Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 25,454,262 ordinary shares, NIS 1.0 par value per share excluding 2,800,000 ordinary shares held by EMI which do not have any voting and equity rights.

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. YES o NO þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 in the Exchange Act. (Check one).

Indicate by check mark which financial statement item the registrant has elected to follow:
ITEM 17 o ITEM 18 þ

If this is an annual report indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act: YES o NO þ

     THIS ANNUAL REPORT ON FORM 20-F CONTAINS “FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE “1934 ACT”). FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT ABOUT THE COMPANY’S BUSINESS, ITS RELATIONSHIP WITH ITS EMPLOYEES AND THE CONDITION OF ITS PROPERTIES. WORDS SUCH AS “BELIEVE,” “EXPECT,” “INTEND,” “ESTIMATE” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED, EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, WITHOUT LIMITATION, THE FACTORS SET FORTH BELOW UNDER THE CAPTION “RISK FACTORS” (WE REFER TO THESE FACTORS AS “CAUTIONARY STATEMENTS”). ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT SPEAK ONLY AS OF THE DATE HEREOF, AND WE CAUTION EXISTING AND PROSPECTIVE INVESTORS NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR CIRCUMSTANCES, AND THEREFORE, THERE CAN BE NO ASSURANCE THAT ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN WILL PROVE TO BE ACCURATE. WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

     For the reader’s convenience, financial information for 2006 has been translated from various foreign currencies to the U.S. dollar (“$” or U.S. dollar), as of December 31, 2006 in accordance with the following exchange rates:

     The dollar amounts reflected in these convenience translations should not be construed as representing amounts that actually can be received or paid in dollars or convertible into dollars (unless otherwise indicated), nor do such convenience translations mean that the NIS amounts (i) actually represent the corresponding dollar amounts stated, or (ii) could be converted into dollars at the assumed rate. The Federal Reserve Bank of New York does not certify for customs purposes a buying rate for cable transfers in NIS. Therefore all information about exchange rates is based on the Bank of Israel rates.

     The exchange rate between the NIS and U.S. dollar published by the Bank of Israel was NIS 4.003 to the dollar on May 31, 2007. The exchange rate has fluctuated during the six months period beginning December 2006 through May 2007 from a high of NIS 4.26 to the dollar to a low of NIS 3.932 to the dollar. The monthly high and low exchange rates between the NIS and the U.S. dollar

during the six months period beginning December 2006 through May 2007, as published by the Bank of Israel, were as follows:

     The average exchange rate between the NIS and U.S. dollar, using the average of the exchange rates on the last day of each month during the period, for each of the five most recent fiscal years was as follows:

     Not Applicable.

     Not Applicable.

     A. SELECTED FINANCIAL DATA

     The following selected consolidated financial data of Elbit Medical Imaging Ltd. and its subsidiaries (together, “EMI,” the “Company,” “our Company,” “we” or “us”) are derived from our 2006 consolidated financial statements and are set forth below in table format. Our 2006 consolidated financial statements and notes included elsewhere in this report were prepared in accordance with Israeli generally accepted accounting principles (“GAAP”), and audited by Brightman Almagor & Co., a firm of certified public accountants in Israel and a member of Deloitte Touche Tohmatsu, except for certain subsidiaries and an associate which were audited by other auditors. Our selected consolidated financial data are presented in NIS. A convenience translation to U.S. dollars is presented for 2006 only.

     Our consolidated financial statements have been prepared in accordance with Israeli GAAP, which differs in significant respects from U.S. GAAP. We have summarized principal differences relevant to us between Israeli GAAP and U.S. GAAP in Note 25 to our consolidated financial statements included in Item 18 of this Annual Report. You should read the information in the following tables in conjunction with “Operating and Financial Review and Prospects” and the consolidated financial statements and Notes to the consolidated financial statements included in Item 18 of this Annual Report.

     On January 1, 2004, Accounting Standard No. 12 of the Israel Accounting Standards Board (“IASB”) (“Standard 12”) came into force and effect. In accordance with the provisions of Standard 12, adjustment of financial statements to the inflation ceased commencing January 1, 2004, with adjusted amounts of non-monetary items which were included in the balance sheet as of December 31, 2003, used as basis for the nominal financial reporting as and from January 1, 2004. Amounts presented in the financial statements for all periods were, therefore, included in values to be hereinafter referred to as — “Reported amounts”.

     Not Applicable.

     Not Applicable.

     We have made some statements in this annual report about our future activities that may or may not come true. Factors, over which we have no or limited control, may affect our actual performance and results of operations and may cause them to be different from what we present to you in this Annual Report.

