later stages in respect of this milestone. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Wavion |
|--------|----|--------|

|   | Wavion Inc. ("Wavion"), provides outdoor Wi-Fi base station solutions which provide increased coverage and capacity, enhanced penetration, and immunity to interference as compared with conventional Wi-Fi access points. Prior to its sale (see below), Elron directly held approximately 67% of Wavion's outstanding shares. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | In accordance with IFRS 3, "Business Combinations" and IAS 38, "Intangible Assets", at the date of initial consolidation of Wavion, a PPA was performed by Elron's management. According to the PPA an amount of $6,723 was allocated to technology. The excess of Elron's portion in the fair value of its interests in Wavion's equity held prior to consolidation over their reported amounts amounted to approximately $3,000 and was recorded to shareholders' equity as a revaluation reserve. The revaluation reserve was amortized over a period of 5 years against retained earnings (the estimated useful life of the assets acquired). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | During 2010, a provision was made in respect of the impairment of such technology in the amount of approximately $2,421, as a result of a decline in its fair value. In addition, as a result of the obsolescence of this technology, its estimated useful life was shortened from 3 years to 1.5 years. Concurrently, a pro-rata portion of the revaluation reserve from consolidation of a subsidiary was amortized against accumulated deficit and the amortization period was shortened as well. The expense in respect of this impairment was included under other expenses, net, in the statement of income for 2010. In calculating the impairment, the amount of the recoverable value of the technology is its value in use, which was calculated at a 26% discount rate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, Elron together with another shareholder of Wavion, invested an aggregate amount of $1,600 in Wavion, of which Elron's share was approximately $1,400. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2010, Elron alone invested an additional amount of $2,000 in Wavion. The investment did not result in any material change to Elron's holdings of Wavion's outstanding shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In March 2011, Elron together with an additional shareholder of Wavion invested an aggregate amount of $1,400 in Wavion, of which Elron's share was approximately $900. The investment did not result in any material change to Elron's holdings of Wavion's outstanding shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2011, an agreement to sell all of the shares of Wavion to Alvarion Ltd. a NASDAQ-traded company ("Alvarion") was signed ("The Transaction"), including, among others, the following terms: (i) The Transaction was executed by way of merger, upon completion of which Wavion was sold to Alvarion in consideration of aggregate proceeds of $26,500, subject to certain adjustments, of which $3,000 was deposited in escrow for a period of 15 months (mainly to cover potential indemnities in connection with breaches on Wavion's part, if any, of the Transaction agreement, that in such case may become payable by the recipients of the Transaction proceeds), and in consideration of additional proceeds of up to $3,750, contingent upon Wavion achieving a certain revenue milestone in the fourth quarter of 2011 (the "Contingent Consideration"); (ii) Alvarion will be entitled to certain indemnities in connection with the Transaction, as is customary in transactions of this type, from the recipients of the Transaction proceeds (without joint liability among them) in amounts not exceeding in the aggregate the Transaction proceeds, except in the case of fraud or willful misconduct. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Upon completion of the Transaction, Elron received aggregate proceeds in the amount of approximately $16,200, approximately $1,900 of which was deposited in escrow. In addition, based on Alvarion's report to the Company subsequent to the reporting date on Wavion's revenues in the fourth quarter of 2011, the Company is expected to receive additional proceeds of approximately $1,272 during the second quarter of 2012 in respect of the Contingent Consideration. In addition, the report received from Alvarion stated that the details regarding revenues are yet to be reviewed by Alvarion's auditors. Therefore, the amount of contingent consideration is not final and may change after the results of this audit. There is no assurance that the additional consideration in this amount will be paid. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Accordingly, the proceeds in escrow were recognized as financial asset under line item other long term receivables and the additional proceeds that may be received were recognized as financial asset in line item other accounts receivable. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In respect of the sale, the Company recorded in 2011 a net gain of approximately $21,400, presented under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. The said gain includes consideration held in escrow and contingent consideration, since the Company is able to estimate the fair value of these components reliably. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Presented below is a breakdown of the consideration and cash flows resulting from the sale: |
|--------|---------------------------------------------------------------------------------------------|

| Sale consideration:                                                            |   |        |   |
|--------------------------------------------------------------------------------|--------|-------------|--------|
|                                                                           |   | $ thousands |   |
|                                                                           |   |        |   |
| Cash received                                                                  |   |        | 14,275 |   |
| Long-term escrow deposit                                                       |   |        | 1900   |   |
| Contingent consideration recognized as financial asset                         |   |        | 1,272  |   |
| Less: transaction costs (*)                                                    |   |        | 208    |   |
|                                                                           |   |        | 17,239 |   |
|                                                                           |   |        |   |   |
|                                                                           |   |        |   |   |
| (*) Not yet paid.                                                              |   |        |   |   |
|                                                                           |   |        |   |   |
| Aggregate cash flows received by the Group  as a result of the sale: |   |        |   |   |
|                                                                           |   | $ thousands |   |
|                                                                           |   |        |   |   |
| Cash received less transaction costs paid in cash                              |   |        | 14,275 |   |
| Less: cash and cash equivalents in subsidiary as of sale date                  |   |        | 1,136  |   |
|                                                                           |   |        |   |   |
| Net cash resulted from the sale                                                |   |        | 13,139 |   |

|   | d) | RDC |
|--------|----|-----|

|   | RDC is a holding company consolidated by Elron. Elron holds 50.1% of RDC's outstanding shares, through DEP Technology Holdings Ltd. ("DEP"), a subsidiary fully owned by Elron. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | RDC establishes and develops projects and companies that commercially exploit technologies which were developed by Rafael for military uses. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2007, Elron, DEP, RDC and Rafael signed an agreement amending the existing agreement between the parties pertaining to the rights granted to RDC to commercialize certain technologies of Rafael (the "Addendum"). The Addendum, which came into effect on January 1, 2008, and which was subsequently approved by the court, settled a claim filed by Rafael in September 2006 against RDC and DEP. Pursuant to the Addendum, RDC's rights to commercialize certain technologies of Rafael will continue without time restrictions. Pursuant to the terms of the Addendum, Elron made a one-time investment in RDC of $4,000 and is committed to make further investments of $750 in RDC for each company established by RDC based on Rafael's technologies. The Addendum settles all claims between Rafael and RDC and DEP as well as resolves other issues with the end of facilitating cooperation between the parties. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In 2008, RDC established two new companies, each of which is based on Rafael's technologies following which and in accordance with the terms of the Addendum, Elron invested an additional $1,500 in RDC. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The excess of the $5,500 invested in RDC in respect of Elron's investment in RDC's equity in the amount of approximately $2,700 was allocated to the agreement with Rafael as an intangible asset with indefinite useful life, and accordingly is not subject to amortization, but rather is reviewed for impairment at least annually or more frequently if indicators of impairment exist. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Intangible assets, net, include an amount of approximately $3,053 in respect of this agreement (see Note 12). |
|--------|---------------------------------------------------------------------------------------------------------------|

|   | In December 2009, RDC signed a loan agreement with Elron and Rafael in the aggregate amount of $15,000, of which Elron's share was approximately $7,500. In January 2010, a payment in respect of the loan in the amount of $7,500 was advanced to RDC, of which Elron's share was approximately $3,750. During the second quarter of 2010, payments in the amount of $4,500 were advanced to RDC, of which Elron's share was approximately $2,250. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In June 2010, RDC's entire debt in respect of loans granted to it by Bank Mizrahi Tefahot Ltd. and by its shareholders (Elron and Rafael) was prepaid. For additional information, see Note 15 (1) below. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On August 16, 2010, RDC distributed a special cash dividend in the aggregate amount of approximately $30,000. Elron's share in such dividend, through its corporate company DEP, amounted to approximately $15,000. The balance of the dividend amount was distributed to Rafael. Rafael's share in the said dividend in the amount of $14,997 was recorded in the statement of changes in equity. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In May 2011, RDC signed a loan agreement with Elron and Rafael in the aggregate amount of up to $10,000, of which Elron's share is $5,000. A payment in respect of the loan in the amount of $2,000 was advanced to RDC immediately, of which Elron's share was $1,000. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In October 2011, an additional amount of $4,500 in respect of this loan was advanced to RDC, of which Elron's share was $2,250. |
|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | e) | Sela |
|--------|----|------|

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

|   |   | On September 24, 2009, Camtek Ltd. ("Camtek", an Israeli company, publicly traded on Nasdaq and the Tel-Aviv Stock Exchange), acquired the entire share capital of Sela from Elron, RDC and Sela's other shareholders. As consideration for the shares, Camtek will pay Sela's selling shareholders contingent future payments in the aggregate amount of up to $9,500, depending on Sela's future revenues, of which Elron's and RDC's portions are estimated to be up to $1,750 and $4,500, respectively. On the date of the sale, the Company recognized a consolidated gain of approximately $1,115. As of December 31, 2011, Elron and RDC received approximately $80 and $207, respectively, on account of such future payments. During 2010, Elron and RDC recognized a gain in the amount of approximately $276 and $712, respectively, under line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | f) | Kyma |
|--------|----|------|

|   | Kyma Medical Technologies Ltd. ("Kyma") is developing a remote patient monitoring (RPM) solution for Congestive Heart Failure (CHF) patients. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | In September 2010, Elron and Kyma signed an investment agreement according to which Elron invested $1,000 in Kyma in consideration for 65,738 Preferred B shares. Following this transaction, Elron held approximately 27% of Kyma's outstanding shares, and accordingly, Kyma was accounted for under the equity method of accounting. Pursuant to the investment agreement, Elron was entitled, as of January 1, 2011, to invest an additional $4,000 in consideration for 262,953 Preferred B shares which would entitle Elron, among other things, to an additional approximately 38% of Kyma's outstanding shares. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2011, Elron exercised this right, and invested an additional $4,000 in Kyma. Following this investment, Elron's holding in Kyma's outstanding shares increased to approximately 65%. As a result, Kyma became a consolidated company and the Company recognized a $407 gain resulting from the revaluation to fair value of the shares of Kyma held by it prior to obtaining control (a fair value of $1,000 less the prior carrying value of $593). This gain was recognized in line item gain from disposal of investee companies and changes in holdings, net, in the statement of income. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The impact on the assets and liabilities in the Company's consolidated statement of financial as of the date of initial consolidation of Kyma's financial statements was as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                          |   | Carrying amount in Kyma's financial statements at the date of initial consolidation |   |   | Adjustment to fair value |   |   | Values recognized upon initial consolidation |   |
|-----------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|--------|--------------------------|--------|--------|----------------------------------------------|--------|
|                                          |   | $ thousands                                                                         |   |
|                                          |   |                                                                                |   |   |                     |   |   |                                         |   |
| Cash and cash equivalents                     |   |                                                                                | 4,668  |   |                     |   | -      |                                         |   |   | 4,668 |   |
| Restricted cash                               |   |                                                                                | 14     |   |                     |   | -      |                                         |   |   | 14 |   |
| Other account receivables                     |   |                                                                                | 328    |   |                     |   | -      |                                         |   |   | 328 |   |
| Other long-term receivables                   |   |                                                                                | 16     |   |                     |   | -      |                                         |   |   | 16 |   |
| Property, plant and equipment, net            |   |                                                                                | 50     |   |                     |   | -      |                                         |   |   | 50 |   |
| Intangible assets                             |   |                                                                                | -      |   |                     |   | 1,224  |                                         |   |   | 1,224 |   |
| Trade payables                                |   |                                                                                | (23    | )      |                     |   | -      |                                         |   |   | (23 | ) |
| Other account payables                        |   |                                                                                | (136   | )      |                     |   | -      |                                         |   |   | (136 | ) |
| Royalty bearing government grants             |   |                                                                                | (414   | )      |                     |   | -      |                                         |   |   | (414 | ) |
| Non-controlling interests                     |   |                                                                                | -      |   |                     |   | (727   | )                                            |   |   | (727 | ) |
|                                          |   |                                                                                |   |   |                     |   |   |                                         |   |   |   |   |
| Purchase consideration  transferred |   |                                                                                | 4,503  |   |                     |   | 497    |                                         |   |   | 5,000 |   |

|   | The purchase consideration of the business combination amounted to $5,000 and included a $4,000 cash payment as well as an amount of $1,000 which represents the fair value of the Company's investment on the date control was obtained. The fair value of non-controlling interests was estimated at the date of initial consolidation at $727. As a result, at the time of the business combination an intangible asset attributed to IPR&D in the amount of $1,244 was recognized. The amortization of this asset will commence when sales from the relevant development will start. The rate of depreciation will be determined according to an estimation of the time of sales from this development. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Aggregate cash flows received by the Group as a result of the business combination: |
|--------|-------------------------------------------------------------------------------------|

|                                                                  |   | $ thousands |   |
|-----------------------------------------------------------------------|--------|-------------|--------|
|                                                                  |   |        |   |
| Cash and cash equivalents in acquired company as of the purchase date |   |        | 4,668  |   |
| Cash paid                                                             |   |        | (4,000 | ) |
|                                                                  |   |        |   |   |
|                                                                  |   |        | 668    |   |

|   | Kyma has contributed approximately $2,676 to the consolidated loss in the year ended on December 31, 2011. |
|--------|------------------------------------------------------------------------------------------------------------|

|   | In March 2011, Elron transferred its investment in Kyma, including any rights and obligations in regards to this investment, to RDC in consideration for $5,000. As a result, Kyma became an RDC subsidiary. As of the reporting date, RDC holds approximately 65% of Kyma's outstanding shares. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In September 2011, RDC and Kyma signed an investment agreement, according to which RDC will invest $2,500 in Kyma in three installments during 2012. Following the completion of this investment RDC's holding is expected to increase to approximately 73% of Kyma's outstanding shares. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2012, subsequent to the reporting date, RDC advanced the first installment at the amount of $500, in respect of the said investment, following which its holding in Kyma increased to approximately 67% of Kyma's outstanding shares. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | g) | Navitrio |
|--------|----|----------|

|   | In May 2011, Elron together with another partner founded Navitrio Ltd. ("Navitrio"), a subsidiary, in order to incubate projects and to invest in companies based on technologies in the fields of electronic commerce, mobile applications, cloud computing applications, social networks, medical and pharmaceutical digital applications and other related fields. Elron directly holds 80% of Navitrio's outstanding shares, and is the sole financer of Navitrio's operations. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In June 2011, Elron invested $1,500 in Navitrio. The investment did not result in any change to Elron's holdings of Navitrio's outstanding shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | h) | Cloudyn |
|--------|----|---------|

|   | Cloudyn Software Ltd. ("Cloudyn") develops software for the optimization of resources and costs related to the cloud environment. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2011, Cloudyn and Navitrio signed an investment agreement, according to which Navitrio will invest in Cloudyn an amount of up to $1,300 in three installments. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Upon signing the investment agreement Navitrio advanced to Cloudyn the first installment in the amount of $500. As a result of the said investment, Navitrio holds approximately 27% of Cloudyn's outstanding shares and 51% of Cloudyn's voting rights. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | After the second and third installments will be advanced (which are conditional upon Cloudyn achieving certain milestones as stipulated in the agreement), Navitrio will hold approximately 43% of Cloudyn's outstanding shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Due to Navitrio's investment in Cloudyn, Elron began consolidating Cloudyn's results in its financial statements commencing from November 30, 2011. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The fair value of non-controlling interests was estimated at the date of Cloudyn's initial consolidation at $537. As a result, an intangible asset attributed to in process development was recognized in this amount. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | i) | Financial data of previously consolidated and initially consolidated companies |
|--------|----|--------------------------------------------------------------------------------|

|                                                 |   | Companies previously consolidated as of the date of deconsolidation |   |
|------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                                 |   | 2011                                                                |   |   | 2010 |   |   | 2009 |   |
|                                                 |   | $ thousand                                                          |   |
| Cash and cash equivalents                            |   |                                                                | 1,136  |   |   |   | 229 |   |   |   | 982 |   |
| Current assets (excluding cash and cash equivalents) |   |                                                                | 5,938  |   |   |   | 501 |   |   |   | 2,667 |   |
| Non-current assets                                   |   |                                                                | 1,415  |   |   |   | 1,504 |   |   |   | 1,747 |   |
| Current liabilities                                  |   |                                                                | (9,688 | ) |   |   | (2,641 | ) |   |   | (5,755 | ) |
| Non-current liabilities                              |   |                                                                | (4,406 | ) |   |   | - |   |   |   | (2,138 | ) |

|                                                 |   | Companies initially consolidated |   |
|------------------------------------------------------|--------|----------------------------------|--------|
|                                                 |   | 2011                             |   |   | 2010 |   |   | 2009 |   |
|                                                 |   | $ thousand                       |   |
| Cash and cash equivalents                            |   |                             | 5,158  |   |   |   | - |   |   |   | - |   |
| Current assets (excluding cash and cash equivalents) |   |                             | 342    |   |   |   | - |   |   |   | - |   |
| Non-current assets                                   |   |                             | 67     |   |   |   | - |   |   |   | - |   |
| Current liabilities                                  |   |                             | (260   | ) |   |   | - |   |   |   | - |   |
| Non-current liabilities                              |   |                             | (414   | ) |   |   | - |   |   |   | - |   |

|                                       |   | December 31 |   |   | December 31 |   |
|--------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                       |   | 2011        |   |   | 2010        |   |
|                                       |   | $ thousands |   |
| Cash                                       |   |        | 3,933  |   |        |   | 4,102 |   |
| Cash equivalents - short-term deposits (*) |   |        | 36,129 |   |        |   | 52,437 |   |
|                                       |   |        |   |   |        |   |   |   |
|                                       |   |        | 40,062 |   |        |   | 56,539 |   |

|   | (*) | The deposits bear variable interest rate, which is determined based on the deposit period. The interest rate on deposits as of December 31, 2011, is 1.15%-2.20%. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                  |   | December 31 |   |   | December 31 |   |
|---------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                  |   | 2011        |   |   | 2010        |   |
|                                  |   | $ thousands |   |
| Open accounts                         |   |        | -      |   |        |   | 3,082 |   |
| Less: allowance for doubtful accounts |   |        | -      |   |        |   | 21 |   |
|                                  |   |        |   |   |        |   |   |   |
| Trade receivables, net                |   |        | -      |   |        |   | 3,061 |   |

|                                                           |   | December 31 |   |   | December 31 |   |
|----------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                           |   | 2011        |   |   | 2010        |   |
|                                                           |   | $ thousands |   |
| Associates                                                     |   |        | 28     |   |        |   | 28 |   |
| Government institutions                                        |   |        | 606    |   |        |   | 672 |   |
| Prepaid expenses                                               |   |        | 109    |   |        |   | 1,845 |   |
| Government grants                                              |   |        | 313    |   |        |   | 477 |   |
| Advances to suppliers                                          |   |        | 47     |   |        |   | 512 |   |
| Escrow deposit (*)                                             |   |        | 22,639 |   |        |   | - |   |
| Additional consideration due to sale of Wavion  (**) |   |        | 1,272  |   |        |   | - |   |
| Other current assets                                           |   |        | 304    |   |        |   | 790 |   |
|                                                           |   |        |   |   |        |   |   |   |
|                                                           |   |        | 25,318 |   |        |   | 4,324 |   |

|   | (*) | A deposit held in escrow due to the sale of Medingo. For details see Note 3.C.2.b). As of December 31, 2010, this deposit was included under other long term receivables. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (**) |   For details on additional consideration that is expected to be received due to sale of Wavion, see Note 3.C.2.c) below. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------|

|             |   | December 31 |   |   | December 31 |   |
|------------------|--------|-------------|--------|--------|-------------|--------|
|             |   | 2011        |   |   | 2010        |   |
|             |   | $ thousands |   |
| Raw materials    |   |        | 98     |   |        |   | 4,073 |   |
| Work in progress |   |        | -      |   |        |   | 436 |   |
| Finished goods   |   |        | -      |   |        |   | 847 |   |
|             |   |        |   |   |        |   |   |   |
|             |   |        | 98     |   |        |   | 5,356 |   |

----

----

|                                             |   | December 31, 2011 |   |   | December 31, 2010 |   |
|--------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                             |   | Quoted            |   |   | Unquoted          |   |   | Total |   |   | Quoted |   |   | Unquoted |   |   | Total |   |
|                                             |   | $ thousands       |   |
| Investment in shares                             |   |              | 1,510  |   |              |   | 16,014 |   |   |   | 17,524 |   |   |   | 219 |   |   |   | 20,002 |   |   |   | 20,221 |   |
|                                             |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impairment recognized in the statement of income |   |              | 9,874  |   |              |   | 1,771 |   |   |   | 11,645 |   |   |   | 133 |   |   |   | 1,647 |   |   |   | 1,780 |   |

|   A. | Available for sale financial assets - unquoted shares |
|-----------|-------------------------------------------------------|

|   | 1. | Discounted Future Earnings Method - This methodology is used when the investees undergoing evaluation are able to provide projections for their future cash flows. In addition, it was deemed not unreasonable that market participants or other investors would use this methodology to determine the fair value of their rights in these companies. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Company Security Transaction Method ("CSTM") - According to the CSTM method, the value of each investee is estimated based upon recent transaction prices in the investee's securities. For these transactions to be relied upon to develop an estimate of fair value, they must be arm's length transactions. Additional factors considered in this analysis include: size, amount and type of shares sold; the timing of the transaction relative to the estimation date; differences in the rights, preferences, marketability, control of the transaction securities, participation of new investors and the subject securities; volatility in the investee's projections and the volatility of comparable firms. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Option Pricing Model ("OPM") - After deriving the investee's fair value, it is generally accepted for market participants to allocate the value of the investee to the different classes of equity. OPM is an option pricing model based on the Black and Scholes' formula or based on the Binomial (lattice) model. This model is based upon the concept that the securities of a firm's capital structure can be considered as call options on the value of the firm. The model uses a Black and Scholes option model or a Binomial (lattice) model to estimate the value of the investee between value ranges. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   B. | Available for sale financial assets - quoted shares |
|-----------|-----------------------------------------------------|

----

----

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

|   C. | Impairment of available for sale assets |
|-----------|-----------------------------------------|

----

----

----

----

| D. | Details about valuations, pursuant to the requirements of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970, in regards with investment in shares that are not traded: |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | The subject of the valuation: Elron's investment in Jordan Valley Semiconductors Ltd. |
|--------|----|---------------------------------------------------------------------------------------|

|   | 2. | The valuation's effective date: As of December 31, 2011. The date of the agreement between Empire and Elron was December 4, 2011. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | The carrying amount of the investment in Jordan Valley in the Company's financial statements: As of December 31, 2010 - $13,510, as of September 30, 2011 - $13,000. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | The value of Jordan Valley established by the Appraiser: Jordan Valley's value is $48,700, and accordingly, the value of Elron's interest was determined to be $12,300. As a result, in 2011 the Company recognized a decrease in capital reserve of $1,210 in other comprehensive income in respect of available for sale financial assets. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Details of the Appraiser - Empire Valuation Consultants, LLC. The valuation was performed by a team led by Mr. Mark Shayne, a Managing Director with Empire. Mr. Shayne has an M.B.A. from the Stern Graduate School of Business at New York University, and is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers, and Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants. Mr. Shayne has experience providing financial consulting, appraisal, due diligence, and expert witness testimony on valuation matters. His areas of expertise include valuation of common and preferred stock, employee and incentive stock options, partnership interests, and intangible assets, among others. There is no dependency between the Appraiser and the Company, the party who ordered the valuation. The Appraiser is indemnified by the Company for expenses which may be incurred to the Appraiser in carrying out this valuation. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | The valuation model in accordance with which the Appraiser worked: |
|--------|----|--------------------------------------------------------------------|

|   | a. | The DCF Method for determining Jordan Valley's value (enterprise value). |
|--------|----|--------------------------------------------------------------------------|

|   | b. | The Black and Scholes model for allocating Jordan Valley's value to different types of shares and for determining the value of Elron's interest accordingly. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 7. | The assumptions on which the Appraiser has relied: |
|--------|----|----------------------------------------------------|

|   | a. | The discount rate (WACC): 24%. |
|--------|----|--------------------------------|

|   | b. | The long term growth rate: 3% per year. |
|--------|----|-----------------------------------------|

|   | c. | The terminal value as a percentage of the value determined in the valuation: 24.2%. |
|--------|----|-------------------------------------------------------------------------------------|

|   | d. | The standard deviation: The volatility used in the Black and Scholes model was 60%. |
|--------|----|-------------------------------------------------------------------------------------|

|   | e. | Comparable prices used: The volatility was estimated from the volatilities of six comparable companies using their historical equity prices. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | f. | The number of comparable items used: Six companies, as mentioned above. Up to six matrices per company were used as a basis for comparison between Jordan Valley's overall value and the value of comparable publicly listed companies. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|                                  |   | December 31 |   |
|---------------------------------------|--------|-------------|--------|
|                                  |   | 2011        |   |   | 2010 |   |
| Investment in shares of Enablence (*) |   |        | -      |   |   |   | 15,082 |   |
| Investment in shares of GigOptix (**) |   |        | 590    |   |   |   | 2,129 |   |
| Investment in shares of Wave (***)    |   |        | 2,565  |   |   |   | - |   |
|                                  |   |        | 3,155  |   |   |   | 17,211 |   |

|   | (*) | Enablence- As aforementioned in Note 8.B above, as of December 31, 2011 the investment in shares of Enablence no longer fulfills the conditions set in IFRS 5 for classification of non-current assets as held for sale. Accordingly, the investment in shares of Enablence is presented under other investments (accounted as available for sale). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (**) | GigOptix- See below regarding the sale of a portion of the shares of GigOptix during 2011. |
|--------|------|--------------------------------------------------------------------------------------------|

|   | (***) | Wave- As detailed in Note 3.C.1.e) above, shares of Wave were received as consideration from the sale of Safend in 2011. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------|

|   | B. | In December 2010, the Company's Board of Directors decided to sell its holdings in GigOptix's and Enablence's shares. In December 2010, the Company engaged with Oppenheimer Inc. in order to sell these shares. As of December 31, 2010, management was of the opinion that the investments in these shares complied with the terms set in IFRS 5 for classification as non-current assets held for sale, and accordingly, these investments were classified as non-current assets held for sale in the statement of financial position as of December 31, 2010. As aforementioned, as of December 31, 2011, the investment in shares of Enablence no longer complies with the terms set in IFRS 5 for classification of a non-current asset as held for sale. Accordingly, the investment in shares of Enablence is presented as of December 31, 2011 under other investments (accounted as available for sale). |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                  |   | December 31 |   |   | December 31 |   |
|-----------------------|--------|-------------|--------|--------|-------------|--------|
|                  |   | 2011        |   |   | 2010        |   |
|                  |   | $ thousands |   |
| Escrow deposits (1)   |   |        | 1,900  |   |        |   | 22,639 |   |
| Debentures (2)        |   |        | -      |   |        |   | 3,878 |   |
| Income receivable (3) |   |        | 2,611  |   |        |   | 731 |   |
| Other                 |   |        | 797    |   |        |   | 970 |   |
|                  |   |        |   |   |        |   |   |   |
|                  |   |        | 5,308  |   |        |   | 28,218 |   |

|   | (1) | The balance as of December 31, 2010 is comprised of a deposit held in escrow due to the sale of Medingo. See Note 3.C.2.b). As of December 31, 2011, this deposit was included in line item other current assets. As of December 31, 2011, the balance comprised of a deposit held in escrow due to the sale of Wavion. See Note 3.C.2.c). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Debentures received in the sale of Teledata. For details, see Note 3.C.1.b). The debentures are unquoted, bear an annual interest rate of 5%, their par value is approximately $3,779, and they are payable (principal and interest) two years after issuance (June 23, 2012). As of December 31, 2011, these debentures were fully written off. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | The balance as of December 31, 2011 is comprised of the rest of the future consideration expected to be received due to the sale of Starling's operation, see Note 3.C.2.a). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                   |   |        |   |   |     |   |   | Computers, |   |   |         |   |   |   |   |
|----------------------------------------|--------|-------------|--------|--------|----------|--------|--------|------------|--------|--------|--------------|--------|--------|--------|--------|
|                                   |   |        |   |   |     |   |   | office     |   |   |         |   |   |   |   |
|                                   |   |        |   |   |     |   |   | furniture  |   |   |         |   |   |   |   |
|                                   |   | Machinery   |   |   |     |   |   | and        |   |   |         |   |   |   |   |
|                                   |   | and         |   |   | Motor    |   |   | other      |   |   | Leasehold    |   |   |   |   |
|                                   |   | equipment   |   |   | vehicles |   |   | equipment  |   |   | improvements |   |   | Total  |   |
|                                   |   | $ thousands |   |
| Cost                                   |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |
| Balance at January 1, 2010        |   |        | 3,313  |   |     |   | 305    |       |   |   | 3,715        |   |   |   | 1,136  |   |   |   | 8,469 |   |
| Additions:                             |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Acquisitions                           |   |        | 759    |   |     |   | 1      |       |   |   | 513          |   |   |   | 55     |   |   |   | 1,328 |   |
| Translation differences                |   |        | 64     |   |     |   | 2      |       |   |   | 39           |   |   |   | 6      |   |   |   | 111 |   |
| Eliminations:                          |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Disposals                              |   |        | (6     | )      |     |   | (188   | )          |   |   | (304         | )      |   |   | (51    | ) |   |   | (549 | ) |
| Deconsolidation of company (1)         |   |        | (1,323 | )      |     |   | -      |       |   |   | (446         | )      |   |   | (112   | ) |   |   | (1,881 | ) |
| Balance at December 31, 2010      |   |        | 2,807  |   |     |   | 120    |       |   |   | 3,517        |   |   |   | 1,034  |   |   |   | 7,478 |   |
| Additions:                             |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Acquisitions                           |   |        | 620    |   |     |   | -      |       |   |   | 303          |   |   |   | 35     |   |   |   | 958 |   |
| Additions due to business combinations |   |        | 44     |   |     |   | -      |       |   |   | 40           |   |   |   | -      |   |   |   | 84 |   |
| Translation differences                |   |        | (45    | )      |     |   | (1     | )          |   |   | (28          | )      |   |   | (3     | ) |   |   | (77 | ) |
| Eliminations:                          |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Disposals                              |   |        | (6     | )      |     |   | (63    | )          |   |   | (9           | )      |   |   | (184   | ) |   |   | (262 | ) |
| Sale of Starling's operation           |   |        | (962   | )      |     |   | (29    | )          |   |   | (633         | )      |   |   | (73    | ) |   |   | (1,697 | ) |
| Deconsolidation of company (2)         |   |        | (2,224 | )      |     |   | -      |       |   |   | (2,102       | )      |   |   | (58    | ) |   |   | (4,384 | ) |
| Balance at December 31, 2011      |   |        | 234    |   |     |   | 27     |       |   |   | 1,088        |   |   |   | 751    |   |   |   | 2,100 |   |
|                                   |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Depreciation                           |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2010        |   |        | 1,408  |   |     |   | 161    |       |   |   | 2,915        |   |   |   | 994    |   |   |   | 5,478 |   |
| Additions:                             |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Depreciation                           |   |        | 392    |   |     |   | 28     |       |   |   | 364          |   |   |   | 47     |   |   |   | 831 |   |
| Translation differences                |   |        | 40     |   |     |   | -      |       |   |   | 33           |   |   |   | 3      |   |   |   | 76 |   |
| Eliminations:                          |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Disposals                              |   |        | (6     | )      |     |   | (132   | )          |   |   | (231         | )      |   |   | (36    | ) |   |   | (405 | ) |
| Deconsolidation of company (1)         |   |        | (250   | )      |     |   | -      |       |   |   | (266         | )      |   |   | (65    | ) |   |   | (581 | ) |
| Balance at December 31, 2010      |   |        | 1,584  |   |     |   | 57     |       |   |   | 2,815        |   |   |   | 943    |   |   |   | 5,399 |   |
| Additions:                             |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Depreciation                           |   |        | 462    |   |     |   | 11     |       |   |   | 395          |   |   |   | 34     |   |   |   | 902 |   |
| Additions due to business combinations |   |        | 14     |   |     |   | -      |       |   |   | 19           |   |   |   | -      |   |   |   | 33 |   |
| Translation differences                |   |        | (13    | )      |     |   | (1     | )          |   |   | (14          | )      |   |   | (1     | ) |   |   | (29 | ) |
| Eliminations:                          |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Disposals                              |   |        | (2     | )      |     |   | (40    | )          |   |   | (8           | )      |   |   | (184   | ) |   |   | (234 | ) |
| Sale of Starling's operation           |   |        | (559   | )      |     |   | (11    | )          |   |   | (529         | )      |   |   | (50    | ) |   |   | (1,149 | ) |
| Deconsolidation of company (2)         |   |        | (1,291 | )      |     |   | -      |       |   |   | (1,755       | )      |   |   | (22    | ) |   |   | (3,068 | ) |
| Balance at December 31, 2011      |   |        | 195    |   |     |   | 16     |       |   |   | 923          |   |   |   | 720    |   |   |   | 1,854 |   |
|                                   |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Depreciated cost                       |   |        |   |   |     |   |   |       |   |   |         |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2010      |   |        | 1,223  |   |     |   | 63     |       |   |   | 702          |   |   |   | 91     |   |   |   | 2,079 |   |
| Balance at December 31, 2011      |   |        | 39     |   |     |   | 11     |       |   |   | 165          |   |   |   | 31     |   |   |   | 246 |   |

----

----

|                                               |   | Technology     |   |   |            |   |   |   |   |   |   |   |
|----------------------------------------------------|--------|----------------|--------|--------|-----------------|--------|--------|--------|--------|--------|--------|--------|
|                                               |   | and in-process |   |   | Agreement       |   |   |   |   |   |   |   |
|                                               |   | development    |   |   | with Rafael (1) |   |   | Other  |   |   | Total  |   |
|                                               |   | $ thousands    |   |
|                                               |   |           |   |   |            |   |   |   |   |   |   |   |
| Cost                                               |   |           |   |   |            |   |   |   |   |   |   |   |
| Balance at January 1, 2010                    |   |           | 7,104  |   |            |   | 3,053  |   |   |   | 488    |   |   |   | 10,645 |   |
| Acquisitions                                       |   |           | -      |   |            |   | -      |   |   |   | 276    |   |   |   | 276 |   |
| Decrease due to sale of consolidated company (2)   |   |           | -      |   |            |   | -      |   |   |   | (431   | )      |   |   | (431 | ) |
| Translation differences                            |   |           | -      |   |            |   | -      |   |   |   | 24     |   |   |   | 24 |   |
| Balance at December 31, 2010                  |   |           | 7,104  |   |            |   | 3,053  |   |   |   | 357    |   |   |   | 10,514 |   |
| Acquisitions                                       |   |           | -      |   |            |   |   |   |   |   | 9      |   |   |   | 9 |   |
| Additions due to business combinations (3)         |   |           | 1,871  |   |            |   | -      |   |   |   | -      |   |   |   | 1,871 |   |
| Disposition as part of sale of Starling's business |   |           | -      |   |            |   | -      |   |   |   | (307   | )      |   |   | (307 | ) |
| Decrease due to sale of consolidated company (4)   |   |           | (342   | )      |            |   | -      |   |   |   | -      |   |   |   | (342 | ) |
| Translation differences                            |   |           | -      |   |            |   | -      |   |   |   | (59    | )      |   |   | (59 | ) |
| Balance at December 31, 2011                  |   |           | 8,633  |   |            |   | 3,053  |   |   |   | -      |   |   |   | 11,686 |   |
|                                               |   |           |   |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Amortization and impairment losses                 |   |           |   |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2010                    |   |           | 2,859  |   |            |   | -      |   |   |   | 265    |   |   |   | 3,124 |   |
| Amortization recognized during the year (5)        |   |           | 1,483  |   |            |   | -      |   |   |   | 98     |   |   |   | 1,581 |   |
| Decrease due to sale of consolidated company (4)   |   |           | -      |   |            |   | -      |   |   |   | (227   | )      |   |   | (227 | ) |
| Impairment (6)                                     |   |           | 2,421  |   |            |   | -      |   |   |   | -      |   |   |   | 2,421 |   |
| Translation differences                            |   |           | -      |   |            |   | -      |   |   |   | 20     |   |   |   | 20 |   |
| Balance at December 31, 2010                  |   |           | 6,763  |   |            |   | -      |   |   |   | 156    |   |   |   | 6,919 |   |
| Amortization recognized during the year (5)        |   |           | 314    |   |            |   | -      |   |   |   | 118    |   |   |   | 432 |   |
| Disposition as part of sale of Starling's business |   |           | -      |   |            |   | -      |   |   |   | (225   | )      |   |   | (225 | ) |
| Decrease due to sale of consolidated company (4)   |   |           | (313   | )      |            |   | -      |   |   |   | -      |   |   |   | (313 | ) |
| Translation differences                            |   |           | -      |   |            |   | -      |   |   |   | (49    | )      |   |   | (49 | ) |
| Balance at December 31, 2011                  |   |           | 6,764  |   |            |   | -      |   |   |   | -      |   |   |   | 6,764 |   |
|                                               |   |           |   |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Amortized cost                                     |   |           |   |   |            |   |   |   |   |   |   |   |   |   |   |   |
| Balance at December 31, 2010                  |   |           | 341    |   |            |   | 3,053  |   |   |   | 201    |   |   |   | 3,595 |   |
| Balance at December 31, 2011                  |   |           | 1,869  |   |            |   | 3,053  |   |   |   | -      |   |   |   | 4,922 |   |

|   | (1) | Not systematically amortized – indefinite useful life (see Note 3.C.2.d)). The Company estimated the fair value of the agreement with Rafael as part of RDC as a whole. In accordance with this examination, it was concluded that there was no need to depreciate the carrying amount of the asset in the financial statements. The assets and liabilities of RDC were included in the fair value estimate. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Sale of Medingo in 2010 (see Note 3.C.2.b)). |
|--------|-----|----------------------------------------------|

|   | (3) | Acquisition of Kyma and Cloudyn (see Notes 3.C.2.f). and 3.C.2.h)). |
|--------|-----|---------------------------------------------------------------------|

|   | (4) | Sale of Wavion in 2011 (see Note 3.C.2.c)). |
|--------|-----|---------------------------------------------|

|   | (5) | Assets are amortized on a straight-line basis, amortization is included under line item amortization of intangible assets in the statement of income (see Note 2.L). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Impairment of technology attributed to Wavion resulting from the initial consolidation of Wavion in 2008 (see Note 3.C.2.c)). |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------|

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

|           |   | December 31 |   |   | December 31 |   |
|----------------|--------|-------------|--------|--------|-------------|--------|
|           |   | 2011        |   |   | 2010        |   |
|           |   | $ thousands |   |
| Open accounts  |   |        | 604    |   |        |   | 3,620 |   |
| Checks payable |   |        | 52     |   |        |   | 236 |   |
|           |   |        |   |   |        |   |   |   |
|           |   |        | 656    |   |        |   | 3,856 |   |

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

----

----

|                                                  |   | December 31 |   |   | December 31 |   |
|-------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                                  |   | 2011        |   |   | 2010        |   |
|                                                  |   | $ thousands |   |
| Accrued expenses                                      |   |        | 1,129  |   |        |   | 1,534 |   |
| Liabilities to employees                              |   |        | 928    |   |        |   | 3,196 |   |
| Governmental institutions                             |   |        | 760    |   |        |   | 1,031 |   |
| Employees call options (*)                            |   |        | 332    |   |        |   | 38 |   |
| Current maturity of royalty bearing government grants |   |        | 4      |   |        |   | 771 |   |
| Advance from customers                                |   |        | 294    |   |        |   | 732 |   |
| Other payables                                        |   |        | 890    |   |        |   | 1,499 |   |
|                                                  |   |        | 4,337  |   |        |   | 8,801 |   |

|   | (*) | With regard to options for shares of Pocared granted to the chairman of the Company and another employee, see Note 23.D.1. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------|

|                                             |   | December 31 |   |   | December 31 |   |
|--------------------------------------------------|--------|-------------|--------|--------|-------------|--------|
|                                             |   | 2011        |   |   | 2010        |   |
|                                             |   | $ thousands |   |   | $ thousands |   |
| Current liabilities:                             |   |        |   |   |        |   |
| Loans from banks                                 |   |        | -      |   |        |   | 601 |   |
|                                             |   |        | -      |   |        |   | 601 |   |
| Current maturities of loans from banks           |   |        | -      |   |        |   | 249 |   |
| Current maturities of convertible debentures (6) |   |        | -      |   |        |   | 1,275 |   |
|                                             |   |        | -      |   |        |   | 2,125 |   |
| Long-term liabilities:                           |   |        |   |   |        |   |   |   |
| Loans from banks                                 |   |        | -      |   |        |   | 535 |   |
| Loans from others (2)                            |   |        | 3,288  |   |        |   | - |   |
| Convertible debentures (6)                       |   |        | -      |   |        |   | 2,110 |   |
|                                             |   |        |   |   |        |   |   |   |
|                                             |   |        | 3,288  |   |        |   | 2,645 |   |

|   | (1) | In 2008, RDC signed an agreement with Bank Mizrahi Tefahot Ltd. ("Bank Mizrahi"), whereby Bank Mizrahi provided RDC a credit line in the total amount of up to $10,000, which was fully utilized by December 31, 2009. The loans provided in accordance with the credit line agreement were secured by a fixed, first priority lien on shares of Given held by RDC at the rate of 200% of the actual loans withdrawn, to be adjusted in accordance with the terms of the credit line agreement. In June 2010, RDC's entire debt to Bank Mizrahi was prepaid (without incurring a prepayment commission). As a result, the pledge on 2,461,334 Given shares held by RDC in favor of Bank Mizrahi, then representing approximately 8% of Given's outstanding shares, was removed. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | In May 2011, RDC signed a loan agreement with Elron and Rafael in the aggregate amount of up to $10,000, of which Elron's share is $5,000. A payment in respect of the loan in the amount of $2,000 was advanced to RDC immediately, of which Elron's share was $1,000. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In October 2011, an additional amount of $4,500 in respect of this loan was advanced to RDC, of which Elron's share was $2,250. Rafael's share in the said loan is presented under loans from others. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | On May 15, 2008, the Company signed an agreement with Israel Discount Bank Ltd. ("Discount Bank") whereby Discount Bank provided the Company a credit line in the aggregate amount of $30,000, which was fully utilized by December 31, 2009. Under the agreement with Discount Bank, the Company committed to comply with certain financial covenants. In November 2009, the Company replaced its commitment to comply with financial convenents with a pledge on its holding in 3,359,676 Given shares in favor of Discount Bank. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In June 2010, the Company's Audit Committee and Board of Directors approved the prepayment of Elron's entire debt to Discount Bank in respect of loans in the aggregate amount of $30,000, on the nearest interest payment dates in respect of the debt (without incurring a prepayment commission), the last of which was in September 2010. Upon repayment of the Company's entire debt to Discount Bank, the pledge on 3,359,676 Given shares held by Elron in favor of Discount Bank, then representing approximately 11% of Given's outstanding shares, was removed. Upon repayment of the Company's entire debt to Discount Bank, the Company's entire debt in respect of the loans granted to it by DIC was repaid as well (see section 5 below). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | In November 2011, Elron entered into a binding agreement with Silicon Valley Bank (the "Bank") to receive a credit line in the amount of $30,000 for a period of up to 18 months (the "Period"). The credit line was obtained in order to diversify and ensure additional sources of financing for the Company towards continued investing in companies held by the Company and new companies and to finance its ongoing operations. During the Period, the Company will be entitled to draw down loans for periods of up to 3 years from the date of each respective draw down, at the Wall Street Journal prime rate of interest plus 0.75% per annum. According to the terms of the credit line, the Company will be able to make early repayment of all the loans without any cost. At the time the credit line is actually utilized, the Company will pledge shares of Given directly held by it in an amount equal to maintain a 3.25 ratio of the market value of the pledged shares (based on their trailing 5-day average closing price prior to the computation date) to the amount of credit utilized. Pursuant to the agreement with the Bank, should the ratio of the market value of the pledged shares to the credit amount utilized decrease below 3, then the Company shall be required either to pledge additional Given shares or repay a portion of the credit utilized in order to maintain a coverage ratio of 3.25, or provide alternative collateral acceptable to the Bank. As of the approval date of the financial statements, the Company has not yet made any draw down. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | During 2008 and 2009 DIC provided the Company loans in the aggregate amount of $15,000 in three separate loan agreements. The loans from DIC were subordinated to the loan from Discount Bank and extended for the same period through September 24, 2011. Pursuant to the terms of the loan agreements with DIC, if the loan from Discount Bank is repaid earlier, then the loan from DIC will be repaid at the same time. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Pursuant to these terms, upon repayment of the Company's entire debt to Discount Bank in September 2010, as mentioned above, the Company's entire debt in respect of the loans granted to it by DIC was repaid as well (without incurring a prepayment commission). Approval by the Company's Audit Committee and Board of Directors was given in compliance with Regulation 1 of the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760-2000. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | (6) | On June 13, 2007, Starling completed an initial public offering on the Tel Aviv Stock Exchange of shares, convertible debentures (bearing a 6% annual interest and CPI-linked) ("Convertible Debentures") and options to purchase the Convertible Debentures. The Convertible Debentures principal is payable in four equal annual payments starting June 10 of each of 2010-2013, and payment of the Convertible Debentures interest is made once a year on June 10 of each of the years 2008-2013, starting 2008. In November 2011, Starling fully prepaid the Convertible Debentures. For further details, see Note 3.C.2.a). |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                          |   | 2011        |   |   | 2010   |   |
|-----------------------------------------------------------------------------------------------|--------|-------------|--------|--------|--------|--------|
|                                                                                          |   | $ thousands |   |
|                                                                                          |   |        |   |   |   |   |
| Balance as of January 1                                                                       |   |        | 9,156  |   |   |   | 9,116 |   |
| Grants received during the year                                                               |   |        | 1,518  |   |   |   | 1,499 |   |
| Additions due to business combination                                                         |   |        | 414    |   |   |   | - |   |
| Royalties paid during the year                                                                |   |        | (508   | )      |   |   | (314 | ) |
| Payments made by Starling in its business sale agreement (*)                                  |   |        | (4,435 | )      |   |   | - |   |
| Deconsolidation of a subsidiary                                                               |   |        | (4,731 | )      |   |   | - |   |
| Amounts charged to the statement of income                                                    |   |        | (268   | )      |   |   | (1,312 | ) |
| Translation differences                                                                       |   |        | (188   | )      |   |   | 167 |   |
| Balance as of December 31                                                                     |   |        | 958    |   |   |   | 9,156 |   |
|                                                                                          |   |        |   |   |   |   |   |   |
| (*)           See Note 3.C.2.a) above. |   |        |   |   |   |   |   |   |
|                                                                                          |   |        |   |   |   |   |   |   |
| Presented in the statement of financial position under:                                       |   |        |   |   |   |   |   |   |
| Current liabilities- other current liabilities                                                |   |        | 4      |   |   |   | 771 |   |
| Non-current liabilities- royalty bearing government grants                                    |   |        | 954    |   |   |   | 8,385 |   |
|                                                                                          |   |        | 958    |   |   |   | 9,156 |   |