     Our statements in this annual report are accurate to the best of our knowledge and belief as of the date this document is filed with the SEC. We take no responsibility to publicly update or revise such statements.

     The Company engages, directly or indirectly, mainly in the following areas: initiation, construction, operation, management and sale of commercial and entertainment centers in Israel, in Central and Eastern Europe and in India; hotels ownership, primarily in major European cities, as well as operation, management and sale of same; investments in the research and development, production and marketing of magnetic resonance imaging guided focused ultrasound treatment equipment; distributing and marketing of women’s fashion and accessories; and venture-capital investments.

     The following is a list of the material risk factors that affect our business and our results of operation. We cannot predict nor can we asses the impact, if any, of such risk factors on our business or the extent which any factor, or a combination of factors, may cause actual results to differ materially from those projected in any forward looking statement.

Suitable locations are critical to the success of a shopping and entertainment center

     The choice of suitable locations for the development of shopping and entertainment center projects is an important factor in the success of the individual projects. Ideally, these sites should be located: (i) within the city center, with well-developed transportation infrastructure (road and rail) located in close proximity to facilitate customer access; and (ii) within local areas with sufficient population to support the centers. If we are not able to find sites in the target cities which meet these criteria, either at all or at viable prices, this may materially adversely affect our business and results of operation.

     Sites which meet our criteria must be zoned for commercial activities of the type contained in shopping and entertainment centers. In instances where the existing zoning is not suitable or in which the zoning has yet to be determined, we will apply for the required zoning classifications. This procedure may be protracted, particularly in countries where the bureaucracy is cumbersome and inefficient, and we cannot be certain that the process of obtaining proper zoning will be completed with sufficient speed to enable the centers to open ahead of the competition or at all. Opposition by local residents to zoning and/or building permit applications may also cause considerable delays. Certain of our site acquisitions are conditioned upon the grant of a building permit. In addition, arbitrary changes to applicable zoning may jeopardize projects that have already commenced. Therefore, if we cannot receive zoning approvals or if the procedures for the receipt of such zoning approvals are delayed, our cost will increase which will have an adverse affect on our business.

     We rely on subcontractors for all of our construction and development activities. If we cannot enter into subcontracting arrangements on terms acceptable to us or at all, we will incur additional costs which will have an adverse affect on our business. The competition for the services of quality contractors and subcontractors may cause delays in construction, thus exposing us to a loss of our competitive advantage. Subcontracting arrangements may be on less favorable terms than would otherwise be available, which may result in increased development and construction costs. By relying on subcontractors, we become subject to a number of risks relating to these entities, such as quality of performance, varied work ethics, performance delays, construction defects and the financial stability of the subcontractors. A shortage of workers would have a detrimental effect on us and our subcontractors and, as a result, on our ability to conclude construction phases on time and within budget. We generally require our subcontractors to provide bank guarantees in our favor to financially secure their performance. In the event the subcontractor fails to perform, the bank guarantees provide for a monetary payment to us. The guarantees do not, however, obligate the subcontractors to complete the project and may not adequately cover our costs of completing the project or our lost profits during the period while alternative means of completing the project are sought.

     An important element in the success of our shopping and entertainment center projects is the short construction time (generally 12 to 18 months from the receipt of building permits, depending on the size of the project), and our ability to open the centers ahead of our competitors, particularly in cities which do not have shopping and entertainment centers of the type constructed by us.

     This makes us subject to a number of risks relating to these activities, including:

     In addition, under our development contracts with local municipalities, we have deadlines for most of our projects (subject to limited exceptions). If construction of a project does not proceed in accordance with our schedule, we may in some instances be required to pay penalties to the vendor (usually local municipalities) based on the extent of the delay and in isolated cases to forfeit rights in the land. The failure to complete a particular project on schedule or on budget may have a material adverse effect on our business, prospects, results of operations or financial condition.

     We are dependent on our ability to enter into new leases on favorable terms in order to receive a profitable price for each shopping and entertainment center. We may find it more difficult to engage third parties to enter into leases during periods when market rents are increasing, or when general consumer activity is decreasing. We seek agreements in principle with anchor tenants (such as the operators of cinemas, supermarkets, department stores and electrical appliances stores), either generally or on a property-by property basis, prior to entering into a formal lease.

The termination of a lease by any anchor tenant may adversely affect the relevant specific shopping and entertainment center and the price obtainable for the sale of such shopping and entertainment center.