----

----

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

|                                             |   | December 31,     |       |
|--------------------------------------------------|--------|------------------|------------|
|                                             |   | 2011             |       |   | 2010 |   |
|                                             |   | Authorized       |       |   | Issued and outstanding |   |   | Authorized |   |   | Issued and outstanding |   |
|                                             |   | number of shares |       |
|                                             |   |             |       |   |   |   |   |   |   |   |   |   |
| Ordinary shares of NIS 0.003 par value each |   |             | 35,000,000 |   |   |   | 29,660,017 |   |   |   | 35,000,000 |   |   |   | 29,660,017 |   |

|   B. | Rights attached to shares |
|-----------|---------------------------|

|   | 1. | Voting rights at the general meeting, right to dividend, rights upon liquidation of the Company and right to nominate the directors in the Company. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Quoted on the Tel Aviv Stock Exchange and the over-the-counter market in the United States (see also Note 1). |
|--------|----|---------------------------------------------------------------------------------------------------------------|

|   C. | Movement in issued and outstanding share capital |
|-----------|--------------------------------------------------|

|                                               |   | Number ofshares |       |   | $ thousandspar value |   |
|----------------------------------------------------|--------|-----------------|------------|--------|----------------------|--------|
|                                               |   |            |       |   |                 |   |
| Balance at January 1, 2010                         |   |            | 29,650,017 |   |                 |   | 9,573 |   |
|                                               |   |            |       |   |                 |   |   |   |
| Exercise of employees' options into shares in 2010 |   |            | 10,000     |   |                 |   | (* | ) |
|                                               |   |            |       |   |                 |   |   |   |
| Balance at December 31, 2010 and December 31, 2011 |   |            | 29,660,017 |   |                 |   | 9,573 |   |

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

| E. | Capital reserve of transaction with controlling shareholders |
|----|--------------------------------------------------------------|

----

----

|   | F. | Comprehensive income (loss) |
|--------|----|-----------------------------|

|                                                                                                            |   | Attributable to the Company's shareholders |    |   |                                                                      |   |   |                                            |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|--------|---------------------------------------------------------------------------|--------|--------|-------------------------------------------------|--------|
|                                                                                                            |   | Accumulated deficit                        |    |   |   Reserve for available for sale financial assets held for sale |   |   | Reserve for available-for-sale financial assets |   |   | Adjustments arising from translating financial statements of foreign operations |   |   | Total |   |   | Non-controlling interests |   |   | Total |   |
|                                                                                                            |   | $ thousands                                |    |
|                                                                                                            |   |                                       |    |   |                                                                      |   |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss                                                                                                            |   |                                       | (17,021 | )      |                                                                      |   | -      |                                            |   |   | - |   |   |   | - |   |   |   | (17,021 | ) |   |   | (6,292 | ) |   |   | (23,313 | ) |
| Loss from available-for-sale financial assets                                                                   |   |                                       | -       |   |                                                                      |   | (6,508 | )                                               |   |   | (1,034 | ) |   |   | - |   |   |   | (7,542 | ) |   |   | - |   |   |   | (7,542 | ) |
| Available-for-sale financial assets classified to the statement of income                                       |   |                                       | -       |   |                                                                      |   | 2,234  |                                            |   |   | (1,452 | ) |   |   | - |   |   |   | 782 |   |   |   | - |   |   |   | 782 |   |
| Adjustments arising from translating financial statements of foreign operations                                 |   |                                       | -       |   |                                                                      |   | -      |                                            |   |   | - |   |   |   | 1,399 |   |   |   | 1,399 |   |   |   | 505 |   |   |   | 1,904 |   |
| Foreign currency translation differences charged to the statement of income upon disposal of foreign operations |   |                                       | -       |   |                                                                      |   | -      |                                            |   |   | - |   |   |   | (1,200 | ) |   |   | (1,200 | ) |   |   | - |   |   |   | (1,200 | ) |
| Actuarial loss from defined benefit plans                                                                       |   |                                       | (54     | )      |                                                                      |   | -      |                                            |   |   | - |   |   |   | - |   |   |   | (54 | ) |   |   | (27 | ) |   |   | (81 | ) |
| Group's share of net other comprehensive income (loss) of companies accounted for under the equity method       |   |                                       | 210     |   |                                                                      |   | -      |                                            |   |   | (263 | ) |   |   | - |   |   |   | (53 | ) |   |   | (8 | ) |   |   | (61 | ) |
|                                                                                                            |   |                                       |    |   |                                                                      |   |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss)                                                                         |   |                                       | 156     |   |                                                                      |   | (4,274 | )                                               |   |   | (2,749 | ) |   |   | 199 |   |   |   | (6,668 | ) |   |   | 470 |   |   |   | (6,198 | ) |
|                                                                                                            |   |                                       |    |   |                                                                      |   |   |                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                                               |   |                                       | (16,865 | )      |                                                                      |   | (4,274 | )                                               |   |   | (2,749 | ) |   |   | 199 |   |   |   | (23,689 | ) |   |   | (5,822 | ) |   |   | (29,511 | ) |

----

----

|   | F. | Comprehensive income (loss) (Cont.) |
|--------|----|-------------------------------------|

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

----

----

|   | F. | Comprehensive income (loss) (Cont.) |
|--------|----|-------------------------------------|

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

----

----

|   G. | Share-based payments |
|-----------|----------------------|

|   | 1. | Company option plans |
|--------|----|----------------------|

|   | The Company has various stock option plans under which the Company may grant options to purchase the Company's shares or subsidiaries' shares to officers, directors and employees of the Company. Such options have been granted mainly with exercise prices below market price at the date of grant. Generally, the options vest over a four-year period from the date of grant in four equal annual portions. The options expire after 5 to 7 years from the date of grant. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Board of Directors has the discretion to extend vesting and the period within which to exercise options following termination of employment. In granting the options, the Board of Directors selected the capital gains tax track pursuant to the Israeli legislation. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In 2009 and 2010, the Company's Board of Directors determined that with respect to prior grants of 80,000, 22,500 and 30,000 options, which would otherwise expire in accordance with their respective terms in 2009 and 2010 as a result of termination of employment, the term of each such grant was extended for an additional 3.5, 3 and 0.25 years respectively, from the date of termination. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The abovementioned extensions did not have a material effect on the Company's financial statements. |
|--------|-----------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Changes during 2011, 2010 and 2009 |
|--------|----|------------------------------------|

|                                                                       |   | 2011              |    |   | 2010                            |   |   | 2009              |   |
|----------------------------------------------------------------------------|--------|-------------------|---------|--------|---------------------------------|--------|--------|-------------------|--------|
|                                                                       |   | Number of options |    |   | Weighted average exercise price |   |   | Number of options |   |   | Weighted average exercise price |   |   | Number of options |   |   | Weighted average exercise price |   |
|                                                                       |   | $                 |    |   |                            |   |   | $                 |   |   |   |   |   | $ |   |   |   |   |
|                                                                       |   |              |    |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Share options outstanding at    beginning of  the year |   |              | 237,500 |   |                            |   | 10.96  |              |   |   | 267,500 |   |   |   | 10.63 |   |   |   | 358,750 |   |   |   | 10.24 |   |
| Share options granted during the year                                      |   |              | -       |   |                            |   | -      |              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Share options forfeited during the year                                    |   |              | (5,000  | )      |                            |   | 9.05   |              |   |   | (20,000 | ) |   |   | 9.41 |   |   |   | (91,250 | ) |   |   | 9.11 |   |
| Share options exercised during the year (1)                                |   |              | -       |   |                            |   | -      |              |   |   | (10,000 | ) |   |   | 5 |   |   |   | - |   |   |   | - |   |
|                                                                       |   |              |    |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share options outstanding at end of  the year                    |   |              | 232,500 |   |                            |   | 11.01  |              |   |   | 237,500 |   |   |   | 10.96 |   |   |   | 267,500 |   |   |   | 10.63 |   |
|                                                                       |   |              |    |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share options exercisable at end of the year                               |   |              | 232,500 |   |                            |   | 11.01  |              |   |   | 207,500 |   |   |   | 10.3 |   |   |   | 206,250 |   |   |   | 9.21 |   |

|   | (1) | The weighted average price per share of shares exercised in 2010 at the date of exercise is approximately $5. |
|--------|-----|---------------------------------------------------------------------------------------------------------------|

----

----

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

|   B. | Revenues based on the location of customers, are as follows: |
|-----------|--------------------------------------------------------------|

|                    |   | December 31, |     |
|-------------------------|--------|--------------|----------|
|                    |   |         | 2011 (*) |   |   |   | 2010 |   |   |   | 2009 |   |
|                    |   | $ thousands  |     |
|                    |   |         |     |   |   |   |   |   |   |   |   |   |
| Israel                  |   |         | 1,682    |   |   |   | 855 |   |   |   | 490 |   |
| USA & North America |   |         | 1,110    |   |   |   | 1,570 |   |   |   | 1,416 |   |
| Europe                  |   |         | 747      |   |   |   | 698 |   |   |   | 947 |   |
| Asia                    |   |         | 5,803    |   |   |   | 3,220 |   |   |   | 3,821 |   |
| South America           |   |         | 1,282    |   |   |   | 1,625 |   |   |   | 1,653 |   |
| Other                   |   |         | 3,479    |   |   |   | 1,640 |   |   |   | 1,577 |   |
|                    |   |         |     |   |   |   |   |   |   |   |   |   |
|                    |   |         | 14,103   |   |   |   | 9,608 |   |   |   | 9,904 |   |

|   | (*) | Represents income recognized until November 23, 2011, the date of Wavion's sale, see also Note 3.C.2.c) above. |
|--------|-----|----------------------------------------------------------------------------------------------------------------|

|   C. | The Group had no major customers for the years ended December 31, 2011, 2010 and 2009. |
|-----------|----------------------------------------------------------------------------------------|

|   D. | The majority of the Company's non-current assets are located in Israel. |
|-----------|-------------------------------------------------------------------------|

|   A. | Legal claims |
|-----------|--------------|

|   | 1. | In November 1999, a number of institutional shareholders of Elscint filed a claim in the District Court of Haifa, together with a request to approve certain causes of action set out in the claim, as a class action on behalf of the public shareholders of Elscint, and a request for certain causes of action to be treated as a derivative action against various defendants, including Elscint, Elbit Imaging, Elron, companies to which Elron sold its holdings in Elbit Imaging in May 1999, and certain officers in the defendant companies. The claim alleges, mainly, that Elbit Imaging is duty bound to make a tender offer for the shares of Elscint held by the public and that it unlawfully refuses to do so and, in addition, it raises allegations of preference of the interests of the defendants over those of Elscint and its public shareholders with respect to a number of transactions involving Elscint that the plaintiffs allege discriminated against Elscint's public shareholders. The relief requested in the claim, is the ordering of Elbit Imaging to make a tender offer for the publicly held shares of Elscint at a price of $14 per share or, alternatively, to require the defendants to compensate Elscint's public shareholders or Elscint itself for the damage the plaintiffs allege were caused to them by the defendants' actions, without actually indicating any amount of damages in the said claim. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | In February 2001, the plaintiffs filed an amended statement of claim with the court that is similar to the previous one but is designated as a personal claim and partly as a derivative action rather than as a purported class action. In June 2007 the plaintiffs submitted to the Haifa District Court an updated statement of claim and request to approve the claim as a class action. The updated claim claims compensation for damages sustained due to the alledged failure to effect the ender offer, but no longer seeks an order compelling the tender offer. The updated statement of claim does not specify the monetary amount claimed, but does include various allegations relating to the manner of determining the damages claimed, which depends, amongst other things, upon verification of the specific circumstances with regard to each shareholder of Elscint separately and the substance of the each damage claimed. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2009, the Haifa District Court dismissed the plaintiffs' request to approve the claim as a class action. In March 2009, the plaintiffs appealed against the Haifa District Court's decision. The hearing on the appeal took place on December 8, 2010 and the Company is awaiting the Supreme Court's decision. At this stage, the personal claims of the plaintiffs for monetary damages and their request to treat certain of it as a derivative action remain pending. The Company has instituted execution office proceedings against the plaintiffs in connection with the expenses awarded to the Company up to the present time in the class action. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | With respect to the claim regarding Elscint, detailed in section 1 above, against Elron and various other defendants, in September 2006 two additional claims were filed in the Haifa District Court against the same defendants and based substantially on the same facts of the claim detailed in section 1 above, along with requests to recognize the claims as class actions. The claims are for an undisclosed amount. The court has determined that at this stage the defendants do not yet have to file statements of defense. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | The Company rejects all the allegations described above in Paragraphs 1 and 2 above, and management is of the opinion, based on the legal advice received, that it has good defense arguments against these claims, to the extent they are directed against it, which, more likely than not, will cause dismissal of the claims. Therefore, no provision in connection with the claims described above has been included in Elron's financial statements. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | The Company is involved in various claims, in addition to those described above, in the ordinary course of business. The costs that may result from these claims are recognized as provisions only when it is more likely than not that an obligation originating from past events will arise, and the amount of that obligation can be quantified or estimated within a reliable range. The amount of the provisions is based on the estimated risk factor in every claim. Events occuring during legal deliberations may require a renewed valuation of that estimation. The Company's estimation of the risk is based on the legal opinion of its legal consultants as well as the Company's estimation for probable settlement amounts that the Company may pay, providing both parties agree to the settlement's conditions. The aggregate amount of these claims, if accepted, is estimated by the plaintiffs at an immaterial amount. No provision was included in the financial statements in respect of these additional claims. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   B. | Commitments |
|-----------|-------------|

|   | 1. | Operating lease commitments |
|--------|----|-----------------------------|

|                      |   | $ thousands |   |
|---------------------------|--------|-------------|--------|
| First year                |   |        | 535    |   |
| Second through fifth year |   |        | 1,463  |   |
|                      |   |        |   |   |
| Total                     |   |        | 1,998  |   |

|   | 2. | For details about the Services Agreement with DIC, see Note 23.B. |
|--------|----|-------------------------------------------------------------------|

|   | 3. | For details about other commitments with related parties, see Note 23. |
|--------|----|------------------------------------------------------------------------|

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

|                                                |   | For the     |   |   | For the     |   |    | For the     |   |
|-----------------------------------------------------|--------|-------------|--------|--------|-------------|--------|---------|-------------|--------|
|                                                |   | year ended  |   |   | year ended  |   |    | year ended  |   |
|                                                |   | December 31 |   |   | December 31 |   |    | December 31 |   |
|                                                |   | 2011        |   |   | 2010        |   |    | 2009        |   |
|                                                |   | $ thousands |   |
| Wavion (see Note 3.C.2.c))                          |   |        | 21,436 |   |        |   | -       |        |   |   | - |   |
| Starling (see Note 3.C.2.a))                        |   |        | 9,602  |   |        |   | -       |        |   |   | - |   |
| Medingo (see Note 3.C.2.b))                         |   |        | -      |   |        |   | 133,467 |        |   |   | - |   |
| Safend (see Note 3.C.1.e))                          |   |        | 2,286  |   |        |   | -       |        |   |   | - |   |
| Kyma(see Note 3.C.2.f))                             |   |        | 407    |   |        |   | -       |        |   |   | - |   |
| Teledata (see Note 3.C.1.b))                        |   |        | -      |   |        |   | 22,364  |        |   |   | - |   |
| Galil (see Note 3.C.1.c))                           |   |        | -      |   |        |   | 773     |        |   |   | - |   |
| NetVision (See Note 3.C.1.j))                       |   |        | -      |   |        |   | -       |        |   |   | 21,900 |   |
| 3DV (See Note 3.C.1.k))                             |   |        | -      |   |        |   | 1,034   |        |   |   | 6,090 |   |
| ChipX (See Note 3.C.1.l))                           |   |        | -      |   |        |   | -       |        |   |   | 1,548 |   |
| Sela (See Note 3.C.2.e))                            |   |        | -      |   |        |   | 988     |        |   |   | 1,115 |   |
| Notal (See Note 3.C.1.h))                           |   |        | -      |   |        |   | 1,610   |        |   |   | - |   |
| Other (mainly due to decrease in holdings in Given) |   |        | 2,084  |   |        |   | (226    | )           |   |   | 1,149 |   |
|                                                |   |        | 35,815 |   |        |   | 160,010 |        |   |   | 31,802 |   |

----

----

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

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                 |   | $ thousands |   |
| Materials                            |   |        | 1,659  |   |        |   | 3,724  |        |   |   | 4,023 |   |
| Depreciation and amortization        |   |        | 81     |   |        |   | 57     |        |   |   | 74 |   |
| Salaries, wages and related expenses |   |        | 316    |   |        |   | 276    |        |   |   | 507 |   |
| Changes in inventories and other     |   |        | 3,767  |   |        |   | (109   | )           |   |   | 220 |   |
|                                 |   |        | 5,823  |   |        |   | 3,948  |        |   |   | 4,824 |   |

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

|                             |   | For the     |   |   | For the     |   |   | For the     |   |
|----------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                             |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                             |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                             |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                             |   | $ thousands |   |
| Cost of research and development |   |        | 19,731 |   |        |   | 20,203 |        |   |   | 26,163 |   |
| Less: government grants          |   |        | 1,547  |   |        |   | 1,994  |        |   |   | 464 |   |
|                             |   |        |   |   |        |   |   |        |   |   |   |   |
|                             |   |        | 18,184 |   |        |   | 18,209 |        |   |   | 25,699 |   |

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

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                 |   | $ thousands |   |
| Salaries, wages and related expenses |   |        | 3,254  |   |        |   | 3,445  |        |   |   | 4,228 |   |
| Depreciation                         |   |        | 2      |   |        |   | 12     |        |   |   | 21 |   |
| Rent and building maintenance        |   |        | 70     |   |        |   | 111    |        |   |   | 143 |   |
| Advertising and public relations     |   |        | 171    |   |        |   | 523    |        |   |   | 1,636 |   |
| Commissions and royalties            |   |        | 882    |   |        |   | 1,427  |        |   |   | 981 |   |
| Other                                |   |        | 1,293  |   |        |   | 1,033  |        |   |   | 1,976 |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
|                                 |   |        | 5,672  |   |        |   | 6,551  |        |   |   | 8,985 |   |

----

----

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

|                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                 |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                 |   | $ thousands |   |
| Salaries, wages and related expenses |   |        | 3,808  |   |        |   | 6,999  |        |   |   | 8,943 |   |
| Services agreement with DIC (*)      |   |        | 1,423  |   |        |   | 1,312  |        |   |   | 848 |   |
| Depreciation and amortization        |   |        | 58     |   |        |   | 80     |        |   |   | 141 |   |
| Rent and building maintenance        |   |        | 905    |   |        |   | 1,132  |        |   |   | 1,658 |   |
| Professional services                |   |        | 2,094  |   |        |   | 2,312  |        |   |   | 2,182 |   |
| Other                                |   |        | 2,186  |   |        |   | 1,742  |        |   |   | 2,093 |   |
|                                 |   |        |   |   |        |   |   |        |   |   |   |   |
|                                 |   |        | 10,474 |   |        |   | 13,577 |        |   |   | 15,865 |   |

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

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

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

|                                                       |   | For the     |   |   | For the     |   |   | For the     |   |
|------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                       |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                                       |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                                       |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                                       |   | $ thousands |   |
|                                                       |   |        |   |   |        |   |   |        |   |
| Interest income from loans, deposits and other receivables |   |        | 258    |   |        |   | 436    |        |   |   | 782 |   |
| Interest income from bank deposits                         |   |        | 601    |   |        |   | 784    |        |   |   | 111 |   |
| Income from exchange rate differences, net                 |   |        | -      |   |        |   | 1,294  |        |   |   | - |   |
| Other                                                      |   |        | 645    |   |        |   | 225    |        |   |   | 520 |   |
| Total financial income                                     |   |        | 1,504  |   |        |   | 2,739  |        |   |   | 1,413 |   |

----

----

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

|                                                                                                         |   | For the     |       |   | For the     |   |         | For the     |   |
|--------------------------------------------------------------------------------------------------------------|--------|-------------|------------|--------|-------------|--------|--------------|-------------|--------|
|                                                                                                         |   | year ended  |       |   | year ended  |   |         | year ended  |   |
|                                                                                                         |   | December 31 |       |   | December 31 |   |         | December 31 |   |
|                                                                                                         |   | 2011        |       |   | 2010        |   |         | 2009        |   |
|                                                                                                         |   | $ thousands |       |
|                                                                                                         |   |        |       |   |        |   |         |        |   |
| Interest expenses on financial liabilities measured at amortized cost                                        |   |        |   426 |   |        |   |   1,541 |        |   |   |   2,806 |   |
| Interest expenses on financial liabilities measured at fair value                                            |   |        | -          |   |        |   | -            |        |   |   | 316 |   |
| Negative change in fair value of financial assets and liabilities measured through profit and loss, net |   |        |   714 |   |        |   |   1,331 |        |   |   |   901 |   |
| Loss from change in exchange rate of foreign currency, net                                                   |   |        | 1,822      |   |        |   | -            |        |   |   | 818 |   |
| Commissions                                                                                                  |   |        | 209        |   |        |   | 109          |        |   |   | 94 |   |
| Other financial expenses                                                                                     |   |        | 688        |   |        |   | 50           |        |   |   | 499 |   |
| Total financial expenses                                                                                     |   |        | 3,859      |   |        |   | 3,031        |        |   |   | 5,434 |   |

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

|                                   |   | For the     |   |   | For the     |   |   | For the     |   |
|----------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                   |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                   |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                   |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                   |   | $ thousands |   |
| Deposits and receivables               |   |        |   |   |        |   |   |        |   |
| Bank deposits                          |   |        | 611    |   |        |   | 842    |        |   |   | 111 |   |
| Other deposits and other receivables   |   |        | (929   | )      |        |   | 1,897  |        |   |   | 782 |   |
|                                   |   |        |   |   |        |   |   |        |   |   |   |   |
| Financial liabilities                  |   |        |   |   |        |   |   |        |   |   |   |   |
| Convertible debentures (*)             |   |        | (714   | )      |        |   | (1,331 | )           |   |   | (1,217 | ) |
| Loans - current                        |   |        | -      |   |        |   | -      |        |   |   | (891 | ) |
| Loans - non-current                    |   |        | (1,323 | )      |        |   | (1,700 | )           |   |   | (2,806 | ) |
|                                   |   |        |   |   |        |   |   |        |   |   |   |   |
| Total financial income (expenses), net |   |        | (2,355 | )      |        |   | (292   | )           |   |   | (4,021 | ) |

|   | (*) | See Note 3.C.2.a) above. |
|--------|-----|--------------------------|

----

----

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

|                                                 |   | For the     |   |   | For the     |   |   | For the     |   |
|------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                 |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                                 |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                                 |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                                 |   | $ thousands |   |
| Company's share in net losses of associates (1) (2)  |   |        | 5,810  |   |        |   | 6,227  |        |   |   | 4,614 |   |
| Amortization of excess cost in respect of associates |   |        | 4,564  |   |        |   | 4,636  |        |   |   | 5,900 |   |
| Total loss on equity basis, net                      |   |        | 10,374 |   |        |   | 10,863 |        |   |   | 10,514 |   |

|   | (1) | Including the Company's share in the losses of consolidated companies through the dates of their initial consolidation and of previously consolidated companies from the date of their deconsolidation and initial treatment under the equity method of accounting. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (B) | See also Note 3.A above. |
|--------|-----|--------------------------|

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

|                                                                           |   | For the     |   |   | For the     |   |   | For the     |   |
|--------------------------------------------------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|-------------|--------|
|                                                                           |   | year ended  |   |   | year ended  |   |   | year ended  |   |
|                                                                           |   | December 31 |   |   | December 31 |   |   | December 31 |   |
|                                                                           |   | 2011        |   |   | 2010        |   |   | 2009        |   |
|                                                                           |   | $ thousands |   |
|                                                                           |   |        |   |   |        |   |   |        |   |
| Impairment losses from investments, financial assets and intangible assets (1) |   |        | 15,720 |   |        |   | 4,194  |        |   |   | 1,853 |   |
| Equity in losses of partnerships - Innomed                                     |   |        | 1,065  |   |        |   | (118   | )           |   |   | 234 |   |
| Gain from sale of KIT (2)                                                      |   |        | -      |   |        |   | (1,993 | )           |   |   | - |   |
| Loss from sale of property, plant and equipment                                |   |        | 1      |   |        |   | 66     |        |   |   | 64 |   |
| Impairment charge in respect of inventory of Starling (see also Note 7)        |   |        | 3,233  |   |        |   | 1,011  |        |   |   | - |   |
| Other (3)                                                                      |   |        | (585   | )      |        |   | (24    | )           |   |   | 79 |   |
|                                                                           |   |        | 19,434 |   |        |   | 3,136  |        |   |   | 2,230 |   |

|   | (1) | Impairment losses in 2011 are primarily due to an impairment charge in respect of the investment in Enablence's shares (see Note 8.C) and debentures (see Note 8.C) and an impairment charge in respect of BPT (see Note 8.C). Impairment losses in 2010 were primarily due to an impairment charge in respect of Impliant which resulted from the decision of Impliant's Board of Directors to cease its operations (see Note 3.C.1.f)) and an impairment charge in respect of technology of Wavion (see Note 3.C.2.c)). Impairment losses in 2009 were primarily due to impairment charges of approximately $900 and $400 in respect of Radlive Ltd. and Kyma, respectively. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | (3) | Other income in 2011 are primarily comprised of a gain from the sale of shares of  GigOptix (in the amount of approximately $415)and a gain from the sale of shares of EVS (in the amount of approximately $128). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   A. | Tax laws applicable to the Group companies |
|-----------|--------------------------------------------|

----

----

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

|   | 1. | Its main field of activity is biotechnology or nanotechnology as approved by the Head of the Administration of Industrial Research and Development, prior to the approval of the aforementioned plan. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Its sales revenues during the tax year of the facility from a specific country do not exceed 75% of its total revenues of the facility for that tax year. A "market" is defined as a separate country or customs duty territory. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | At least 25% of its revenues during the tax year were generated by sales of the facility in a specific market with a population of at least 12 million. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   B. | Tax rates applicable to the Group |
|-----------|-----------------------------------|

| C. | The Company received final tax assessments through 2005. The subsidiaries received final tax assessments through 2005-2006. |
|----|-----------------------------------------------------------------------------------------------------------------------------|

----

----

|   D. | Carryforward operating tax losses and capital losses of the Group total approximately $290,000 as of December 31, 2011. Carryforward tax losses in Israel may be set against future taxable income. Deferred tax assets relating to carryforward operating losses and to other temporary differences of approximately $90,000 were not recognized because their utilization in the foreseeable future is not probable. In addition, the Company does not have tax results carried to other comprehensive income. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   E. | Taxes on income included in the statements of income |
|-----------|------------------------------------------------------|

|                                   |   | Year ended December 31, |   |
|----------------------------------------|--------|-------------------------|--------|
|                                   |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
|                                   |   | $ thousands             |   |
|                                   |   |                    |   |   |   |   |   |   |   |
| Current taxes                          |   |                    | -      |   |   |   | 1,735 |   |   |   | - |   |
| Deferred taxes                         |   |                    | 400    |   |   |   | 4,746 |   |   |   | - |   |
| Net taxes in respect of previous years |   |                    | 202    |   |   |   | (369 | ) |   |   | (2,453 | ) |
|                                   |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                   |   |                    | 602    |   |   |   | 6,112 |   |   |   | (2,453 | ) |

|   F. | Deferred taxes |
|-----------|----------------|

----

----

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

|                                                                                                       |   | Year ended December 31, |    |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                       |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
|                                                                                                       |   | $ thousands             |    |
|                                                                                                       |   |                    |    |   |   |   |   |   |   |
| Income (loss) before taxes on income                                                                       |   |                    | (22,711 | ) |   |   | 111,558 |   |   |   | (31,848 | ) |
|                                                                                                       |   |                    |    |   |   |   |   |   |   |   |   |   |
| Statutory tax rate                                                                                         |   |                    | 24      | % |   |   | 25 | % |   |   | 26 | % |
|                                                                                                       |   |                    |    |   |   |   |   |   |   |   |   |   |
| Tax (tax saving) computed at the statutory tax rate                                                        |   |                    | (5,451  | ) |   |   | 27,890 |   |   |   | (8,280 | ) |
| Increase (decrease) in taxes on income resulting from the following factors:                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| Company's share of earnings (losses) of associates                                                         |   |                    | 2,490   |   |   |   | 2,716 |   |   |   | 2,734 |   |
| Changes in temporary differences with respect to which deferred taxes were not recognized                  |   |                    | (6,349  | ) |   |   | (39,490 | ) |   |   | (1,632 | ) |
| Increase in unrecognized tax losses for which deferred taxes were not recognized                           |   |                    | 9,693   |   |   |   | 22,237 |   |   |   | 7,035 |   |
| Utilization of previously unrecognized tax losses for which deferred taxes were not recognized in the past |   |                    | (37     | ) |   |   | (7,272 | ) |   |   | - |   |
| Non-deductible expenses for tax purposes                                                                   |   |                    | 413     |   |   |   | 400 |   |   |   | 143 |   |
| Income in a special tax rate                                                                               |   |                    | (359    | ) |   |   | - |   |   |   | - |   |
| Taxes in respect of previous years                                                                         |   |                    | 202     |   |   |   | (369 | ) |   |   | (2,453 | ) |
|                                                                                                       |   |                    |    |   |   |   |   |   |   |   |   |   |
| Taxes on income (tax benefit)                                                                              |   |                    | 602     |   |   |   | 6,112 |   |   |   | (2,453 | ) |

|   A. | Basic net earnings (loss) per share |
|-----------|-------------------------------------|

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

|                                                                                        |   | Year ended December 31, |    |
|---------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                        |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
|                                                                                        |   | $ thousands             |    |
|                                                                                        |   |                    |    |   |   |   |   |   |   |
| Net earnings (loss) attributable to ordinary shareholders                                   |   |                    | (17,021 | ) |   |   | 60,678 |   |   |   | (14,304 | ) |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Adjustment for Company's share in the basic net earnings (loss) per share of associates (*) |   |                    | (1,745  | ) |   |   | (1,918 | ) |   |   | 50 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Income (loss) used in computation of basic net earnings (loss) per share                    |   |                    | (18,766 | ) |   |   | 58,760 |   |   |   | (14,254 | ) |

----

----

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

|                                                                                                                   |   | Year ended December 31, |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                                   |   | 2011                    |       |   | 2010 |   |   | 2009 |   |
|                                                                                                                   |   | $ thousands             |       |
|                                                                                                                   |   |                    |       |   |   |   |   |   |   |
| Balance as of January 1                                                                                                |   |                    | 29,660,017 |   |   |   | 29,650,017 |   |   |   | 29,650,017 |   |
|                                                                                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Effect of options converted into shares                                                                                |   |                    | -          |   |   |   | 4,611 |   |   |   | - |   |
|                                                                                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of ordinary shares used in the    computation of basic net earnings (loss) per share |   |                    | 29,660,017 |   |   |   | 29,654,628 |   |   |   | 29,650,017 |   |

|   B. | Diluted net earnings (loss) per share |
|-----------|---------------------------------------|

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

|                                                                                          |   | Year ended December 31, |    |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                          |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
|                                                                                          |   | $ thousands             |    |
|                                                                                          |   |                    |    |   |   |   |   |   |   |
| Income (loss) used in the computation of basic net earnings (loss) per share                  |   |                    | (18,766 | ) |   |   | 58,760 |   |   |   | (14,254 | ) |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Adjustment for Company's share in the diluted net earnings (loss) per share of associates (*) |   |                    | -       |   |   |   | 38 |   |   |   | (338 | ) |
|                                                                                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Income (loss) used in computation of diluted net earnings (loss) per share                    |   |                    | (18,766 | ) |   |   | 58,798 |   |   |   | (14,592 | ) |

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

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

|                                                                                                                     |   | Year ended December 31, |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                                                                     |   | 2011                    |       |   | 2010 |   |   | 2009 |   |
|                                                                                                                     |   | $ thousands             |       |
|                                                                                                                     |   |                    |       |   |   |   |   |   |   |
| Number of shares used in the computation of basic net earnings (loss) per share                                          |   |                    | 29,660,017 |   |   |   | 29,654,628 |   |   |   | 29,650,017 |   |
|                                                                                                                     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Effect of options convertible into shares                                                                                |   |                    | -          |   |   |   | 11,572 |   |   |   | - |   |
|                                                                                                                     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of ordinary shares used in the    computation of diluted net earnings (loss) per share |   |                    | 29,660,017 |   |   |   | 29,666,200 |   |   |   | 29,650,017 |   |

----

----

|   A. | Related parties |
|-----------|-----------------|

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

----

----

----

----

|   | a) | As for loans granted by the Company to Starling see Note 3.C.2.a). |
|--------|----|--------------------------------------------------------------------|

|   | b) | As for loans granted by the Company to RDC and their repayment see Note 3.C.2.d). |
|--------|----|-----------------------------------------------------------------------------------|

|   | c) | As for the Company's and RDC's holdings in Starling convertible debentures see Note 3.C.2.a). |
|--------|----|-----------------------------------------------------------------------------------------------|

|   | d) | As for loans granted by the Company to Wavion see Note 3.C.2.c). |
|--------|----|------------------------------------------------------------------|

|   | e) | As for loans granted by the Company to Pocared and their conversion, see Note 3.C.1.a). |
|--------|----|-----------------------------------------------------------------------------------------|

|   | f) | As for loans granted by the Company to NuLens, see Note 3.C.1.d). |
|--------|----|-------------------------------------------------------------------|

|   | g) | As for a loan granted by the Company to Safend see Note 3.C.1.e). |
|--------|----|-------------------------------------------------------------------|

----

----

|   | C. | Composition of balances with interested and related parties As of December 31, 2011 |
|--------|----|------------------------------------------------------------------------------------------|

|                                                       |   | Controlling shareholder (parent company) |   |   | Other related parties and interested parties |   |   | Ultimate parent company |   |   | Associates |   |   | Key management personnel |   |
|------------------------------------------------------------|--------|------------------------------------------|--------|--------|----------------------------------------------|--------|--------|-------------------------|--------|--------|------------|--------|--------|--------------------------|--------|
|                                                       |   | $ thousands                              |   |
|                                                       |   |                                     |   |   |                                         |   |   |                    |   |   |       |   |   |                     |   |
| Other accounts receivable                                  |   |                                     | 4      |   |                                         |   | 2      |                    |   |   | -          |   |   |                     | 7      |   |   |   | - |   |
| Other accounts payable                                     |   |                                     | (11    | )      |                                         |   | -      |                    |   |   | (4         | )      |   |                     | -      |   |   |   | (157 | ) |
| Highest balance during the year of loans and current debts |   |                                     | -      |   |                                         |   | -      |                    |   |   | -          |   |   |                     | 12     |   |   |   | - |   |

|                                                       |   | Controlling shareholder (parent company) |   |   | Other related parties and interested parties |   |   | Ultimate parent company |   |   | Associates |   |   | Key management personnel |   |
|------------------------------------------------------------|--------|------------------------------------------|--------|--------|----------------------------------------------|--------|--------|-------------------------|--------|--------|------------|--------|--------|--------------------------|--------|
|                                                       |   | $ thousands                              |   |
|                                                       |   |                                     |   |   |                                         |   |   |                    |   |   |       |   |   |                     |   |
| Other accounts receivable                                  |   |                                     | 12     |   |                                         |   | -      |                    |   |   | -          |   |   |                     | 30     |   |   |   | - |   |
| Other accounts payable                                     |   |                                     | (15    | )      |                                         |   | (2     | )                       |   |   | (32        | )      |   |                     | -      |   |   |   | (180 | ) |
| Convertible debentures                                     |   |                                     | -      |   |                                         |   | (530   | )                       |   |   | -          |   |   |                     | -      |   |   |   | - |   |
| Highest balance during the year of loans and current debts |   |                                     | -      |   |                                         |   | -      |                    |   |   | -          |   |   |                     | 30     |   |   |   | - |   |

----

----

|   | D. | Transactions with related and interested parties |
|--------|----|--------------------------------------------------|

|                                     |   | For terms |   |   | Controlling shareholder (parent company) |   |   | Sister companies |   | Ultimate parent company |   |   | Associates and subsidiaries |   |   | Key management personnel |   |   | Other related parties and interested party |   |
|------------------------------------------|--------|-----------|--------|--------|-----------------------------------------------|--------|--------|------------------|--------|-------------------------|--------|--------|-----------------------------|--------|--------|--------------------------|--------|--------|--------------------------------------------|--------|
|                                     |   | see Note  |   |   | $ thousands                                   |   |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |
| Income                                   |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |
| Interest and commission for guarantees   |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | 38     |                                       |   |   | - |   |   |   | - |   |
| Participation in directors' remuneration |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | 59     |                                       |   |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | 11     |   |             |   | -                       |   |   |                        | 3      |   |                     |   | 24     |                                       |   |   | - |   |   |   | - |   |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
| Expenses                                 |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
| Services Agreement-related expenses      |   | 23.B      |   |   |                                          | (1,423 | )      |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | (49    | )      |                     |   | -      |                                       |   |   | - |   |   |   | - |   |
| Directors' remuneration                  |   | 23.D.5    |   |   |                                          | (48    | )      |             |   | -                       |   |   |                        | (9     | )      |                     |   | -      |                                       |   |   | (372 | ) |   |   | - |   |
| Insurance-related expenses               |   | 23.D.4    |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   | (123 | ) |
| Salaries, wages and related expenses     |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | (697 | ) |   |   | - |   |
| Other                                    |   |      |   |   |                                          | -      |   |             |   | (145                    | )      |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   | (68 | ) |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
|                                     |   |      |   |   |                                          | (1,460 | )      |             |   | (145                    | )      |   |                        | (55    | )      |                     |   | 121    |                                       |   |   | (1,069 | ) |   |   | (191 | ) |

----

----

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

|                                     |   | For terms |   |   | Controlling shareholder (parent company) |   |   | Sister companies |   | Ultimate parent company |   |   | Associates and subsidiaries |   |   | Key management personnel |   |   | Other related parties and interested party |   |
|------------------------------------------|--------|-----------|--------|--------|-----------------------------------------------|--------|--------|------------------|--------|-------------------------|--------|--------|-----------------------------|--------|--------|--------------------------|--------|--------|--------------------------------------------|--------|
|                                     |   | see Note  |   |   | $ thousands                                   |   |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |
| Income                                   |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |
| Interest and commission for guarantees   |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | 147    |                                       |   |   | - |   |   |   | - |   |
| Participation in directors' remuneration |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | 35     |                                       |   |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | 38     | (*)    |             |   | -                       |   |   |                        | 3      |   |                     |   | 29     |                                       |   |   | - |   |   |   | - |   |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
| Expenses                                 |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
| Services Agreement-related expenses      |   | 23.B      |   |   |                                          | (1,312 | )      |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | (78    | )      |                     |   | -      |                                       |   |   |   |   |   |   | - |   |
| Directors' remuneration                  |   | 23.D.5    |   |   |                                          | (70    | )      |             |   | -                       |   |   |                        | (25    | )      |                     |   | -      |                                       |   |   | (371 | ) |   |   | - |   |
| Interest expenses                        |   | 15(5)     |   |   |                                          | (742   | )      |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   |   |   |
| Insurance-related expenses               |   | 23.D.4    |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   |   |   |   |   | (321 | ) |
| Salaries, wages and related expenses     |   |      |   |   |                                          | -      |   |             |   | -                       |   |   |                        | -      |   |                     |   | -      |                                       |   |   | (903 | ) |   |   | - |   |
| Other                                    |   |      |   |   |                                          | -      |   |             |   | (137                    | )      |   |                        | -      |   |                     |   | -      |                                       |   |   | - |   |   |   | (360 | ) |
|                                     |   |      |   |   |                                          |   |   |             |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |   |
|                                     |   |      |   |   |                                          | (2,086 | )      |             |   | (137                    | )      |   |                        | (100   | )      |                     |   | 211    |                                       |   |   | (1,274 | ) |   |   | (681 | ) |

----

----

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

|                                     |   | For terms |   |   | Controlling shareholder (parent company) |   |   | Sister companies |   |   | Ultimate parent company |   |   | Associates and subsidiaries |   |   | Key management personnel |   |   | Other related parties and interested party |   |
|------------------------------------------|--------|-----------|--------|--------|-----------------------------------------------|--------|--------|------------------|--------|--------|-------------------------|--------|--------|-----------------------------|--------|--------|--------------------------|--------|--------|--------------------------------------------|--------|
|                                     |   | see Note  |   |   | $ thousands                                   |   |
|                                     |   |      |   |   |                                          |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Income                                   |   |      |   |   |                                          |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |
| Interest and commission for guarantees   |   |      |   |   |                                          | -      |   |             |   | -      |                    |   |   | -                           |   |   |                     | 750    |   |                                       |   | - |   |   |   | - |   |
| Participation in directors' remuneration |   |      |   |   |                                          | -      |   |             |   | -      |                    |   |   | -                           |   |   |                     | 80     |   |                                       |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | 102    |   |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | - |   |
| Consideration from sale of NetVision     |   | 3.C.1.j)  |   |   |                                          | 34,109 |   |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | 26,661 |   |
|                                     |   |      |   |   |                                          |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |
| Expenses                                 |   |      |   |   |                                          |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |
| Services Agreement-related expenses      |   | 23.B      |   |   |                                          | (848   | )      |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | - |   |
| Participation in expenses                |   |      |   |   |                                          | -      |   |             |   | -      |                    |   |   | (32                         | )      |   |                     | -      |   |                                       |   | - |   |   |   | - |   |
| Directors' remuneration                  |   | 23.D.5    |   |   |                                          | (79    | )      |             |   | -      |                    |   |   | (23                         | )      |   |                     | -      |   |                                       |   | (309 | ) |   |   | - |   |
| Interest expenses                        |   | 15(5)     |   |   |                                          | (1,561 | )      |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | - |   |
| Insurance-related expenses               |   | 23.D.4    |   |   |                                          | -      |   |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | (321 | ) |
| Salaries, wages and related expenses     |   |      |   |   |                                          | -      |   |             |   | -      |                    |   |   | -                           |   |   |                     | -      |   |                                       |   | (802 | ) |   |   |   |   |
| Other                                    |   |      |   |   |                                          | -      |   |             |   | (108   | )                       |   |   | -                           |   |   |                     | -      |   |                                       |   | - |   |   |   | (131 | ) |
|                                     |   |      |   |   |                                          |   |   |             |   |   |                    |   |   |                        |   |   |                     |   |   |                                       |   |   |   |   |   |   |   |
|                                     |   |      |   |   |                                          | 31,723 |   |             |   | (108   | )                       |   |   | (55                         | )      |   |                     | 830    |   |                                       |   | (1,111 | ) |   |   | 26,209 |   |

----

----

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

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

|                             |   | No. of personnel in |   |   | For the year ended December 31, 2011 |   |   | No. of personnel in |   |   | For the year ended December 31, 2010 |   |   | No. of personnel in |   |   | For the year ended December 31, 2009 |   |
|----------------------------------|--------|---------------------|--------|--------|-------------------------------------------|--------|--------|---------------------|--------|--------|-------------------------------------------|--------|--------|---------------------|--------|--------|-------------------------------------------|--------|
|                             |   | 2011                |   |   | $ thousands                               |   |   | 2010                |   |   | $ thousands                               |   |   | 2009                |   |   | $ thousands                               |   |
| Short-term employee benefits     |   |                | 1      |   |                                      |   | 509    | (*)                 |   |   | 1                                         |   |   |                | 767    | (*)    |                                      |   | 1 |   |   |   | 617 |   |
| Termination benefits             |   |                | 1      |   |                                      |   | 56     |                |   |   | 1                                         |   |   |                | 51     |   |                                      |   | 1 |   |   |   | 49 |   |
| Share-based payment transactions |   |                | 1      |   |                                      |   | 132    |                |   |   | 1                                         |   |   |                | 85     |   |                                      |   | 1 |   |   |   | 136 |   |
| Total                            |   |                |   |   |                                      |   | 697    |                |   |   |                                      |   |   |                | 903    |   |                                      |   |   |   |   |   | 802 |   |

| (*) | See Section 1 (Grants) below for details regarding a bonus for the year 2010 which was included under short-term benefits. |
|-----|----------------------------------------------------------------------------------------------------------------------------|

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

|                         |   | No. of personnel in |   |   | For the year ended December 31, 2011 |   |   | No. of personnel in |   |   | For the year ended December 31, 2010 |   |   | No. of personnel in |   |   | For the year ended December 31, 2009 |   |
|------------------------------|--------|---------------------|--------|--------|-------------------------------------------|--------|--------|---------------------|--------|--------|-------------------------------------------|--------|--------|---------------------|--------|--------|-------------------------------------------|--------|
|                         |   | 2011                |   |   | $ thousands                               |   |   | 2010                |   |   | $ thousands                               |   |   | 2009                |   |   | $ thousands                               |   |
| Short-term employee benefits |   |                | 10     |   |                                      |   | 429    |                |   |   | 10                                        |   |   |                | 466    |   |                                      |   | 12 |   |   |   | 411 |   |

|   | 1. | Grants: |
|--------|----|---------|

----

----

----

----

|   | 2. | Consulting Agreement |
|--------|----|----------------------|

|   | In September 2009, following the approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved a consulting agreement with one of its directors, Prof. Gabi Barbash, pursuant to which, in addition to his director fees, he will receive $5,000 per month for his additional services to to the Company, mainly consulting services in connection with its medical device group companies. The agreement commenced in August 2009 and terminated in August 2010. In October 2011, following the approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved the renewal of the consulting agreement commencing from September 2010 until December 2012, on the same terms. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Indemnification and exemption to directors and officers |
|--------|----|---------------------------------------------------------|

|   | In 2001, following the approval of the Company's Audit Committee, Board of Directors and shareholders, the Company granted letters of indemnification to its directors and officers. The aggregate indemnification shall not exceed 25% of the Company's shareholders' equity according to the Company's consolidated financial statements for the year ended December 31, 2000, amounting to approximately $70,000, for all persons and cases to be indemnified. In addition, the Company undertook to exempt its directors and officers, to the extent permitted by law, from any liability towards the Company for any damage caused or that may be caused to it by them, if caused or that may be caused following a breach of their duty of care towards it. The Company continues to grant letters of exemption to its directors and officers who and/or whose relatives are not controlling shareholders and/or in the granting of which the Company's controlling shareholders do not have a personal interest, in accordance with the above terms. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Following approval of the Company's Audit Committee, Board of Directors and shareholders, commencing from February 2012, subsequent to the reporting date, the Company grants amended letters of indemnification to all of the directors and officers who serve and will serve from time to time, and to its officers (including directors) who serve and/or shall serve therein from time to time and who are and/or whose relatives are controlling shareholders as of February 1, 2012 and/or in the granting of which the Company's controlling shareholders may have a personal interest. The indemnification amount that the Company shall pay to all of its officers, in the aggregate, including officers who serve or will serve, at its request, as officers of other companies, according to all of the amended letters of indemnification that shall be issued to them by the Company according to the indemnification resolution, in respect of a monetary liability, shall not exceed, in the aggregate, 25% of the Company's equity (in U.S. dollars) according to its latest financial statements (annual or quarterly) that are known before actual payment of the indemnification. The letters of indemnification shall remain in effect until February 2021, with the exception of letters of indemnification that shall be granted to directors and to officers who and/or whose relatives are controlling shareholders, which will remain in effect for three years until February 2015. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | The Company's indemnification obligation for Elron's directors and other officers will remain in effect even after the end of the term of the directors and officers provided that the actions with respect to which the indemnification is given, were and/will be performed during the term of service or during the period in which the indemnification was in effect, as applicable. The provisions of the amended indemnification letter approved in February 2012 will prevail over any previous undertaking or consent, whether written or oral, between the Company and the said directors / officers on the matters stated in the amended letter of indemnification, also in relation to events that occurred prior to grant of the amended indemnification letter, and before indemnification was requested from the Company in relation to such events, as long as the previous indemnification, if any, continues to apply and to be valid, subject to any law, in relation to any such event (even if the indemnification was requested from the Company after the amended letter was granted) if the terms and conditions of the amended indemnification letter worsen the terms and conditions of the indemnification in relation to such event. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. |  Directors and officers insurance policy |
|--------|----|-----------------------------------------------|