     Bankruptcy filings by our retail tenants are normal in the course of our operations. We are continually re-leasing vacant spaces arising out of tenant terminations as a result of bankruptcy. Pressures that affect consumer confidence, job growth, energy costs and income gains can affect retail sales growth, and a continuing soft economic cycle may impact our ability to find new tenants for property vacancies that result from store closings or bankruptcies.

     If an economic recession occurs, the demand and rents for neighborhood and community shopping and entertainment centers could decline and adversely affect our financial condition and results of operations. Our financial condition and results of operations could also be adversely affected if our tenants are unable to make lease payments or fail to renew their leases as a result of declining consumer spending.

     We rely on the presence of “anchor” tenants in our entertainment and commercial centers. Anchor stores in entertainment and commercial centers play an important part in generating customer traffic and making a center a desirable location for other tenants. The failure of an anchor store to renew its lease, the termination of an anchor store’s lease, or the bankruptcy or economic decline of an anchor tenant can have a material adverse effect on the economic performance of the centers. There can be no assurance that if the anchor stores were to close or fail to renew their leases, we would be able to replace such anchor stores in a timely manner or that we could do so without incurring material additional costs and adverse economic effects. The expiration of an anchor lease at an entertainment and commercial center may make refinancing of such center difficult.

     The shopping and entertainment centers business in Eastern Europe is rapidly becoming more competitive with a number of developers (particularly from Germany and France) becoming active in our target areas. The shopping and entertainment centers concept we promote is gaining increasing popularity due to its potentially high yields. Developers compete not only for patrons, but also for desirable properties, financing, raw materials, qualified contractors, experienced system consultants, expert marketing agents and skilled labor. The public bidding process (the process through which we often acquire new properties) is subject to intense competition and some of our competitors have longer operating histories and greater resources than us, all of which may limit our ability to obtain such projects. There can be no assurance that we will be successful in winning projects that we bid for or which are awarded pursuant to fixed price tenders or that we will otherwise continue to be successful in competing in Eastern Europe.

The hotels industry may be affected by economic conditions, oversupply, travel patterns, weather and other conditions beyond our control which may adversely affect our business and results of operations.

     The hotels industry may be adversely affected by changes in national or local economic conditions and other local market conditions. Our hotels generally, and in particular, in London, Amsterdam may be subject to the risk of oversupply of hotel rooms. Other general risks that may affect our hotels business are changes in travel patterns, extreme weather conditions, changes in governmental regulations which influence or determine wages, workers’ union activities, increases in land acquisition prices or construction costs, changes in interest rates, the availability of financing for operating or capital needs, and changes in real estate tax rates and other current operating

expenses. Unforeseen events, such as terrorist attacks, outbreaks of epidemics and economic recessions have had and may continue to have an adverse effect on local and international travel patterns and, as a result, on occupancy rates and prices in our hotels. Downturns or prolonged adverse conditions in the real estate or capital markets or in national or local economies and difficulties in securing financing for the development of hotels could have a material adverse effect on our business, results of operations, ability to develop new projects and the attainment of our strategic goals.

Competition in the hotels industry could have a material adverse effect on our business and results of operations.

     The hotels business is highly competitive. This is particularly the case in those areas where there is an oversupply of rooms, such as in London and Amsterdam. Competitive factors within the industry include:

     We operate, and intend to develop or acquire, most of our hotels in geographic locations where other hotels are or may be located. We expect to compete for guests and development sites with national chains, large franchisees and independent operators. Many of these competitors have greater financial resources and better brand name recognition than we do, and may have more established relationships with prospective franchisers, representatives in the construction industry and other parties engaged in the lodging industry. The number of competitive lodging facilities in a particular area could have a material adverse effect on our hotel occupancy and rates and, therefore, revenues of our hotels. We believe that competition within the lodging market may increase in the foreseeable future especially for our hotels located in Eastern Europe. New or existing competitors may significantly reduce their rates or offer greater convenience, services or amenities or significantly expand or improve hotels in the markets in which we currently or may subsequently compete, thereby materially adversely affecting our business and results of operations.

Acquiring, developing and renovating hotels involves substantial risks, and we cannot be certain of the success of any future projects.

     Part of our strategy is to develop new hotels and to acquire and redevelop old or under-performing hotels. Acquiring, developing and renovating hotels involve substantial risks, including:

     We cannot be certain that present or future development or renovation will be successful. If we are not successful in future projects, it will have a material adverse affect on our business. For successful growth, we must be able to develop or acquire hotels on attractive terms and integrate such hotels into our existing operations. For acquired hotels, we must consolidate management, operations, systems, personnel and procedures, which may not be immediately possible due to collective labor agreements or other legal or operational obstacles. Any substantial delays or unexpected costs in this integration process could materially affect our business, financial condition or results of operations. We cannot be certain that newly acquired (or constructed or refurbished) hotels will perform as we expect or that we will be able to realize projected cost savings for acquired hotels.