|   | In April 2005, following the approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved the purchase of a directors' and officers' liability insurance policy for its and its subsidiaries' directors and officers from Clal Insurance Company Ltd. ("Clal Insurance"), a related party, and approved the application of the policy to those of its directors, and any future director or officer of the Company who may currently be considered a controlling shareholder under the Israel Companies Law, 1999. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In addition, the Company's shareholders approved any renewal and/or extension of the Policy for all its directors and officers and the purchase of any other directors' and officers' liability insurance policy for its directors and officers upon the expiration of the original policy; provided that any such renewal or purchase is for the benefit of its previous and/or current and/or future directors and officers and on terms substantially similar to those of the original policy, and provided that the premium will not increase by more than 25% in any year, as compared with the previous year. The annual premium for 2010 was $320. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On January 1, 2011, the policy was renewed for a period of 18 months ending on June 30, 2012 on the following main terms: (1) the coverage under the Policy was limited to $30,000 per claim and in the aggregate during the Policy period, an amount equal to that approved by the Company's shareholders as stated above; (2) the premium for a period of 18 months amounted to approximately $184 (an annual premium of approximately $120). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In February 2012, subsequent to the reporting date, following approval of the Company's Audit Committee and Board of Directors, the Company's shareholders approved in advance its engagement in a directors' and officers' liability insurance policy from July 1, 2012 (the date of expiration of its current policy) through Clal Insurance or through another insurer, for a period to be determined ("Initial Insurance Period"), and to approve, in advance, its engagement in an insurance policy after expiration of the Initial Insurance Period, all including by way of extension of the present policy and/or through the purchase of new policies, and which shall apply with respect to directors and officers, as shall serve in the Company or the Group from time to time, including officers who or whose relatives are controlling shareholders. The engagement in such insurance policies is subject to the Company's Audit Committee and Board of Directors having determined that no material changes occurred in the terms and conditions of the insurance compared with those of its current policy, and that the increase in the sum of the insurance premium shall not exceed 50% relative to the insurance premium paid for its current policy. This approval will remain in effect for three years from the Initial Insurance Period. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 5. |  Directors' compensation |
|--------|----|-------------------------------|

|   | Compensation to directors who are controlling persons or their family members, for their employment as directors of the Company and their participation it its meetings and committees was approved by the Company's shareholders on October 18, 2007 (following approval by the Company's Audit Committee and Board of Directors), in the maximum amounts stated in regulations 4 and 5 of the Israel Companies Regulations (Rules Regarding Remuneration and Expenses for an Outside Director), 2000. Directors' compensation or any other compensation shall not be paid to directors who are paid employees of the Company or of a company under its control, or who are eligible to compensation therefrom in a capacity other than director of the Company. Due to Amendment No. 16 to the Israel Companies Law, 1999, in December 2011, the Company's Audit Committee and Board of Directors approved to continue to grant compensation to those of the Company's  directors who are controlling shareholders and/or affiliates thereof, or to those of the Company's directors whose compensation for holding office is paid to a controlling shareholder of the Company, who at the resolution date held office and who may hold office from time to time, for a three-year period until October 24, 2014. The audit committee's and board of directors' approval was given pursuant to the Israeli Companies Regulations (Reliefs in Related Parties Transactions), 5760-2000.Directors' fees which do not exceed the customary remuneration that was paid by the Company for the year 2011 to the directors of the Company during this period, 10 directors in total, amounted to approximately $429 (see section D above). Of such amount, a sum of approximately $9 was paid to IDB Holding Corporation Ltd. for the service of two officers thereof as directors of the Company, a sum of approximately $48 was paid to DIC for the service of two officers  thereof as directors of the Company, and a sum of approximately $27 was paid to Dori Manor, a controlling shareholder of the Company, for his office as a director of the Company, in 2011. Since September 2010, Ms. Rona Dankner, a director of the Company and the daughter of the ultimate controlling shareholder of the Company, Mr. Nochi Dankner, waived the entire director's remuneration that she is entitled to receive from the Company (which amounted to immaterial amounts). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. |  Share based payments |
|--------|----|----------------------------|

|   | The Company's Chairman, in his capacity as a director of Given, holds the following options to purchase ordinary shares of Given: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

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

|   | (*) | Restricted until Given's next annual shareholders meeting, expected to take place in May 2012. |
|--------|-----|------------------------------------------------------------------------------------------------|

|   | For details regarding options on regular shares of the Company issued to the Chairman of the Company's board of directors, see Note 17.G.1. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   A. | Classification of financial assets and financial liabilities |
|-----------|--------------------------------------------------------------|

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

|                                                                                       |   | December 31, |   |
|--------------------------------------------------------------------------------------------|--------|--------------|--------|
|                                                                                       |   | 2011         |   |   | 2010 |   |
|                                                                                       |   | $ thousands  |   |
| Financial assets:                                                                          |   |         |   |   |   |   |
|                                                                                       |   |         |   |   |   |   |
| Loans and other current assets:                                                            |   |         |   |   |   |   |
| Trade receivables                                                                          |   |         | -      |   |   |   | 3,061 |   |
| Other accounts receivable                                                                  |   |         | 24,894 |   |   |   | 1,853 |   |
| Other long-term receivables                                                                |   |         | 5,249  |   |   |   | 28,053 |   |
|                                                                                       |   |         |   |   |   |   |   |   |
| Other investments (accounted as available-for-sale)                                        |   |         | 17,524 |   |   |   | 20,221 |   |
| Available-for-sale financial assets classified as held for sale                            |   |         | 3,155  |   |   |   | 17,211 |   |
|                                                                                       |   |         |   |   |   |   |   |   |
| Financial liabilities:                                                                     |   |         |   |   |   |   |   |   |
|                                                                                       |   |         |   |   |   |   |   |   |
| Financial liabilities measured at amortized cost:                                          |   |         |   |   |   |   |   |   |
| Loans from bank and others                                                                 |   |         | 3,288  |   |   |   | 1,385 |   |
| Trade payables and other current liabilities                                               |   |         | 3,999  |   |   |   | 9,931 |   |
| Royalty bearing government grants                                                          |   |         | 958    |   |   |   | 9,156 |   |
|                                                                                       |   |         |   |   |   |   |   |   |
| Financial liabilities at fair value through profit or loss:                                |   |         |   |   |   |   |   |   |
| Convertible debentures (Financial liabilities designated as such upon initial recognition) |   |         | -      |   |   |   | 3,514 |   |

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

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

|   | · | Market risk (including currency risk, CPI risk, interest rate risk and other price risk). |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | · | Credit risk. |
|--------|--------|--------------|

|   | · | Liquidity risk. |
|--------|--------|-----------------|

|   | The handling of financial exposures, formulation of hedging strategy, supervision over, execution and provision of an immediate response to extraordinary developments in the various markets, is under the responsibility of the officer responsible for the Company's risk management, who acts in consultation with the Company's CEO, Audit Committee members and Investment Committee members. A report on the implementation of the Company's policy is presented to the members of the Audit Committee on a quarterly basis. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company's principal financial liabilities comprise of loans and borrowings, royalty bearing government grants and trade and other payables. The main purpose of these financial liabilities is to finance the Company's and group companies' operations. The Company's financial assets include trade and other receivables (current and non-current), and cash and short-term deposits that derive directly from its operations. The Company also holds available-for-sale investments, and occasionally enters into derivative transactions (mainly with respect to foregin currency hedge). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | Market risk |
|--------|-------------|

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

|   | 1. | Currency risk |
|--------|----|---------------|

|   | The Company holds a significant portion of its cash balances in dollars, however, in the future, changes may take place from time to time in the amounts of these balances, in how the Company maintains its cash, and the portion of cash it holds in each currency, based on business developments and future decisions. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | CPI risk |
|--------|----|----------|

|   | The Company is engaged in a services agreement with DIC (see Note 23.B). In addition, the Company and several group companies are engaged in a number of lease agreements that are linked to the CPI for various time periods, which are also impacted by changes in the CPI. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Other price risk |
|--------|----|------------------|

|   | The Company has investments in unquoted financial instruments and in quoted financial instruments that are classified as financial assets available-for-sale and financial assets held for sale, which expose the Company to risk stemming from fluctuations in the security price determined based, among other things, on the stock market prices. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 4. | Interest risk |
|--------|----|---------------|

|   | The following table details the interest of the Group's interest-bearing financial instruments: |
|--------|-------------------------------------------------------------------------------------------------|

|                       |   | December 31, |   |
|----------------------------|--------|--------------|--------|
|                       |   | 2011         |   |   | 2010 |   |
|                       |   | $ thousands  |   |
| Fixed rate instruments:    |   |         |   |   |   |   |
|                       |   |         |   |   |   |   |
| Financial assets           |   |         | 22,208 |   |   |   | 55,744 |   |
| Financial liabilities      |   |         | -      |   |   |   | (753 | ) |
|                       |   |         |   |   |   |   |   |   |
|                       |   |         | 22,208 |   |   |   | 54,991 |   |
| Floating rate instruments: |   |         |   |   |   |   |   |   |
|                       |   |         |   |   |   |   |   |   |
| Financial assets           |   |         | 40,635 |   |   |   | 25,215 |   |
| Financial liabilities      |   |         | (4,242 | ) |   |   | (9,788 | ) |
|                       |   |         |   |   |   |   |   |   |
|                       |   |         | 36,393 |   |   |   | 15,427 |   |

|   | Credit risk |
|--------|-------------|

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

|   | As the Group holds most of its cash and cash equivalents, short-term and long-term investments and other financial instruments in various financial institutions with high credit ratings, the Group does not have significant concentrations of credit risk. The Company's policy is spreading out its cash investments among the various institutions. Pursuant to the Company's policy, assessments are made on an ongoing basis regarding the relative credit strength of the various financial institutions. As of December 31, 2011, cash and cash equivalents amounted to $40,062. In addition, other long term receivables include $1,900 in escrow from the sale of Wavion (see Note 3.C.2.c)), and other current assets include $22,639 in escrow from the sale of Medingo (see Note 3.C.2.b)). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2011 , there are no trade receivables in the consolidated statements of financial position. |
|--------|----------------------------------------------------------------------------------------------------------------|

----

----

|   | Liquidity risks |
|--------|-----------------|

|   | The Group's policy for managing its liquidity is to assure, to the extent possible, that it will have sufficient liquidity to settle its liabilities in a timely manner and to ascertain the existence of the cash balances it requires to meet its financial obligations. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   C. | Sensitivity tests relating to changes in market factors |
|-----------|---------------------------------------------------------|

|   | 1. | Sensitivity analysis of the cash flows relating to variable interest bearing instruments |
|--------|----|------------------------------------------------------------------------------------------|

|   | A change in the interest rates on the reported date would increase (decrease) the equity and the anticipated annual income or loss by the theoretical amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect to 2010 was prepared under the same assumptions. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   | Change of 0.5% in the interest rate at |   |
|--------------------------------------------------|--------|----------------------------------------|--------|
|                                             |   | December 31,                           |   |
|                                             |   | 2011                                   |   |   | 2010 |   |
|                                             |   | Increase                               |   |   | Decrease |   |   | Increase |   |   | Decrease |   |
|                                             |   | of                                     |   |   | of |   |   | of |   |   | of |   |
|                                             |   |  0.5%                             |   |   |  0.5% |   |   |  0.5% |   |   |  0.5% |   |
|                                             |   | $ thousands                            |   |
|                                             |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments  bearing variable interest |   |                                   | 263    |   |   |   | (263 | ) |   |   | 325 |   |   |   | (325 | ) |

|                                             |   | Change of 1% in the interest rate at |   |
|--------------------------------------------------|--------|--------------------------------------|--------|
|                                             |   | December 31,                         |   |
|                                             |   | 2011                                 |   |   | 2010 |   |
|                                             |   | Increase                             |   |   | Decrease |   |   | Increase |   |   | Decrease |   |
|                                             |   | of                                   |   |   | of |   |   | of |   |   | of |   |
|                                             |   |  1%                             |   |   |  1% |   |   |  1% |   |   |  1% |   |
|                                             |   | $ thousands                          |   |
|                                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Instruments  bearing variable interest |   |                                 | 528    |   |   |   | (528 | ) |   |   | 649 |   |   |   | (649 | ) |

|   | 2. | Sensitivity analysis of changes in CPI and foreign currency rates |
|--------|----|-------------------------------------------------------------------|

|   | A change in the exchange rate of the following currencies as of December 31, 2011 would increase (decrease) the Company's equity and income or loss in the amounts presented below. This analysis is made on the assumption that the rest of the variables remain constant. The analysis with respect of December 31, 2010 was prepared under the same assumptions (the impact of change in CPI on the Company's equity and income or loss is negligible). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Change inthe currencyexchange rate |        | December 312011 |        | December 312010 |   |
|--------|--------|------------------------------------|-------------|-----------------|-------------|-----------------|--------|
|   |   |                               | Gain (loss) |            | Gain (loss) |            |
|   |   | %                                  |        | $ thousands     |        |
| NIS    |   |                               | 5           |            |        | 66              |   | 1,162 |   |
|   |   |                               |        |            |        |            |   |   |   |
| NIS    |   |                               | 10          |            |        | 131             |   | 2,324 |   |
|   |   |                               |        |            |        |            |   |   |   |
| NIS    |   |                               | (5          | )               |        | (66             | )      | (1,162 | ) |
|   |   |                               |        |            |        |            |   |   |   |
| NIS    |   |                               | (10         | )               |        | (131            | )      | (2,324 | ) |

----

----

|   D. | Sensitivity tests relating to price risk |
|-----------|------------------------------------------|

|         |   | 2011        |   |   | 2010   |   |   | 2009   |   |
|--------------|--------|-------------|--------|--------|--------|--------|--------|--------|--------|
|         |   | $ thousands |   |
|         |   |        |   |   |   |   |   |   |   |
| 5% increase  |   |        | 1,034  |   |   |   | 1,872  |   |   |   | 837 |   |
| 10% increase |   |        | 2,068  |   |   |   | 3,743  |   |   |   | 1,674 |   |
| 5% decrease  |   |        | (1,034 | )      |   |   | (1,872 | )      |   |   | (837 | ) |
| 10% decrease |   |        | (2,068 | )      |   |   | (3,743 | )      |   |   | (1,674 | ) |

|         |   | 2011        |   |   | 2010   |   |   | 2009   |   |
|--------------|--------|-------------|--------|--------|--------|--------|--------|--------|--------|
|         |   | $ thousands |   |
|         |   |        |   |   |   |   |   |   |   |
| 5% decrease  |   |        | 76     |   |   |   | -      |   |   |   | - |   |
| 10% decrease |   |        | 151    |   |   |   | -      |   |   |   | - |   |

|         |   | 2011        |   |   | 2010   |   |   | 2009   |   |
|--------------|--------|-------------|--------|--------|--------|--------|--------|--------|--------|
|         |   | $ thousands |   |
|         |   |        |   |   |   |   |   |   |   |
| 30% increase |   |        | -      |   |   |   | (1,054 | )      |   |   | (1,062 | ) |
| 30% decrease |   |        | -      |   |   |   | 1,054  |   |   |   | 1,062 |   |

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

----

----

|                                  |   | December 31, 2011 |   |   | December 31, 2010 |   |
|---------------------------------------|--------|-------------------|--------|--------|-------------------|--------|
|                                  |   |              |   |   |              |   |   | Interest |   |   |   |   |   |   |   |   | Interest |   |
|                                  |   |              |   |   |              |   |   | rate |   |   |   |   |   |   |   |   | rate |   |
|                                  |   |              |   |   |              |   |   | used to |   |   |   |   |   |   |   |   | used to |   |
|                                  |   |              |   |   |              |   |   | calculate |   |   |   |   |   |   |   |   | calculate |   |
|                                  |   |              |   |   |              |   |   | the |   |   |   |   |   |   |   |   | the |   |
|                                  |   | Carrying          |   |   | Fair              |   |   | fair |   |   | Carrying |   |   | Fair |   |   | fair |   |
|                                  |   | amount            |   |   | Value             |   |   | value |   |   | amount |   |   | value |   |   | value |   |
|                                  |   | $ thousands       |   |   |              |   |   | $ thousands |   |   |   |   |
|                                  |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                        |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Enablence debentures *                |   |              | -      |   |              |   | - |   |   |   | - |   |   |   | 3,878 |   |   |   | 3,828 |   |   |   | 6 | % |
| Non-current assets                    |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other long term receivables           |   |              | 2,611  |   |              |   | 2,611 |   |   |   | 8.5 | % |   |   | - |   |   |   | - |   |   |   | - |   |
| Financial liabilities                 |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term loans from bank and others* |   |              | (3,288 | )      |              |   | (3,203 | ) |   |   | 4.3 | % |   |   | (1,385 | ) |   |   | (1,385 | ) |   |   | 6.3 | % |
|                                  |   |              | (677   | )      |              |   | (592 | ) |   |   |   |   |   |   | 2,493 |   |   |   | 2,443 |   |   |   |   |   |

|   F. | Classification of financial instruments by fair value hierarchy |
|-----------|-----------------------------------------------------------------|

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

|                                                            |   | Level 1     |   |   | Level 2 |   |   | Level 3 |
|-----------------------------------------------------------------|--------|-------------|--------|--------|---------|--------|--------|---------|
|                                                            |   | $ thousands |
| Other investments (accounted for as available for sale)         |   |        | 1,510  | *)     |    |   | -      |    |   |   | 16,014 |   |
| Available for sale financial assets classified as held for sale |   |        | 590    |   |    |   | 2,565  | **)     |   |   | - |   |

----

----

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

|   | *) | As noted above in Notes 3.C.1.b) and 8.B, as of December 31, 2010, the fair value of the investment in Enablence's shares was determined by reference to their quoted market price less the Discount in respect of the lock-up period. The Discount was estimated based on the Option Pricing Model method and amounted to $1,600 as of December 31, 2010. The Discount alone was measured in respect of level 2, and deducted from the quoted market price of the shares according to level 1.  As of December 31, 2011, the lock up period ended, and the fair value of these shares was determined in accordance with their quoted market price. Accordingly, as of December 31, 2011, the investment in these shares is presented under level 1. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **) | As noted above in Notes 3.C.1.e) , as of December 31, 2011, the fair value of the investment in Wave's shares was determined by reference to their quoted market price less the Discount in respect of the lock-up period. The Discount was estimated based on the Option Pricing Model method and amounted to $254 as of December 31, 2011. The Discount alone was measured in respect of level 2, and deducted from the quoted market price of the shares according to level 1. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                    |   | Available-for-sale financial assets |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                    |   | $ thousands                         |   |
|                                                                                                    |   |                                |   |
| Balance as of January 1, 2010                                                                           |   |                                | 12,514 |   |
|                                                                                                    |   |                                |   |   |
| Total recognized gains :                                                                                |   |                                |   |   |
| In profit or loss                                                                                       |   |                                | 118    |   |
| In other comprehensive income (loss)                                                                    |   |                                | 5,291  |   |
| Classification from investments in associates due to loss of significant influence                      |   |                                | 2,079  |   |
|                                                                                                    |   |                                |   |   |
| Balance as of December 31, 2010                                                                         |   |                                | 20,002 |   |
|                                                                                                    |   |                                |   |   |
| Total recognized losses:                                                                                |   |                                |   |   |
| In profit or loss                                                                                       |   |                                | (4,175 | ) |
| In other comprehensive income (loss)                                                                    |   |                                | (1,259 | ) |
| Acquisitions                                                                                            |   |                                | 1,676  |   |
| Return on investment                                                                                    |   |                                | (230   | ) |
| Balance as of December 31, 2011                                                                         |   |                                | 16,014 |   |
|                                                                                                    |   |                                |   |   |
| Total loss for 2011 included in profit or loss relating to assets held at the end of the reporting year |   |                                | (4,175 | ) |
| Total gain for 2010 included in profit or loss relating to assets held at the end of the reporting year |   |                                | 118    |   |

----

----

|   G. | Liquidity risk |
|-----------|----------------|

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

|                                |   | December 31, 2011 |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | Total             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   | projected         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | More |   |   | No specific |   |
|                                |   | cash              |   |   | First |   |   | Second |   |   | Third |   |   | Fourth |   |   | Fifth |   |   | than |   |   | repayment |   |
|                                |   | flows*            |   |   | year |   |   | year |   |   | year |   |   | year |   |   | year |   |   | 5 years |   |   | date |   |
|                                |   | $ thousands       |   |
|                                |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables                      |   |              | 656    |   |   |   | 656 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other current financial liabilities |   |              | 3,343  |   |   |   | 3,343 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Loans from others                   |   |              | 3,533  |   |   |   | - |   |   |   | - |   |   |   | 3,533 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Royalty bearing government grants   |   |              | 958    |   |   |   | 4 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 954 |   |
|                                |   |              | 8,490  |   |   |   | 4,003 |   |   |   | - |   |   |   | 3,533 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 954 |   |
|                                |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | * | The anticipated cash flows were calculated on the basis of the CPI and the exchange rates that prevailed on December 31, 2011. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------|

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

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

|   | 2. | The expected maturity profile of financial assets according to their contractual terms in non-capitalized amounts (including an estimate of interest to be received): |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                          |   | Less than one year |   |   | 1 to 2 years |   |   | 2 to 3years |   |   | 3 to 4 years |   |   | 4 to 5 years |   |   | > 5 years |   |   | Un-determined |   |   | Total  |   |
|-------------------------------------------------------------------------------|--------|--------------------|--------|--------|--------------|--------|--------|-------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|---------------|--------|--------|--------|--------|
|                                                                          |   | $ thousands        |   |
| Available-for-sale financial assets:                                          |   |               |   |   |         |   |   |        |   |   |         |   |   |         |   |   |         |   |   |          |   |   |   |   |
| Shares                                                                        |   |               | -      |   |         |   | -      |        |   |   | -            |   |   |         | -      |   |         |   | -      |          |   |   | -      |   |   |   | 17,524 |   |   |   | 17,524 |   |
|                                                                          |   |               |   |   |         |   |   |        |   |   |         |   |   |         |   |   |         |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale financial assets    classified as held for sale: |   |               |   |   |         |   |   |        |   |   |         |   |   |         |   |   |         |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares                                                                        |   |               | 3,155  |   |         |   | -      |        |   |   | -            |   |   |         | -      |   |         |   | -      |          |   |   | -      |   |   |   | - |   |   |   | 3,155 |   |
| Loans and receivables                                                         |   |               | 24,894 |   |         |   | 1,949  |        |   |   | -            |   |   |         | 3,400  |   |         |   | -      |          |   |   | -      |   |   |   | 738 |   |   |   | 30,981 |   |
|                                                                          |   |               |   |   |         |   |   |        |   |   |         |   |   |         |   |   |         |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                          |   |               | 28,049 |   |         |   | 1,949  |        |   |   | -            |   |   |         | 3,400  |   |         |   | -      |          |   |   | -      |   |   |   | 18,262 |   |   |   | 51,660 |   |

----

----

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

|   H. | Derivatives and hedging |
|-----------|-------------------------|

----

----

|   I. | Linkage terms of assets and liabilities on a consolidated basis |
|-----------|-----------------------------------------------------------------|

|                                                |   | NIS(CPIlinked) |   |   | USD(or USDlinked) |   |   | NIS(not linked) |   |   | Non-monetary item** |   |   | Total  |    |
|-----------------------------------------------------|--------|----------------|--------|--------|-------------------|--------|--------|-----------------|--------|--------|---------------------|--------|--------|--------|---------|
|                                                |   | $ thousands    |   |
| Assets *                                            |   |           |   |   |              |   |   |            |   |   |                |   |   |   |    |
| Cash and cash equivalents                           |   |           | -      |   |              |   | 34,536 |            |   |   | 5,526               |   |   |   | -       |   |   |   | 40,062 |   |
| Restricted cash                                     |   |           | -      |   |              |   | 16     |            |   |   | -                   |   |   |   | -       |   |   |   | 16 |   |
| Other accounts receivable                           |   |           | 57     |   |              |   | 1,717  |            |   |   | 629                 |   |   |   | 276     |   |   |   | 2,679 |   |
| Inventories                                         |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 98      |   |   |   | 98 |   |
| Assets held for sale                                |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 3,155   |   |   |   | 3,155 |   |
| Investments in associates                           |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 111,405 |   |   |   | 111,405 |   |
| Other investments (accounted as available for sale) |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 17,524  |   |   |   | 17,524 |   |
| Property, plant and  equipment, net       |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 246     |   |   |   | 246 |   |
| Intangible assets, net                              |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 4,922   |   |   |   | 4,922 |   |
| Other long-term receivables                         |   |           | -      |   |              |   | 27,888 |            |   |   | 59                  |   |   |   | -       |   |   |   | 27,947 |   |
|                                                |   |           |   |   |              |   |   |            |   |   |                |   |   |   |    |   |   |   |   |   |
| Total assets                                        |   |           | 57     |   |              |   | 64,157 |            |   |   | 6,214               |   |   |   | 137,626 |   |   |   | 208,054 |   |
|                                                |   |           |   |   |              |   |   |            |   |   |                |   |   |   |    |   |   |   |   |   |
| Liabilities *                                       |   |           |   |   |              |   |   |            |   |   |                |   |   |   |    |   |   |   |   |   |
| Trade payables                                      |   |           | -      |   |              |   | 126    |            |   |   | 530                 |   |   |   | -       |   |   |   | 656 |   |
| Other accounts payable                              |   |           | -      |   |              |   | 165    |            |   |   | 2,807               |   |   |   | 1,361   |   |   |   | 4,333 |   |
| Long term loans from banks and others               |   |           | -      |   |              |   | 3,288  |            |   |   | -                   |   |   |   | -       |   |   |   | 3,288 |   |
| Royalty bearing government grants                   |   |           | -      |   |              |   | 958    |            |   |   | -                   |   |   |   | -       |   |   |   | 958 |   |
| Employee benefits, net                              |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 1       |   |   |   | 1 |   |
| Deferred taxes                                      |   |           | -      |   |              |   | -      |            |   |   | -                   |   |   |   | 5,010   |   |   |   | 5,010 |   |
|                                                |   |           |   |   |              |   |   |            |   |   |                |   |   |   |    |   |   |   |   |   |
| Total liabilities                                   |   |           | -      |   |              |   | 4,537  |            |   |   | 3,337               |   |   |   | 6,372   |   |   |   | 14,246 |   |

|   | * | Non-current assets and liabilities in this table include their current maturities. |
|--------|---|------------------------------------------------------------------------------------|

|   | ** | Including non-financial items. |
|--------|----|--------------------------------|

----

----

|                                                |   | NIS(CPIlinked) |   |   | USD(or USDlinked) |   |   | Other currencies |   |   | NIS(not linked) |   |   | Non-monetary item** |   |   |  Total |   |
|-----------------------------------------------------|--------|----------------|--------|--------|-------------------|--------|--------|------------------|--------|--------|-----------------|--------|--------|---------------------|--------|--------|-------------|--------|
|                                                |   | $ thousands    |   |
| Assets *                                            |   |           |   |   |              |   |   |             |   |   |            |   |   |                |   |   |        |   |
| Cash and cash equivalents                           |   |           | -      |   |              |   | 51,205 |             |   |   | -               |   |   |                | 5,334  |   |        |   | - |   |   |   | 56,539 |   |
| Restricted cash                                     |   |           | 65     |   |              |   | 300    |             |   |   | -               |   |   |                | -      |   |        |   | - |   |   |   | 365 |   |
| Trade receivables                                   |   |           | -      |   |              |   | 2,842  |             |   |   | -               |   |   |                | 219    |   |        |   | - |   |   |   | 3,061 |   |
| Other accounts receivable                           |   |           | -      |   |              |   | 643    |             |   |   | -               |   |   |                | 1,210  |   |        |   | 2,471 |   |   |   | 4,324 |   |
| Inventories                                         |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 5,356 |   |   |   | 5,356 |   |
| Assets held for sale                                |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 17,211 |   |   |   | 17,211 |   |
| Investments in associates                           |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 109,369 |   |   |   | 109,369 |   |
| Other investments (accounted as available for sale) |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 20,221 |   |   |   | 20,221 |   |
| Property, plant and  equipment, net       |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 2,079 |   |   |   | 2,079 |   |
| Intangible assets, net                              |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 3,595 |   |   |   | 3,595 |   |
| Other long-term receivables                         |   |           | -      |   |              |   | 27,997 |             |   |   | -               |   |   |                | 221    |   |        |   | - |   |   |   | 28,218 |   |
|                                                |   |           |   |   |              |   |   |             |   |   |            |   |   |                |   |   |        |   |   |   |   |   |   |   |
| Total assets                                        |   |           | 65     |   |              |   | 82,987 |             |   |   | -               |   |   |                | 6,984  |   |        |   | 160,302 |   |   |   | 250,338 |   |
|                                                |   |           |   |   |              |   |   |             |   |   |            |   |   |                |   |   |        |   |   |   |   |   |   |   |
| Liabilities *                                       |   |           |   |   |              |   |   |             |   |   |            |   |   |                |   |   |        |   |   |   |   |   |   |   |
| Trade payables                                      |   |           | -      |   |              |   | 494    |             |   |   | 14              |   |   |                | 3,348  |   |        |   | - |   |   |   | 3,856 |   |
| Other accounts payable                              |   |           | 128    |   |              |   | 489    |             |   |   | -               |   |   |                | 5,482  |   |        |   | 1,931 |   |   |   | 8,030 |   |
| Long term loans from banks and others               |   |           | -      |   |              |   | 1,385  |             |   |   | -               |   |   |                | -      |   |        |   | - |   |   |   | 1,385 |   |
| Convertible debentures                              |   |           | 3,385  |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | - |   |   |   | 3,385 |   |
| Royalty bearing government grants                   |   |           | -      |   |              |   | 9,156  |             |   |   | -               |   |   |                | -      |   |        |   | - |   |   |   | 9,156 |   |
| Employee benefits, net                              |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 134 |   |   |   | 134 |   |
| Deferred taxes                                      |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 4,746 |   |   |   | 4,746 |   |
| Other long term liabilities                         |   |           | -      |   |              |   | -      |             |   |   | -               |   |   |                | -      |   |        |   | 153 |   |   |   | 153 |   |
|                                                |   |           |   |   |              |   |   |             |   |   |            |   |   |                |   |   |        |   |   |   |   |   |   |   |
| Total liabilities                                   |   |           | 3,513  |   |              |   | 11,524 |             |   |   | 14              |   |   |                | 8,830  |   |        |   | 6,964 |   |   |   | 30,845 |   |

|   | * | Non-current assets and liabilities in this table include their current maturities. |
|--------|---|------------------------------------------------------------------------------------|

|   | ** | Including non-financial items. |
|--------|----|--------------------------------|

----

CON

----

| A. | Details regarding investments in the consolidated financial statements as of December 31, 2011 |
|----|-----------------------------------------------------------------------------------------------------|

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

|                                        |   |   Rate of holdings in equity |   |   | Consolidated rate of holdings in equity  |   |   |  Elron's effective rate of holdings in equity (2)  |   |   |  Fully diluted consolidated rate of holdings  |   |   |  Elron's fully diluted effective rate of holdings (2)  |   |             | Consolidated carrying value of investment |   |                    |   Market value of investment |   |
|---------------------------------------------|--------|-----------------------------------|--------|--------|-----------------------------------------------|--------|--------|--------------------------------------------------------------|--------|--------|---------------------------------------------------------|--------|--------|------------------------------------------------------------------|--------|------------------|-------------------------------------------|--------|-------------------------|-----------------------------------|--------|
|                                        |   |   Elron(1)                   |   |   |   RDC                                    |   |   |                                                         |   |   |                                                    |   |   |                                                             |   | December 31,2011 |                                      |   |  December 31, 2011 |                              |   |  March 12, 2012 |   |
|                                        |   |   %                     |   |   | In thousands of dollars                       |   |
| Investments in investee companies           |   |                              |   |   |                                          |   |   |                                                         |   |   |                                                    |   |   |                                                             |   |             |                                      |   |                    |                              |   |   |   |   |   |   |   |
| Subsidiaries:                               |   |                              |   |   |                                          |   |   |                                                         |   |   |                                                    |   |   |                                                             |   |             |                                      |   |                    |                              |   |   |   |   |   |   |   |
| Starling Advanced Communications Ltd.       |   |                              | 38.55  |   |                                          |   | 44.44  |                                                         |   |   | 82.98                                                   |   |   |                                                             | 60.81  |             |                                      |   | 80.91                   |                              |   |   | 59.29 |   |   |   | 3,197 |   |   |   | 1,754 |   |   | 1,964 |   |
| Sync-Rx Ltd.                                |   |                              | -      |   |                                          |   | 87.47  |                                                         |   |   | 87.47                                                   |   |   |                                                             | 43.82  |             |                                      |   | 78.10                   |                              |   |   | 39.13 |   |   |   | 539 |   |   |   | - |   |   |   | - |   |
| Navitrio Ltd.                               |   |                              | 80.00  |   |                                          |   | -      |                                                         |   |   | 80.00                                                   |   |   |                                                             | 80.00  |             |                                      |   | 80.00                   |                              |   |   | 80.00 |   |   |   | 796 |   |   |   |   |   |   |   |   |   |
| Cloudyn Software Ltd. (5)                   |   |                              | 27.03  |   |                                          |   | -      |                                                         |   |   | 27.03                                                   |   |   |                                                             | 21.62  |             |                                      |   | 25.00                   |                              |   |   | 20.00 |   |   |   | 426 |   |   |   |   |   |   |   |   |   |
| Kyma Medical Technologies Ltd.              |   |                              | -      |   |                                          |   | 65.27  |                                                         |   |   | 65.27                                                   |   |   |                                                             | 32.70  |             |                                      |   | 53.07                   |                              |   |   | 26.59 |   |   |   | 2,324 |   |   |   | - |   |   |   | - |   |
| Smartwave Medical Ltd                       |   |                              | -      |   |                                          |   | 100.00 |                                                         |   |   | 100.00                                                  |   |   |                                                             | 50.10  |             |                                      |   | 89.50                   |                              |   |   | 44.84 |   |   |   | 321 |   |   |   | - |   |   |   | - |   |
|                                        |   |                              |   |   |                                          |   |   |                                                         |   |   |                                                    |   |   |                                                             |   |             |                                      |   |                    |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Associates:                                 |   |                              |   |   |                                          |   |   |                                                         |   |   |                                                    |   |   |                                                             |   |             |                                      |   |                    |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Given Imaging Ltd.                          |   |                              | 22.34  |   |                                          |   | 8.74   |                                                         |   |   | 31.08                                                   |   |   |                                                             | 26.72  |             |                                      |   | 25.95                   |                              |   |   | 22.38 |   |   |   | 104,090 |   |   |   | 164,972 |   |   | 176,519 |   |
| Aqwise – Wise Water Technologies Ltd. |   |                              | 34.03  |   |                                          |   | -      |                                                         |   |   | 34.03                                                   |   |   |                                                             | 34.03  |             |                                      |   | 29.95                   |                              |   |   | 29.95 |   |   |   | 2,629 |   |   |   | - |   |   |   | - |   |
| NuLens Ltd.                                 |   |                              | 34.72  |   |                                          |   |   |                                                         |   |   | 34.72                                                   |   |   |                                                             | 34.72  |             |                                      |   | 29.84                   |                              |   |   | 29.84 |   |   |   | (724 | ) |   |   | - |   |   |   | - |   |
| BrainsGate Ltd.                             |   |                              | 27.26  |   |                                          |   | -      |                                                         |   |   | 27.26                                                   |   |   |                                                             | 27.26  |             |                                      |   | 22.86                   |                              |   |   | 22.86 |   |   |   | 421 |   |   |   | - |   |   |   | - |   |
| Atlantium Technologies Inc.                 |   |                              | 23.44  |   |                                          |   | -      |                                                         |   |   | 23.44                                                   |   |   |                                                             | 23.44  |             |                                      |   | 20.22                   |                              |   |   | 20.22 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Pocared Diagnostics Ltd.                    |   |                              | 40.84  |   |                                          |   | -      |                                                         |   |   | 40.84                                                   |   |   |                                                             | 40.84  |             |                                      |   | 36.97                   |                              |   |   | 36.97 |   |   |   | 4,989 |   |   |   | - |   |   |   | - |   |
| Plymedia Inc.                               |   |                              | 27.96  |   |                                          |   | -      |                                                         |   |   | 27.96                                                   |   |   |                                                             | 27.96  |             |                                      |   | 21.84                   |                              |   |   | 21.84 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other investments:                          |   |                              |   |
| Notal Vision Inc.                           |   |                              | 20.31  |   |                                          |   | -      |                                                         |   |   | 20.31                                                   |   |   |                                                             | 20.31  |             |                                      |   | 15.42                   |                              |   |   | 15.42 |   |   |   | 2,342 |   |   |   | - |   |   |   | - |   |
| GigOptix Inc.                               |   |                              | 1.52   |   |                                          |   | -      |                                                         |   |   | 1.52                                                    |   |   |                                                             | 1.52   |             |                                      |   | N/A                     |                              |   |   | N/A |   |   |   | 590 |   |   |   | 590 |   |   | 413 | (6) |
| Jordan Valley Semiconductors Ltd.           |   |                              | 18.83  |   |                                          |   | -      |                                                         |   |   | 18.83                                                   |   |   |                                                             | 18.83  |             |                                      |   | 16.95                   |                              |   |   | 16.95 |   |   |   | 12,300 |   |   |   | - |   |   |   | - |   |
| InnoMed Ventures L.P.                       |   |                              | 13.92  |   |                                          |   | -      |                                                         |   |   | 13.92                                                   |   |   |                                                             | 13.92  |             |                                      |   | N/A                     |                              |   |   | N/A |   |   |   | 256 |   |   |   | - |   |   |   | - |   |
| Enablence Technologies Inc.                 |   |                              | 6.61   |   |                                          |   | -      |                                                         |   |   | 6.61                                                    |   |   |                                                             | 6.61   |             |                                      |   | 6.17                    |                              |   |   | 6.17 |   |   |   | 1,509 |   |   |   | 1,509 |   |   | 1,400 |   |
| Whitewater Ltd                              |   |                              | 1.53   |   |                                          |   | -      |                                                         |   |   | 1.53                                                    |   |   |                                                             | 1.53   |             |                                      |   | 1.45                    |                              |   |   | 1.45 |   |   |   | 1,051 | (7) |   |   | - |   |   |   | - |   |
| Wave Systems Corp. (3), (4)                 |   |                              | 1.38   |   |                                          |   | -      |                                                         |   |   | 1.38                                                    |   |   |                                                             | 1.38   |             |                                      | N\A    |                    |                              | N\A    |   |   |   | 2,565 |   |   |   | 2,565 |   |   | 2,027 |   |

| 1)  | Including holding through Elron's fully-owned subsidiaries and through Navitrio.. |
|----------|-----------------------------------------------------------------------------------|

| 2) | Elron's effective holdings include holdings by RDC multiplied by 50.10% and holdings by Navitrio multiplied by 80%. |
|----|---------------------------------------------------------------------------------------------------------------------|

| 3)  | Includes shares held in escrow at a rate of approximately 0.18%. |
|----------|------------------------------------------------------------------|

| 4) | The value of Wave Systems Corp.'s shares are determined by their price quoted on the Nasdaq, net of the discount element in respect of the lock-up period during which they cannot be sold. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5) | Navitrio holds approximately 51% of Cloudyn's voting rights, see Note 3.C.2.h). |
|----|---------------------------------------------------------------------------------|

| 6) | Represents the value of the investment after the sale of additional shares during the first quarter of 2012. Elron's rate of holdings in GigOptix's shares as of March 12, 2012 is approximately 0.84%. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7) | Includes an investment in bonds issued by Whitewater Ltd. |
|----|----------------------------------------------------------------|

----

|  Given Imaging Ltd.and its Subsidiaries ConsolidatedFinancial Statements As of and for theYear Ended December 31, 2011  |
|---------------------------------------------------------------------------------------------------------------------------------------------|

----

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

----

Report 

----

Given 

|                                                |       |   | December 31, |    |
|-----------------------------------------------------|------------|--------|--------------|---------|
|                                                | Note       |   | 2011         |    |   | 2010 |   |
| Assets                                              |       |   |         |    |   |   |   |
|                                                |       |   |         |    |   |   |   |
| Current assets                                      |       |   |         |    |   |   |   |
| Cash and cash equivalents                           | 1D; 2      |   | $            | 24,285  |   |   | $ | 34,619 |   |
| Short-term investments                              | 1H; 5      |   |         | 64,762  |   |   |   | 51,973 |   |
| Accounts receivable:                                |       |   |         |    |   |   |   |   |   |
|  Trade, net                                    | 1E         |   |         | 32,406  |   |   |   | 27,862 |   |
|  Other                                         | 3          |   |         | 5,259   |   |   |   | 4,291 |   |
| Inventories                                         | 1F; 4      |   |         | 22,921  |   |   |   | 19,076 |   |
| Advances to suppliers                               |       |   |         | 1,207   |   |   |   | 441 |   |
| Deferred tax assets                                 | 1Q; 14D    |   |         | 1,538   |   |   |   | 1,638 |   |
| Prepaid expenses                                    |       |   |         | 1,373   |   |   |   | 1,585 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Total current assets                                |       |   |         | 153,751 |   |   |   | 141,485 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Deposits                                            |       |   |         | 1,266   |   |   |   | 1,212 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Assets held for employees’ severance payments | 1G; 10     |   |         | 6,854   |   |   |   | 6,393 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Marketable securities                               | 1H; 5      |   |         | 16,003  |   |   |   | 3,873 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Long-term inventory                                 | 1F; 4      |   |         | 4,926   |   |   |   | 5,626 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Fixed assets, less accumulated depreciation         | 1I; 6      |   |         | 12,301  |   |   |   | 13,709 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Intangible assets, less accumulated amortization    | 1J; 7; 16  |   |         | 29,075  |   |   |   | 25,813 |   |
|                                                |       |   |         |    |   |   |   |   |   |
| Goodwill                                            | 1K; 16; 17 |   |         | 24,089  |   |   |   | 24,089 |   |

|         |   |   |    |   |   |   |
|--------------|--------|--------|---------|--------|--------|--------|
| Total Assets |   | $      | 248,265 |   |   | $      | 222,200 |   |

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

----

|                                                                  |   |   | December 31, |    |
|-----------------------------------------------------------------------|--------|--------|--------------|---------|
|                                                                  | Note   |   | 2011         |    |   | 2010 |   |
| Liabilities and equity                                                |   |   |         |    |   |   |   |
|                                                                  |   |   |         |    |   |   |   |
| Current liabilities                                                   |   |   |         |    |   |   |   |
|                                                                  |   |   |         |    |   |   |   |
| Current installments of obligation under capital lease                | 8A     |   | $            | 139     |   |   | $ | 168 |   |
| Accounts payable:                                                     |   |   |         |    |   |   |   |   |   |
|   Trade                                                     |   |   |         | 8,081   |   |   |   | 9,125 |   |
|   Other                                                     | 9      |   |         | 28,397  |   |   |   | 26,065 |   |
| Deferred revenue                                                      |   |   |         | 521     |   |   |   | 788 |   |
|                                                                  |   |   |         |    |   |   |   |   |   |
| Total current liabilities                                             |   |   |         | 37,138  |   |   |   | 36,146 |   |
|                                                                  |   |   |         |    |   |   |   |   |   |
| Long-term liabilities                                                 |   |   |         |    |   |   |   |   |   |
| Obligation under capital lease                                        | 8A     |   |         | 120     |   |   |   | 244 |   |
| Liability in respect of employees’ severance payments           | 10     |   |         | 7,720   |   |   |   | 7,151 |   |
| Deferred tax liabilities                                              | 14D    |   |         | 5,362   |   |   |   | 5,871 |   |
| Total long-term liabilities                                           |   |   |         | 13,202  |   |   |   | 13,266 |   |
|                                                                  |   |   |         |    |   |   |   |   |   |
| Total liabilities                                                     |   |   |         | 50,340  |   |   |   | 49,412 |   |
|                                                                  |   |   |         |    |   |   |   |   |   |
| Commitments and contingencies                                         | 8      |   |         |    |   |   |   |   |   |
|                                                                  |   |   |         |    |   |   |   |   |   |
| Equity                                                                |   |   |         |    |   |   |   |   |   |
| Shareholders` equity:                                                 | 11     |   |         |    |   |   |   |   |   |
| Ordinary Shares, NIS 0.05 par value each                              |   |   |         |    |   |   |   |   |   |
|  (90,000,000 shares authorized as of December 31, 2011 and 2010, |   |   |         |    |   |   |   |   |   |
|  30,448,838 and 29,829,277 shares issued and fully          |   |   |         |    |   |   |   |   |   |
|  paid as of December 31, 2011 and 2010, respectively)            |   |   |         | 359     |   |   |   | 350 |   |
| Additional paid-in capital                                            |   |   |         | 208,838 |   |   |   | 194,899 |   |
| Capital reserve                                                       |   |   |         | 2,051   |   |   |   | 2,051 |   |
| Accumulated other comprehensive income (loss)                         |   |   |         | (885    | ) |   |   | 95 |   |
| Accumulated deficit                                                   |   |   |         | (12,729 | ) |   |   | (24,707 | ) |
| Total shareholders` equity                                            |   |   |         | 197,634 |   |   |   | 172,688 |   |
| Non-controlling interests                                             |   |   |         | 291     |   |   |   | 100 |   |
| Total equity                                                          |   |   |         | 197,925 |   |   |   | 172,788 |   |

|                                                                         |   |   |    |   |   |   |
|------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Total liabilities,  shareholders’ equity and non-controlling |   |   |    |   |   |   |
|  Interests                                                              |   | $      | 248,265 |   |   | $      | 222,200 |   |

----

Given 

|                                                       |     |   | Year ended December 31, |       |
|------------------------------------------------------------|----------|--------|-------------------------|------------|
|                                                       | Note     |   | 2011                    |       |   | 2010 |   |   | 2009 |   |
| Revenues                                                   | 1O; 12   |   | $                       | 177,955    |   |   | $ | 157,809 |   |   | $ | 141,763 |   |
| Cost of revenues                                           |     |   |                    | (41,466    | ) |   |   | (37,629 | ) |   |   | (33,145 | ) |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Gross profit                                               |     |   |                    | 136,489    |   |   |   | 120,180 |   |   |   | 108,618 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Operating expenses                                         |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Research and development, gross                            | 1R       |   |                    | (26,129    | ) |   |   | (21,695 | ) |   |   | (17,842 | ) |
| Government grants                                          | 1P       |   |                    | 1,113      |   |   |   | 1,477 |   |   |   | 1,109 |   |
| Research and development, net                              |     |   |                    | (25,016    | ) |   |   | (20,218 | ) |   |   | (16,733 | ) |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Sales and marketing                                        |     |   |                    | (75,014    | ) |   |   | (67,114 | ) |   |   | (61,428 | ) |
| General and administrative                                 |     |   |                    | (23,078    | ) |   |   | (25,138 | ) |   |   | (18,919 | ) |
| Other, net                                                 | 6; 7; 17 |   |                    | (397       | ) |   |   | (759 | ) |   |   | (1,220 | ) |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Total operating expenses                                   |     |   |                    | (123,505   | ) |   |   | (113,229 | ) |   |   | (98,300 | ) |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Operating profit                                           |     |   |                    | 12,984     |   |   |   | 6,951 |   |   |   | 10,318 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Financial income, net                                      | 13       |   |                    | 1,343      |   |   |   | 2,599 |   |   |   | 1,584 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Profit before taxes on income                              |     |   |                    | 14,327     |   |   |   | 9,550 |   |   |   | 11,902 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                               | 1Q; 14   |   |                    | (2,158     | ) |   |   | (1,362 | ) |   |   | 1,542 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Net Profit                                                 |     |   |                    | 12,169     |   |   |   | 8,188 |   |   |   | 13,444 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Net loss (profit) attributable to non-controlling interest |     |   |                    | (191       | ) |   |   | 290 |   |   |   | 891 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Net profit attributable to shareholders                    |     |   | $                       | 11,978     |   |   | $ | 8,478 |   |   | $ | 14,335 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Earnings per share:                                        |     |   |                    |       |   |   |   |   |   |   |   |   |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Basic Earnings per Ordinary Share                          | 1M       |   | $                       | 0.40       |   |   | $ | 0.29 |   |   | $ | 0.49 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Diluted Earnings per Ordinary Share                        | 1M       |   | $                       | 0.39       |   |   | $ | 0.28 |   |   | $ | 0.47 |   |
|                                                       |     |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary                        |     |   |                    |       |   |   |   |   |   |   |   |   |   |
|  Shares used to compute basic Earnings                |     |   |                    |       |   |   |   |   |   |   |   |   |   |
|  per Ordinary Share                                   | 1M       |   |                    | 30,212,787 |   |   |   | 29,670,842 |   |   |   | 29,281,897 |   |
| Weighted average number of Ordinary                        |     |   |                    |       |   |   |   |   |   |   |   |   |   |
|  Shares used to compute diluted Earnings              |     |   |                    |       |   |   |   |   |   |   |   |   |   |
|  per Ordinary Share                                   | 1M       |   |                    | 31,089,499 |   |   |   | 30,525,654 |   |   |   | 30,423,162 |   |