Continuous delays with respect to renovations of the physical environment near the Astrid Park Plaza Hotel in Belgium may continue to have an adverse effect on its operations.

     The Municipality of Antwerp has engaged in extensive construction in the Astridplein, located directly opposite the Astrid Park Plaza Hotel since 2000. Such construction is intended to prepare the square to accommodate the increased traffic which will result once the TGV services to the railway station located adjacent to the square become operational. The completion of this construction has been delayed several times, and has caused and continues to cause obstructions to access to the hotel. In the past, this had an adverse effect on the occupancy rate at our hotel and on the performance of the Aquatopia attraction located within the hotel. The continuation of the construction, the permanent changes to the traffic flow around the hotel and the less convenient access for the hotel’s patrons may have an adverse effect on our results of operations.

     We own interests in five operational hotels in partnership with other entities, including in particular, the Red Sea Group of companies (“Red Sea”). (For further information regarding our partnership with Red Sea, see “Item 4. Information on the Company — B. Business Overview — Hotels” below). Red Sea is engaged in the initiation and development of residential and commercial real estate projects in Israel and in the operation of chain of hotels and income producing real estate abroad. We may in the future enter into joint ventures or other collaborative arrangements with Red Sea or with other third parties. Our investments in these joint ventures, including in particular our numerous partnerships with Red Sea, may, under certain circumstances, be subject to (i) the risk that one of our partners may become bankrupt or insolvent, which may cause us to be unable to fulfill our financial obligations, may trigger a default under our bank financing agreements or, in the event of a liquidation, may prevent us from managing or administering our business; (ii) the risk that one of our partners may have economic or other interests or goals that are inconsistent with our interests and goals, and that such partner may be in a position to veto actions which may be in our best interests; and (iii) the possibility that disputes may arise regarding the continued operational requirements of our hotels that are jointly owned.

We rely on management agreements with Park Plaza which may not provide the intended benefits, and may be terminated.

     All of the operating hotels in which we have an interest (other than the Centreville Apartment hotel in Bucharest) are either directly or indirectly operated under long-term management agreements with Park Plaza Hotels Europe Ltd. (“Park Plaza”). Park Plaza is the franchisee for certain territories under territorial license and franchise agreements with Golden Wall Investment Ltd., which entitles Park Plaza to use the “Park Plaza” tradename. Any significant decline in the reputation of Park Plaza or in its ability to ensure the performance of our hotels at anticipated levels could

adversely affect our results of operations. If for any reason Park Plaza loses its principal franchise, we will automatically lose our ability to use the Park Plaza name and other benefits, and would suffer in the areas of brand name recognition, marketing, and centralized reservations systems provided by Park Plaza, which, in turn, could materially affect our operations. If our agreement with Park Plaza is terminated, we would not be certain that we would be able to obtain alternative management services of the same standard on similar or better terms.

Our agreements with Park Plaza and the Rezidor Hotel Group impose obligations on us that may force us to incur significant costs.

     Our agreements with Park Plaza (for the management of the operational hotels) and the Rezidor Hotel Group (for the future management of the Bucuresti hotel in Bucharest, which is currently under renovation and is intended to be operated under the brand name “Radisson SAS”) contain specific standards for, and restrictions and limitations on, hotel operation and maintenance. These standards, restrictions and limitations may conflict with our priorities, and impose capital demands upon us. In addition, Park Plaza and the Rezidor group may alter their standards or hinder our ability to improve or modify our hotels. We may be forced to incur significant costs or make capital improvements in order to comply with requirements of Park Plaza or The Rezidor Hotel Group and, if our relationship with either of these parties is terminated, to change the franchise affiliation of our affected hotels, as a result.

The value of our investment in our hotel properties is subject to various risks related to ownership and operation of real property.

     Our investment in hotel properties is subject to varying degrees of risk related to the ownership and operation of real property. The intrinsic value of our hotels and income from the hotels may be materially adversely affected by:

     Since we acquired a controlling interest in the Bucuresti Hotel complex in Bucharest, Romania (which includes the Bucuresti Hotel and the Centerville apartment hotel), we have encountered a number of attempts to challenge both the validity of the acquisition of the complex and our control over the company owning the rights to the hotel. If any such challenge succeeds, our results of operation and financial position will be materially adversely affected.