----

Given 

|                                                   |   | Company’s shareholders |       |   |    |   |   |       |   |
|--------------------------------------------------------|--------|------------------------------|------------|--------|---------|--------|--------|------------|--------|
|                                                   |   |                         |       |   |    |   |   |       |   |   |   |   |   | Accumulated |   |   |   |   |   |   |   |   |   |   |
|                                                   |   |                         |       |   |    |   |   | Additional |   |   |   |   |   | Other |   |   |   |   |   | Non- |   |   |   |   |
|                                                   |   |                         |       |   |    |   |   | Paid-In    |   |   | Capital |   |   | Comprehensive |   |   | Accumulated |   |   | controlling |   |   |   |   |
|                                                   |   | Ordinary shares              |       |   | Capital |   |   | Reserve    |   |   | Income (loss) |   |   | Deficit |   |   | interests |   |   | Total |   |
|                                                   |   | Shares                       |       |   | Amount  |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                          |   |                         | 29,257,785 |   |    | $      | 343    |       |   | $ | 173,983 |   |   |   | 2,166 |   |   |   | (600 | ) |   |   | (31,721 | ) |   |   | 1,993 |   |   |   | 146,164 |   |
|                                                   |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2009:                           |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net profit (loss)                                      |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 14,335 |   |   |   | (891 | ) |   |   | 13,444 |   |
| Net change in respect of available for sale securities |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | 999 |   |   |   | - |   |   |   | - |   |   |   | 999 |   |
| Total comprehensive income                             |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | 999 |   |   |   | 14,335 |   |   |   | (891 | ) |   |   | 14,443 |   |
| Exercise of stock options                              |   |                         | 113,187    |   |    |   | 2      |       |   |   | 952 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 954 |   |
| Stock based compensation                               |   |                         | -          |   |    |   | -      |       |   |   | 7,268 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 7,268 |   |
| Dividend distribution                                  |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (15,799 | ) |   |   | - |   |   |   | (15,799 | ) |
| Change in non-controlling interest                     |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (424 | ) |   |   | (424 | ) |
| Balance as of December 31, 2009                        |   |                         | 29,370,972 |   |    |   | 345    |       |   |   | 182,203 |   |   |   | 2,166 |   |   |   | 399 |   |   |   | (33,185 | ) |   |   | 678 |   |   |   | 152,606 |   |
|                                                   |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2010:                           |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net profit (loss)                                      |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,478 |   |   |   | (290 | ) |   |   | 8,188 |   |
| Net change in respect of available for sale securities |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | (304 | ) |   |   | - |   |   |   | - |   |   |   | (304 | ) |
| Total comprehensive income                             |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | (304 | ) |   |   | 8,478 |   |   |   | (290 | ) |   |   | 7,884 |   |
| Exercise of stock options                              |   |                         | 458,305    |   |    |   | 5      |       |   |   | 4,214 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,219 |   |
| Stock based compensation                               |   |                         | -          |   |    |   | -      |       |   |   | 8,482 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,482 |   |
| Change in non-controlling interest                     |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | (115 | ) |   |   | - |   |   |   | - |   |   |   | (288 | ) |   |   | (403 | ) |
| Balance as of December 31, 2010                        |   |                         | 29,829,277 |   |    |   | 350    |       |   |   | 194,899 |   |   |   | 2,051 |   |   |   | 95 |   |   |   | (24,707 | ) |   |   | 100 |   |   |   | 172,788 |   |
|                                                   |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change during the year 2011:                           |   |                         |       |   |    |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net profit                                             |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 11,978 |   |   |   | 191 |   |   |   | 12,169 |   |
| Net change in respect of available for sale securities |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | (980 | ) |   |   | - |   |   |   | - |   |   |   | (980 | ) |
| Total comprehensive income                             |   |                         | -          |   |    |   | -      |       |   |   | - |   |   |   | - |   |   |   | (980 | ) |   |   | 11,978 |   |   |   | 191 |   |   |   | 11,189 |   |
| Exercise of equity awards                              |   |                         | 619,561    |   |    |   | 9      |       |   |   | 6,576 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,585 |   |
| Stock based compensation                               |   |                         | -          |   |    |   | -      |       |   |   | 7,363 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 7,363 |   |
| Balance as of December 31, 2011                        |   |                         | 30,448,838 |   |    | $      | 359    |       |   | $ | 208,838 |   |   | $ | 2,051 |   |   | $ | (885 | ) |   | $ | (12,729 | ) |   | $ | 291 |   |   | $ | 197,925 |   |

----

Given 

|                                                                  |   | Year ended December 31, |    |
|-----------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                  |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
| Cash flows from operating activities:                                 |   |                    |    |   |   |   |   |   |   |
| Net profit                                                            |   | $                       | 12,169  |   |   | $ | 8,188 |   |   | $ | 13,444 |   |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Adjustments required to reconcile net profit to net cash              |   |                    |    |   |   |   |   |   |   |   |   |   |
|  provided by operating activities:                               |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                         |   |                    | 8,296   |   |   |   | 7,662 |   |   |   | 6,096 |   |
| Goodwill impairment                                                   |   |                    | -       |   |   |   | 20 |   |   |   | 483 |   |
| Deferred tax assets                                                   |   |                    | 100     |   |   |   | 761 |   |   |   | (1,221 | ) |
| Deferred tax liabilities                                              |   |                    | (509    | ) |   |   | (888 | ) |   |   | - |   |
| Stock based  compensation                                   |   |                    | 7,363   |   |   |   | 8,482 |   |   |   | 7,268 |   |
| Loss from disposal of long term assets                                |   |                    | 397     |   |   |   | 739 |   |   |   | 714 |   |
| Decrease (increase) in accounts receivable – trade         |   |                    | (4,544  | ) |   |   | 560 |   |   |   | (3,069 | ) |
| Decrease (increase) in other accounts receivable                      |   |                    | (968    | ) |   |   | (488 | ) |   |   | 863 |   |
| Decrease (increase) in prepaid expenses                               |   |                    | 212     |   |   |   | (23 | ) |   |   | 595 |   |
| Decrease (increase) in advances to suppliers                          |   |                    | (766    | ) |   |   | 93 |   |   |   | 3,006 |   |
| Decrease (increase) in inventories                                    |   |                    | (3,145  | ) |   |   | 2,331 |   |   |   | (4,386 | ) |
| Increase in accounts payable                                          |   |                    | 1,433   |   |   |   | 3,389 |   |   |   | 1,819 |   |
| Increase (decrease) in deferred revenue                               |   |                    | (267    | ) |   |   | 554 |   |   |   | (1,289 | ) |
| Other                                                                 |   |                    | 158     |   |   |   | 304 |   |   |   | (144 | ) |
| Net cash provided by operating activities                             |   |                    | 19,929  |   |   |   | 31,684 |   |   |   | 24,179 |   |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Purchase of fixed assets and intangible assets                        |   |                    | (10,551 | ) |   |   | (5,056 | ) |   |   | (4,794 | ) |
| Deposits, net                                                         |   |                    | (39     | ) |   |   | (6 | ) |   |   | 34 |   |
| Acquisition of Sierra, net of cash acquired (1)                       |   |                    | -       |   |   |   | (34,709 | ) |   |   | - |   |
| Change in short term deposit, net                                     |   |                    | (20,176 | ) |   |   | (26,830 | ) |   |   | 4,341 |   |
| Proceeds from sale and maturity of marketable securities              |   |                    | 11,141  |   |   |   | 25,167 |   |   |   | 39,002 |   |
| Purchase of marketable securities                                     |   |                    | (16,910 | ) |   |   | (5,953 | ) |   |   | (32,668 | ) |
| Net cash provided by (used in) investing activities                   |   |                    | (36,535 | ) |   |   | (47,387 | ) |   |   | 5,915 |   |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Principal payments on capital lease obligation                        |   |                    | (168    | ) |   |   | (143 | ) |   |   | (131 | ) |
| Proceeds from the issuance of Ordinary Shares                         |   |                    | 6,585   |   |   |   | 4,219 |   |   |   | 954 |   |
| Dividend distribution                                                 |   |                    | -       |   |   |   | - |   |   |   | (15,799 | ) |
| Purchase of shares from a non-controlling shareholder in a subsidiary |   |                    | -       |   |   |   | (403 | ) |   |   | (382 | ) |
| Net cash provided by (used in) financing activities                   |   |                    | 6,417   |   |   |   | 3,673 |   |   |   | (15,358 | ) |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents          |   |                    | (145    | ) |   |   | 191 |   |   |   | 25 |   |
| Increase (decrease) in cash and cash equivalents                      |   |                    | (10,334 | ) |   |   | (11,839 | ) |   |   | 14,761 |   |
| Cash and cash equivalents at beginning of year                        |   |                    | 34,619  |   |   |   | 46,458 |   |   |   | 31,697 |   |
| Cash and cash equivalents at end of year                              |   | $                       | 24,285  |   |   | $ | 34,619 |   |   | $ | 46,458 |   |

| Supplementary cash flow information: |   |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Income taxes paid                    |   | $      | 2,179  |   |   | $      | 234    |   |   | $      | 877    |   |

----

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

----

Given 

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

|   | • | a single-use, disposable PillCam color-imaging capsule that is ingested by the patient; |
|--------|---------|-----------------------------------------------------------------------------------------|

|   | • | a portable data recorder and array of sensors that are worn by the patient; and |
|--------|---------|---------------------------------------------------------------------------------|

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

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

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

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

----

|   | A. | General (cont’d) |
|--------|----|------------------------|

|   | B. | Basis of presentation |
|--------|----|-----------------------|

|   | C. | Functional and reporting currency |
|--------|----|-----------------------------------|

|   | D. | Cash and cash equivalents |
|--------|----|---------------------------|

|   | E. | Allowance for doubtful accounts receivable - trade |
|--------|----|----------------------------------------------------|

----

|   | E. | Allowance for doubtful accounts receivable - trade (cont’d) |
|--------|----|-------------------------------------------------------------------|

|                 |   | Year ended December 31, |   |
|----------------------|--------|-------------------------|--------|
|                 |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Opening balance      |   | $                       | 295    |   |   | $ | 252 |   |   | $ | 210 |   |
| Additional provision |   |                    | 150    |   |   |   | 362 |   |   |   | 265 |   |
| Write-offs           |   |                    | (134   | ) |   |   | (319 | ) |   |   | (223 | ) |
|                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Closing balance      |   | $                       | 311    |   |   | $ | 295 |   |   | $ | 252 |   |

|   | F. | Inventories |
|--------|----|-------------|

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

|   | G. | Assets held for employees’ severance payments |
|--------|----|-----------------------------------------------------|

|   | H. | Marketable securities |
|--------|----|-----------------------|

----

|   | I. | Fixed assets |
|--------|----|--------------|

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

|   | J. | Definite-life intangible assets |
|--------|----|---------------------------------|

----

|   | K. | Goodwill |
|--------|----|----------|

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

|   | M. | Earnings per Ordinary Share |
|--------|----|-----------------------------|

----

|   | M. | Earnings per Ordinary Share (cont’d) |
|--------|----|--------------------------------------------|

|                                                   |   | Year ended December 31, |       |
|--------------------------------------------------------|--------|-------------------------|------------|
|                                                   |   | 2011                    |       |   | 2010 |   |   | 2009 |   |
| Net profit attributable to Ordinary Shares             |   | $                       | 11,978     |   |   | $ | 8,478 |   |   | $ | 14,335 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstanding |   |                    |       |   |   |   |   |   |   |   |   |   |
|  used in basic earnings per Ordinary Share        |   |                    |       |   |   |   |   |   |   |   |   |   |
|  Calculation                                      |   |                    | 30,212,787 |   |   |   | 29,670,842 |   |   |   | 29,281,897 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Add assumed exercise of outstanding dilutive           |   |                    |       |   |   |   |   |   |   |   |   |   |
|  potential Ordinary Shares                        |   |                    | 876,712    |   |   |   | 854,812 |   |   |   | 1,141,265 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Weighted average number of Ordinary Shares outstanding |   |                    |       |   |   |   |   |   |   |   |   |   |
|  used in diluted earnings per Ordinary Share      |   |                    |       |   |   |   |   |   |   |   |   |   |
|  Calculation                                      |   |                    | 31,089,499 |   |   |   | 30,525,654 |   |   |   | 30,423,162 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Basic earnings per Ordinary Share                      |   | $                       | 0.40       |   |   | $ | 0.29 |   |   | $ | 0.49 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Diluted earnings per Ordinary Share                    |   | $                       | 0.39       |   |   | $ | 0.28 |   |   | $ | 0.47 |   |
|                                                   |   |                    |       |   |   |   |   |   |   |   |   |   |
| Number of equity awards excluded from the              |   |                    |       |   |   |   |   |   |   |   |   |   |
|  diluted earnings per share calculation           |   |                    |       |   |   |   |   |   |   |   |   |   |
|  due to their anti-dilutive effect                |   |                    | 3,904,630  |   |   |   | 4,763,410 |   |   |   | 4,849,070 |   |

|   | N. | Use of estimates |
|--------|----|------------------|

|   | O. | Revenue recognition |
|--------|----|---------------------|

----

|   | O. | Revenue recognition (cont’d) |
|--------|----|------------------------------------|

|   | Taxes collected from customers and remitted to governmental authorities are presented in the financial statements on a net basis. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

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

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

----

|   | Q. | Taxes on income |
|--------|----|-----------------|

|   | R. | Research and development costs |
|--------|----|--------------------------------|

|   | S. | Allowance for product warranty |
|--------|----|--------------------------------|

----

|   | T. | Concentration of credit risk |
|--------|----|------------------------------|

|   | U. | Comprehensive Income |
|--------|----|----------------------|

|   | V. | Fair Value Measurements |
|--------|----|-------------------------|

----

|   | W. | Business Combinations |
|--------|----|-----------------------|

|   | X. | Recent accounting pronouncements |
|--------|----|----------------------------------|

|                               |   | December 31, |   |
|------------------------------------|--------|--------------|--------|
|                               |   | 2011         |   |   | 2010 |   |
|                               |   |         |   |   |   |   |
| Denominated in U.S. dollars        |   | $            | 15,405 |   |   | $ | 25,471 |   |
| Denominated in New Israeli Shekels |   |         | 1,686  |   |   |   | 2,251 |   |
| Denominated in Euros               |   |         | 4,754  |   |   |   | 3,653 |   |
| Denominated in Japanese Yen        |   |         | 1,146  |   |   |   | 2,372 |   |
| Denominated in other currencies    |   |         | 1,294  |   |   |   | 872 |   |
|                               |   |         |   |   |   |   |   |   |
|                               |   | $            | 24,285 |   |   | $ | 34,619 |   |

----

|                    |   | December 31, |   |
|-------------------------|--------|--------------|--------|
|                    |   | 2011         |   |   | 2010 |   |
| Government institutions |   | $            | 2,139  |   |   | $ | 2,514 |   |
| Other                   |   |         | 3,120  |   |   |   | 1,777 |   |
|                    |   |         |   |   |   |   |   |   |
|                    |   | $            | 5,259  |   |   | $ | 4,291 |   |

|                         |   | December 31, |   |
|------------------------------|--------|--------------|--------|
|                         |   | 2011         |   |   | 2010 |   |
| Raw materials and components |   | $            | 13,051 |   |   | $ | 12,782 |   |
| Work-in-progress             |   |         | 6,169  |   |   |   | 4,973 |   |
| Finished goods               |   |         | 8,627  |   |   |   | 6,947 |   |
|                         |   |         |   |   |   |   |   |   |
|                         |   | $            | 27,847 |   |   | $ | 24,702 |   |

|               |   | December 31, |   |
|--------------------|--------|--------------|--------|
|               |   | 2011         |   |   | 2010 |   |
| Current assets     |   | $            | 22,921 |   |   | $ | 19,076 |   |
| Non-current assets |   |         | 4,926  |   |   |   | 5,626 |   |
|               |   | $            | 27,847 |   |   | $ | 24,702 |   |

----

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

|                          |   | December 31, |   |
|-------------------------------|--------|--------------|--------|
|                          |   | 2011         |   |   | 2010 |   |
|                          |   |         |   |   |   |   |
| Available-for-sale securities |   | $            | 3,794  |   |   | $ | 10,058 |   |
| Trading securities            |   |         | -      |   |   |   | 1,123 |   |
| Bank deposits                 |   |         | 60,968 |   |   |   | 40,792 |   |
| Total                         |   | $            | 64,762 |   |   | $ | 51,973 |   |

|   | B. | Available for sale marketable securities |
|--------|----|------------------------------------------|

|                                  |   |     |   |   | Gross         |   |   | Gross            |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|---------------|--------|--------|------------------|--------|--------|------------|--------|
|                                  |   | Carrying |   |   | unrealized    |   |   | unrealized       |   |   |       |   |
|                                  |   | amount   |   |   | holding gains |   |   | holding (losses) |   |   | Fair value |   |
| At December 31, 2011 -                |   |     |   |   |          |   |   |             |   |   |       |   |
|   corporate debt securities |   | $        | 20,682 |   |          | $      | 3      |             |   | $      | (888       | )      |   | $ | 19,797 |   |
| At December 31, 2010                  |   |     |   |   |          |   |   |             |   |   |       |   |   |   |   |   |
| U.S government or government          |   |     |   |   |          |   |   |             |   |   |       |   |   |   |   |   |
|  agencies                        |   | $        | 2,021  |   |          | $      | 12     |             |   | $      | -          |   |   | $ | 2,023 |   |
| Corporate debt securities             |   |     | 11,815 |   |          |   | 101    |             |   |   | (18        | )      |   |   | 11,898 |   |
| Total At December 31, 2010            |   | $        | 13,836 |   |          | $      | 113    |             |   | $      | (18        | )      |   | $ | 13,931 |   |

|                                  |   | Carrying |   |   |       |   |
|---------------------------------------|--------|----------|--------|--------|------------|--------|
|                                  |   | amount   |   |   | Fair value |   |
| Current maturities                    |   | $        | 3,791  |   |       | $      | 3,794 |   |
| Due after one year through five years |   |     | 16,891 |   |       |   | 16,003 |   |
|                                  |   | $        | 20,682 |   |       | $      | 19,797 |   |

----

|                                                |   | December 31, |    |
|-----------------------------------------------------|--------|--------------|---------|
|                                                |   | 2011         |    |   | 2010 |   |
| Computers and software                              |   | $            | 12,195  |   |   | $ | 11,368 |   |
| Instruments and laboratory equipment                |   |         | 1,476   |   |   |   | 1,413 |   |
| Leasehold improvements                              |   |         | 5,471   |   |   |   | 5,514 |   |
| Motor vehicles                                      |   |         | 140     |   |   |   | 170 |   |
| Machinery and equipment                             |   |         | 18,926  |   |   |   | 17,561 |   |
| Communication equipment                             |   |         | 558     |   |   |   | 504 |   |
| Office furniture and equipment                      |   |         | 2,306   |   |   |   | 2,199 |   |
|                                                |   |         |    |   |   |   |   |   |
| Fixed assets, at cost                               |   |         | 41,072  |   |   |   | 38,729 |   |
|                                                |   |         |    |   |   |   |   |   |
| Accumulated depreciation                            |   |         | (28,771 | ) |   |   | (25,020 | ) |
|                                                |   |         |    |   |   |   |   |   |
| Fixed assets at cost, less accumulated depreciation |   | $            | 12,301  |   |   | $ | 13,709 |   |

----

|                                                        |   | December 31, |    |
|-------------------------------------------------------------|--------|--------------|---------|
|                                                        |   | 2011         |    |   | 2010 |   |
| Patents and trademarks                                      |   | $            | 14,414  |   |   | $ | 7,600 |   |
| Web site development                                        |   |         | 1,518   |   |   |   | 1,453 |   |
| Software development                                        |   |         | 647     |   |   |   | 647 |   |
| IPR&D acquired in a business combination(note 16B) |   |         | 5,306   |   |   |   | 5,306 |   |
| Patents and technology acquired in business                 |   |         |    |   |   |   |   |   |
| combinations                                                |   |         | 12,562  |   |   |   | 12,562 |   |
| Trademarks and trade names acquired in                      |   |         |    |   |   |   |   |   |
| business combinations                                       |   |         | 4,020   |   |   |   | 4,020 |   |
| Customer relationships acquired in business                 |   |         |    |   |   |   |   |   |
| combinations                                                |   |         | 2,891   |   |   |   | 2,891 |   |
|                                                        |   |         |    |   |   |   |   |   |
| Intangible assets, at cost                                  |   |         | 41,358  |   |   |   | 34,479 |   |
|                                                        |   |         |    |   |   |   |   |   |
| Accumulated amortization                                    |   |         | (12,283 | ) |   |   | (8,666 | ) |
|                                                        |   |         |    |   |   |   |   |   |
| Intangible assets, less accumulated amortization            |   | $            | 29,075  |   |   | $ | 25,813 |   |

----

|   | A. | Leases |
|--------|----|--------|

|                |   | Capital leases |   |   | Operating leases |   |
|---------------------|--------|----------------|--------|--------|------------------|--------|
| 2012                |   | $              | 140    |   |             | $      | 4,846 |   |
| 2013                |   |           | 38     |   |             |   | 3,913 |   |
| 2014                |   |           | -      |   |             |   | 2,890 |   |
| 2015                |   |           | -      |   |             |   | 2,311 |   |
| 2016 and thereafter |   |           | -      |   |             |   | 293 |   |
|                |   | $              | 178    |   |             | $      | 14,253 |   |

|   | B. | Agreements with key single - source suppliers and commitments to suppliers |
|--------|----|----------------------------------------------------------------------------|

|   | (1) | The Company has agreements with a number of single source suppliers for some of the components necessary for the production of its products. For example, the Company has sole suppliers for the imaging sensor and transmitter of its PillCam capsules and the data recorder unit of the Bravo system. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Note 8 - Commitments and Contingencies (cont'd) |
|--------|-------------------------------------------------|

|   | B. | Agreements with key single - source suppliers and commitments to suppliers (cont’d) |
|--------|----|-------------------------------------------------------------------------------------------|

|   | (2) | The Company’s annual commitments under agreements with single source and other suppliers for the next 5 years are as follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------|

| 2012            |   | $      | 7,422  |   |
|-----------------|--------|--------|--------|--------|
| 2013            |   |   | 298    |   |
| 2014            |   |   | 1,562  |   |
| 2015            |   |   | 2,946  |   |
| 2016 and beyond |   |   | 6,256  |   |
|            |   | $      | 18,484 |   |

|   | C. | Litigation |
|--------|----|------------|

|   | D. | Registration Rights Agreement |
|--------|----|-------------------------------|

----

|   | D. | Registration Rights Agreement (cont’d) |
|--------|----|----------------------------------------------|

|                              |   | December 31, |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | 2011         |   |   | 2010 |   |
| Government institutions           |   | $            | 5,145  |   |   | $ | 4,983 |   |
| Liabilities relating to employees |   |         | 15,370 |   |   |   | 14,385 |   |
| Advances from customers           |   |         | 201    |   |   |   | 109 |   |
| Warranty                          |   |         | 665    |   |   |   | 340 |   |
| Commissions                       |   |         | 1,857  |   |   |   | 1,497 |   |
| Accrued expenses                  |   |         | 5,159  |   |   |   | 4,751 |   |
|                              |   |         |   |   |   |   |   |   |
|                              |   | $            | 28,397 |   |   | $ | 26,065 |   |

----

|   | A. | Ordinary shares |
|--------|----|-----------------|

|   | B. | Employees’ and non employees’ stock options |
|--------|----|---------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont’d) |
|--------|----|------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|   | 1. | Dividend yield of zero percent. |
|--------|----|---------------------------------|

|   | 2. | Risk free average interest rate of 1.72%, which represents the risk free rate of US$ zero - coupon U.S Government Bonds. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Weighted average expected life of 4.32 years, which represents the period for which the options granted are expected to be outstanding, based on experience from previous employee behavior. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Expected average volatility of 44.54%, which represents a weighted average standard deviation rate for the price of the Company's Ordinary Shares in the NASDAQ National Market. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|            |   | Options outstanding as of |      |
|-----------------|--------|---------------------------|-----------|
|            |   | December 31, 2011         |      |
|            |   |                      |      |   | Weighted |   |
|            |   |                      |      |   | Average |   |
|            |   |                      |      |   | Remaining |   |
|            |   | Number                    |      |   | contractual life |   |
| Exercise prices |   | outstanding at            |      |   | (in years |   |
| $1 - $10        |   |                      | 790,080   |   |   |   | 2.87 |   |
| $10.01-$20      |   |                      | 1,990,864 |   |   |   | 2.29 |   |
| $20.01-$30      |   |                      | 1,825,172 |   |   |   | 1.96 |   |
| $30.01-$40      |   |                      | 499,440   |   |   |   | 2.90 |   |
|            |   |                      | 5,105,556 |   |   |   |   |   |

|            |   | Options outstanding as of |      |
|-----------------|--------|---------------------------|-----------|
|            |   | December 31, 2010         |      |
|            |   |                      |      |   | Weighted |   |
|            |   |                      |      |   | Average |   |
|            |   |                      |      |   | Remaining |   |
|            |   | Number                    |      |   | contractual life |   |
| Exercise prices |   | outstanding at            |      |   | (in years |   |
| $1 - $10        |   |                      | 976,986   |   |   |   | 3.68 |   |
| $10.01-$20      |   |                      | 2,354,500 |   |   |   | 3.06 |   |
| $20.01-$30      |   |                      | 2,075,704 |   |   |   | 2.65 |   |
| $30.01-$40      |   |                      | 499,440   |   |   |   | 3.90 |   |
|            |   |                      | 5,906,630 |   |   |   |   |   |

|                             |   |             |      |   |             |   |   | Weighted average |   |   |
|----------------------------------|--------|------------------|-----------|--------|------------------|--------|--------|------------------|--------|--------|
|                             |   |             |      |   | Weighted average |   |   | grant date       |   |   |
|                             |   | Number of shares |      |   | exercise price   |   |   | fair value       |   |   |
| Balance at January 1, 2011       |   |             | 5,906,630 |   |             | $      | 19.75  |             |   | $      | 9.20 |   |
| Forfeited                        |   |             | (251,533  | )      |             |   | 21.90  |             |   |   | 10.23 |   |
| Exercised                        |   |             | (549,541  | )      |             |   | 12.01  |             |   |   | 5.45 |   |
| Balance at December 31, 2011     |   |             | 5,105,556 |   |             |   | 20.48  |             |   |   | 9.55 |   |
| Exercisable at December 31, 2011 |   |             | 4,515,612 |   |             | $      | 21.75  |             |   | $      | 10.30 |   |

----

|   | B. | Employees’ and non employees’ stock options (cont'd) |
|--------|----|------------------------------------------------------------------|

|                                  |   |             |      |   | Weighted average      |   |
|---------------------------------------|--------|------------------|-----------|--------|-----------------------|--------|
| Non-vested options                    |   | Number of shares |      |   | grant date fair value |   |
| Balance at January  1, 2011 |   |             | 1,289,096 |   |                  | $      | 5.29 |   |
| Vested                                |   |             | (696,001  | )      |                  |   | 6.50 |   |
| Forfeited                             |   |             | (3,151    | )      |                  |   | 3.83 |   |
| Balance at December 31, 2011          |   |             | 589,944   |   |                  | $      | 3.86 |   |

|                         |   |             |    |   | Weighted average     |   |
|------------------------------|--------|------------------|---------|--------|----------------------|--------|
| Non-vested RSUs              |   | Number of shares |    |   | grant datefair value |   |
| Balance at January 1, 2011   |   |             | 533,966 |   |                 | $      | 16.68 |   |
| Granted                      |   |             | 338,104 |   |                 |   | 19.53 |   |
| Vested                       |   |             | (70,020 | )      |                 |   | 17.30 |   |
| Forfeited                    |   |             | (8,533  | )      |                 |   | 20.80 |   |
| Balance at December 31, 2011 |   |             | 793,517 |   |                 | $      | 17.80 |   |

----

|   | B. | Employees’ and non employees’ stock options (cont’d) |
|--------|----|------------------------------------------------------------------------|

|                                |   | Year ended December 31, |   |
|-------------------------------------|--------|-------------------------|--------|
|                                |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Research and development costs      |   | $                       | 708    |   |   | $ | 428 |   |   | $ | 257 |   |
| Selling and marketing expenses      |   |                    | 2,175  |   |   |   | 1,557 |   |   |   | 1,619 |   |
| General and administrative expenses |   |                    | 4,480  |   |   |   | 6,497 |   |   |   | 5,392 |   |
|                                |   | $                       | 7,363  |   |   | $ | 8,482 |   |   | $ | 7,268 |   |

|   | A. | Revenues by product lines |
|--------|----|---------------------------|

|                                 |   | Year ended December 31, |    |
|--------------------------------------|--------|-------------------------|---------|
|                                 |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
| Workstations, recorders and software |   | $                       | 9,060   |   |   | $ | 8,120 |   |   | $ | 11,523 |   |
| PillCam SB capsule                   |   |                    | 117,561 |   |   |   | 110,189 |   |   |   | 110,371 |   |
| PillCam ESO capsule                  |   |                    | 425     |   |   |   | 539 |   |   |   | 702 |   |
| PillCam Colon capsule                |   |                    | 1,798   |   |   |   | 1,291 |   |   |   | 1,021 |   |
| Patency capsules and scanners        |   |                    | 792     |   |   |   | 666 |   |   |   | 718 |   |
| Bravo pH monitoring products         |   |                    | 19,746  |   |   |   | 18,603 |   |   |   | 14,985 |   |
| Sierra manometry and catheters       |   |                    | 28,460  |   |   |   | 17,913 |   |   |   | - |   |
| Services                             |   |                    | 113     |   |   |   | 488 |   |   |   | 2,443 |   |
|                                 |   | $                       | 177,955 |   |   | $ | 157,809 |   |   | $ | 141,763 |   |

----

|   | B. | Revenues by geographic areas |
|--------|----|------------------------------|

|                                           |   | Year ended December 31, |    |
|------------------------------------------------|--------|-------------------------|---------|
|                                           |   | 2011                    |    |   | 2010 |   |   | 2009 |   |
| Americas                                       |   | $                       | 108,745 |   |   | $ | 100,501 |   |   | $ | 89,671 |   |
| Europe, Middle East and Africa (mainly Europe) |   |                    | 45,122  |   |   |   | 40,224 |   |   |   | 38,481 |   |
| Asia Pacific                                   |   |                    | 24,088  |   |   |   | 17,084 |   |   |   | 13,611 |   |
|                                           |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                           |   | $                       | 177,955 |   |   | $ | 157,809 |   |   | $ | 141,763 |   |

|                                           |   | Year ended December 31, |   |
|------------------------------------------------|--------|-------------------------|--------|
|                                           |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Currency gains, net                            |   | $                       | 650    |   |   | $ | 1,989 |   |   | $ | 397 |   |
| Income from marketable securities and deposits |   |                    | 1,347  |   |   |   | 1,165 |   |   |   | 1,583 |   |
| Other                                          |   |                    | (654   | ) |   |   | (555 | ) |   |   | (396 | ) |
|                                           |   |                    |   |   |   |   |   |   |   |   |   |   |
|                                           |   | $                       | 1,343  |   |   | $ | 2,599 |   |   | $ | 1,584 |   |

|   | A. | Israeli Taxation |
|--------|----|------------------|

|   | (1) | Israeli income tax is computed on the basis of the Company’s results in New Israeli Shekels (“NIS”) determined for statutory purposes. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | Israeli Taxation (cont'd) |
|--------|----|---------------------------|

|   | a. | Companies that meet the criteria of the Alternative Path of tax benefits will receive those benefits (now called “Beneficiating Enterprise” benefits) without prior approval. In addition, there will be no requirement to file reports with the Investment Center. Companies will be required to notify the Israeli Income Tax Authorities regarding the implementation of the Alternative Path. Audit will take place via the Income Tax Authorities as part of the tax audits. Request for pre-ruling is possible. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Tax benefits of the Alternative Path include lower tax rates or zero tax depending on the investment zone and the path chosen, lower tax rates on dividends and accelerated depreciation. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | In order to receive benefits in the Grant Path or the Alternative Path, the Industrial Enterprise must contribute to the economic independence of  Israel’s economy in one of the following ways: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | Its primary activity is in the Biotechnology or Nanotechnology fields and pre-approval is received from the head of research and development at the Office of the Chief Scientist; |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Its revenue from a specific country is not greater than 75% of its total revenues that year; |
|--------|----|----------------------------------------------------------------------------------------------|

|   | 3. | 25% or more of its revenues are derived from a specific foreign market of at least 12 million residents. |
|--------|----|----------------------------------------------------------------------------------------------------------|

----

|   | A. | Israeli Taxation (cont'd) |
|--------|----|---------------------------|

|   | (2) | As of December 31, 2011, the Company has no tax loss carryforwards in Israel except for capital losses of approximately $13,700 which are available to offset future taxable capital gains for indefinite period. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | As explained above, the Israeli Company is exempt from tax for a ten-year period.  Therefore, the Israeli Company has not recorded deferred tax assets and liabilities. Out of the Company’s accumulated deficit as of December 31, 2011, approximately $12,700 are tax-exempt earnings attributable to its Approved Enterprise and approximately $28,200 are tax-exempt earnings attributable to its Beneficiating Enterprise. The tax-exempt income attributable to the Approved and Beneficiating Enterprises cannot be distributed to shareholders without subjecting the Company to taxes. If these retained tax-exempt profits are distributed, the Company would be taxed at the reduced corporate tax rate applicable to such profits (currently- 25% pursuant to the implementation of the Investment Law). According to the 2005 Amendment, tax-exempt income generated under the Beneficiating Enterprise will be taxed upon dividend distribution or complete liquidation, whereas tax exempt income generated under the Approved Enterprise will be taxed only upon dividend distribution (but not upon complete liquidation, as the tax liability will be incurred by the shareholders). As of December 31, 2011, if the income attributed to the Approved Enterprise were distributed as dividend, the Company would incur a tax liability of approximately $3,200. If income attributed to the Beneficiating Enterprise were distributed as dividend, or upon liquidation, the Company would incur a tax liability in the amount of approximately $7,100. These amounts will be recorded as an income tax expense in the period in which the Company declares the dividend. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | On July 14, 2009, the Knesset (the Israeli parliament) passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) - 2009, which provided, inter-alia, an additional gradual reduction in the regular company tax rate to 18% as from the 2016 tax year. In accordance with the aforementioned amendments, the regular company tax rates applicable as from the 2009 tax year are as follows: in the 2009 tax year- 26%, in the 2010 tax year - 25%, in the 2011 tax year - 24%, in the 2012 tax year - 23%, in the 2013 tax year - 22%, in the 2014 tax year - 21%, in the 2015 tax year - 20% and as from the 2016 tax year the regular company tax rate will be 18%. The aforementioned change in the tax rates had no material impact on the Company's financial position or results of operations, since the Israeli company is currently tax exempt as explained above. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | In 2009, the Company signed a settlement agreement with the Israeli Tax Authorities (ITA) for fiscal years 2004 through 2007 (see also Note 14(F) below). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | Israeli Taxation (cont'd) |
|--------|----|---------------------------|

|   | (6) | The 2010 Amendment to the Law for the Encouragement of Capital Investments – 1959 |
|--------|-----|-----------------------------------------------------------------------------------------|

|   | B. | Foreign subsidiaries |
|--------|----|----------------------|

----

|   | C. | Profit (loss) before tax and income tax benefit (expense) included in the consolidated statements of operations |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|                                 |   | Year ended December 31, |   |
|--------------------------------------|--------|-------------------------|--------|
|                                 |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Profit (loss) before taxes on income |   |                    |   |   |   |   |   |   |
|  and non controlling interest:  |   |                    |   |   |   |   |   |   |
| Israel                               |   | $                       | 6,598  |   |   | $ | 8,232 |   |   | $ | 12,096 |   |
| Foreign jurisdiction                 |   |                    | 7,729  |   |   |   | 1,318 |   |   |   | (194 | ) |
|                                 |   |                    | 14,327 |   |   |   | 9,550 |   |   |   | 11,902 |   |
|                                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Current tax benefit (expense):       |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                               |   |                    | (1,002 | ) |   |   | (294 | ) |   |   | 500 |   |
| Foreign jurisdiction                 |   |                    | (1,565 | ) |   |   | (1,195 | ) |   |   | (179 | ) |
|                                 |   |                    | (2,567 | ) |   |   | (1,489 | ) |   |   | 321 |   |
|                                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Deferred taxes (see Note 14D):       |   |                    |   |   |   |   |   |   |   |   |   |   |
| Israel                               |   |                    | -      |   |   |   | - |   |   |   | - |   |
| Foreign jurisdiction                 |   |                    | 409    |   |   |   | 127 |   |   |   | 1,221 |   |
|                                 |   |                    | 409    |   |   |   | 127 |   |   |   | 1,221 |   |
|                                 |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)         |   | $                       | (2,158 | ) |   | $ | (1,362 | ) |   | $ | 1,542 |   |

|   | D. | Deferred taxes |
|--------|----|----------------|

----

|   | D. | Deferred taxes (cont’d) |
|--------|----|-------------------------------|

|                                                              |   | December 31, |    |
|-------------------------------------------------------------------|--------|--------------|---------|
|                                                              |   | 2011         |    |   | 2010 |   |
| Deferred tax assets:                                              |   |         |    |   |   |   |
| Tax loss carryforwards of subsidiaries                            |   | $            | 13,123  |   |   | $ | 15,111 |   |
| Other timing differences                                          |   |         | 1,550   |   |   |   | 1,638 |   |
|                                                              |   |         |    |   |   |   |   |   |
| Total gross deferred tax assets                                   |   |         | 14,673  |   |   |   | 16,749 |   |
| Valuation allowance                                               |   |         | (13,135 | ) |   |   | (15,111 | ) |
|                                                              |   |         |    |   |   |   |   |   |
| Net deferred tax assets (presented among current assets)          |   | $            | 1,538   |   |   | $ | 1,638 |   |
|                                                              |   |         |    |   |   |   |   |   |
| Long term deferred tax liabilities -                              |   |         |    |   |   |   |   |   |
| intangible assets acquired in business combination (see Note 16B) |   | $            | (5,362  | ) |   | $ | (5,871 | ) |

|   | E. | Reconciliation of statutory tax benefit (expense) to actual income tax benefit (expense) |
|--------|----|------------------------------------------------------------------------------------------|

|                                               |   | Year ended December 31, |   |
|----------------------------------------------------|--------|-------------------------|--------|
|                                               |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Profit before taxes on income                      |   | $                       | 14,327 |   |   | $ | 9,550 |   |   | $ | 11,902 |   |
| Tax rate                                           |   |                    | 24     | % |   |   | 25 | % |   |   | 26 | % |
| Computed expected tax                              |   |                    | (3,438 | ) |   |   | (2,388 | ) |   |   | (3,095 | ) |
| Tax benefits arising from approved enterprises (*) |   |                    | 1,584  |   |   |   | 2,058 |   |   |   | 3,145 |   |
| Changes in unrecognized tax benefits (expense)     |   |                    | (1,471 | ) |   |   | (57 | ) |   |   | 2,561 |   |
| Permanent difference and other                     |   |                    | (311   | ) |   |   | 64 |   |   |   | 1,020 |   |
| Change in valuation allowance                      |   |                    | 1,976  |   |   |   | (1,898 | ) |   |   | (2,206 | ) |
| Foreign tax rate differential                      |   |                    | (498   | ) |   |   | 859 |   |   |   | 117 |   |
|                                               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                       |   | $                       | (2,158 | ) |   | $ | ( 1,362 | ) |   | $ | 1,542 |   |

|                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| (*) Net earnings per share – amounts of the benefit resulting from the Approved Enterprises: |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                              |   | $      | 0.05   |   |   | $      | 0.07   |   |   | $      | 0.11   |   |
| Diluted                                                                                            |   | $      | 0.05   |   |   | $      | 0.07   |   |   | $      | 0.10   |   |

----

|   | F. | Accounting for income tax uncertainties |
|--------|----|-----------------------------------------|

|                                                               |   | 2011   |   |   | 2010   |   |   | 2009   |   |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Balance at January 1                                               |   | $      | 3,991  |   |   | $      | 3,974  |   |   | $      | 7,091 |   |
|  Additions based on tax positions related to the current year |   |   | 1,479  |   |   |   | 635    |   |   |   | 1,497 |   |
|  Additions for tax positions of prior years                   |   |   | -      |   |   |   | -      |   |   |   | 507 |   |
|  Reductions for tax positions of prior years                  |   |   | (169   | )      |   |   | (618   | )      |   |   | (2,010 | ) |
|  Settlements                                                  |   |   | -      |   |   |   | -      |   |   |   | (3,111 | ) |
|  Balance at December 31                                       |   | $      | 5,301  |   |   | $      | 3,991  |   |   | $      | 3,974 |   |

----

|                            |   |         |   |   | In active        |   |   |              |   |   |             |   |
|---------------------------------|--------|--------------|--------|--------|------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                            |   |         |   |   | markets for      |   |   | Significant other |   |   | Significant      |   |
|                            |   | December 31, |   |   | identical assets |   |   | observable        |   |   | unobservable     |   |
|                            |   | 2011         |   |   | (Level 1)        |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                         |   |         |   |   |             |   |   |              |   |   |             |   |
| Short-term investments          |   | $            | 3,794  |   |             | $      | 3,794  |              |   | $      | -                |   |   | $ | - |   |
| Long-term marketable securities |   |         | 16,003 |   |             |   | 16,003 |              |   |   | -                |   |   |   | - |   |
| Derivatives                     |   |         | 1,431  |   |             |   | -      |              |   |   | 1,431            |   |   |   | - |   |
| Total At December 31, 2011      |   | $            | 21,228 |   |             | $      | 19,797 |              |   | $      | 1,431            |   |   | $ | - |   |

|                            |   |         |   |   | In active        |   |   |              |   |   |             |   |
|---------------------------------|--------|--------------|--------|--------|------------------|--------|--------|-------------------|--------|--------|------------------|--------|
|                            |   |         |   |   | markets for      |   |   | Significant other |   |   | Significant      |   |
|                            |   | December 31, |   |   | identical assets |   |   | observable        |   |   | unobservable     |   |
|                            |   | 2010         |   |   | (Level 1)        |   |   | inputs (Level 2)  |   |   | inputs (Level 3) |   |
| Assets:                         |   |         |   |   |             |   |   |              |   |   |             |   |
| Short-term investments          |   | $            | 11,181 |   |             | $      | 11,181 |              |   | $      | -                |   |   | $ | - |   |
| Long-term marketable securities |   |         | 3,873  |   |             |   | 3,873  |              |   |   | -                |   |   |   | - |   |
| Derivatives                     |   |         | (132   | )      |             |   | -      |              |   |   | (132             | )      |   |   | - |   |
| Total At December 31, 2010      |   | $            | 14,922 |   |             | $      | 15,054 |              |   | $      | (132             | )      |   | $ | - |   |

----

|   | A. | Investment in the Japanese Subsidiary |
|--------|----|---------------------------------------|

|   | B. | Acquisition of Sierra |
|--------|----|-----------------------|

|                                                         |   | $ in thousands |    |
|--------------------------------------------------------------|--------|----------------|---------|
| Current assets                                               |   | $              | 7,967   |   |
| Property, plant and equipment                                |   |           | 533     |   |
| Other long-term assets                                       |   |           | 65      |   |
| Identifiable intangible assets:                              |   |           |    |   |
|    In-process research and development        |   |           | 5,306   |   |
|    Technological intellectual property (1)    |   |           | 7,562   |   |
|    Backlog                                    |   |           | 612     |   |
|    Business-related intellectual property (2) |   |           | 3,711   |   |
| Goodwill                                                     |   |           | 20,523  |   |
| Total assets acquired                                        |   |           | 46,279  |   |
|                                                         |   |           |    |   |
| Current liabilities                                          |   |           | (4,761  | ) |
| Deferred tax liability                                       |   |           | (6,759  | ) |
| Other non-current liabilities                                |   |           | (9      | ) |
| Total liabilities assumed                                    |   |           | (11,529 | ) |
|                                                         |   |           |    |   |
| Net assets acquired                                          |   | $              | 34,750  |   |

----

|   | B. | Acquisition of Sierra (cont’d) |
|--------|----|--------------------------------------|

|                                     |   | Year ended December 31      |   |
|------------------------------------------|--------|-----------------------------|--------|
|                                     |   | 2010                        |   |   | 2009 |   |
|                                     |   | $ in millions               |   |
|                                     |   | (except Earnings per share) |   |
|                                     |   | (unaudited)                 |   |
| Net sales                                |   | $                           | 162.5  |   |   | $ | 160.3 |   |
| Net income                               |   | $                           | 9.9    |   |   | $ | 12.9 |   |
| Net income attributable to shareholders* |   | $                           | 10.2   |   |   | $ | 13.8 |   |
| Earnings per share:                      |   |                        |   |   |   |   |   |   |
| Basic                                    |   | $                           | 0.34   |   |   | $ | 0.47 |   |
| Diluted                                  |   | $                           | 0.33   |   |   | $ | 0.45 |   |

|   | * | Includes net amortization in the amount of approximately $766 and $1,528 and decrease in interest income of approximately $88 and $350 in 2010 and 2009, respectively. In addition, transaction costs of $936 that were recorded in 2010 were eliminated. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                              |   | December 31, |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | 2011         |   |   | 2010 |   |
| Balance as of January 1           |   |         |   |   |   |   |
| Goodwill                          |   | $            | 24,998 |   |   | $ | 4,475 |   |
| Accumulated impairment losses     |   |         | (909   | ) |   |   | (889 | ) |
|                              |   |         | 24,089 |   |   |   | 3,586 |   |
| Goodwill acquired during the year |   |         | -      |   |   |   | 20,523 |   |
| Impairment loss                   |   |         | -      |   |   |   | (20 | ) |
| Balance as of December 31         |   |         |   |   |   |   |   |   |
| Goodwill                          |   |         | 24,998 |   |   |   | 24,998 |   |
| Accumulated impairment losses     |   |         | (909   | ) |   |   | (909 | ) |
|                              |   |         |   |   |   |   |   |   |
|                              |   | $            | 24,089 |   |   | $ | 24,089 |   |

----

|   | A. | Marketing Subsidiary in Brazil |
|--------|----|--------------------------------|

|   | B. | Acquisition of Non-controlling Interests |
|--------|----|------------------------------------------|

----

----