The failure to comply with government regulation may adversely affect our business and results of operations

          Both the shopping and entertainment centers business and the hotel industry are subject to numerous national and local government regulations, including those relating to building and zoning requirements and fire safety control. In addition, we are subject to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions, and work permit requirements, and in some localities to collective labor agreements. A determination that we are not in compliance with these regulations could result in the imposition of fines, an award of damages to private litigants and significant expenses in bringing our shopping and entertainment centers and hotels into compliance with the regulations. In addition, our ability to dismiss unneeded staff may be hampered by local labor laws and courts which traditionally favor employees in disputes with former employers, particularly in countries with strong socialist histories such as those in Eastern Europe.

          We rely on the quality and timely performance of construction activities by third-party contractors. Claims may be asserted against us by local government and zoning authorities or by third parties for personal injury and design or construction defects. These claims may not be covered by the professional liability insurance of the contractors or of the architects and consultants. These claims may give rise to significant liabilities.

          The building industry may from time to time experience fluctuating prices and shortages in the supply of raw materials as well as shortages of labor and other materials. The inability to obtain sufficient amounts of raw materials and to retain efficient employees on terms acceptable to us may delay construction and increase the budget of our projects and, as a result, have a material adverse effect on the results of our operations.

We may experience fluctuations in our annual and quarterly results as a result of our opening new centers, entering into new businesses and disposing of other centers, hotels or other businesses.

          We periodically review our business to identify properties or other assets that we believe either no longer complement our business, or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and realizing investments and from time to time, attempt to sell these assets. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all. We also periodically review our business to identify opportunities for the acquisition or development of new centers and/or hotels. There can be no assurance that we will be able to develop or acquire centers and/or hotels that will become successful. As a result of our disposition and acquisition or development of centers, we may experience significant fluctuations in our annual and quarterly results. As a result, we believe that period-to-period comparisons of our historical results of operations may not necessarily be meaningful and that investors should not rely on them as an indication for future performance.

Factors that affect the value of our real-estate assets and our investments may adversely change and therefore we will need to charge an impairment loss not previously recorded.

          Certain specific circumstances may affect the fair value of our real estate assets (operating or under construction) and investments. An impairment loss not previously recorded may be required and/or depreciation may be accelerated, upon the occurrence of one or more of the following circumstances:

          Since market conditions and other parameters (such as macroeconomic environment trends, and others), which affect the fair value of our real-estate and investment, vary from time to time, the fair value may not be adequate on a date other than the date the measurement was executed (immediately prior to the balance sheet date). In the event the projected forecasts regarding the future cash flows generated by those assets are not met, we may have to record an additional impairment loss not previously recorded.

InSightec is currently dependent on sales of the ExAblate 2000 for the treatment of uterine fibroids and the sale of research systems for its clinical research.

          The ExAblate 2000 is in an early stage of commercialization. InSightec received FDA approval in October 2004 to market the ExAblate 2000 in the United States only for the treatment of uterine fibroids. InSightec expects sales of the ExAblate 2000 to come from this application and from sales of research systems for the foreseeable future, depending upon the timing of regulatory approval of

14

additional applications for the ExAblate 2000. As a result, factors adversely affecting InSightec’s ability to sell, or pricing of or demand for, InSightec’s product would have a material adverse effect on its financial condition and results of operations, which would in turn adversely affect the Company’s results of operations.

If the ExAblate 2000 does not achieve broad market acceptance for the treatment of uterine fibroids, InSightec will not be able to generate sufficient sales to support its business.

     InSightec must achieve broad market acceptance of the ExAblate 2000 for the treatment of uterine fibroids among physicians, patients and third party payors in order to generate a sufficient amount of sales to support its business. Physicians will not recommend the use of the ExAblate 2000 unless InSightec can demonstrate that it produces results comparable or superior to existing treatments for uterine fibroids. If long-term patient studies do not support InSightec’s existing clinical results, or if they indicate that the use of the ExAblate 2000 has negative side effects on patients, physicians may not adopt or continue to use the ExAblate 2000. Even if InSightec demonstrates the effectiveness of the ExAblate 2000, physicians may still not use the system for a number of other reasons. Physicians may continue to recommend traditional uterine fibroid treatment options simply because those methods are already widely accepted and are based on established technologies. Patients may also be reluctant to undergo new, less established treatments for uterine fibroids. If, due to any of these factors, the ExAblate 2000 does not receive broad market acceptance among physicians or patients, InSightec will not generate significant sales. In this event, InSightec’s business, financial condition and results of operations would be seriously harmed, and InSightec’s ability to develop additional treatment applications for the ExAblate 2000 would be adversely affected.

If physicians, hospitals and other healthcare providers are unable to obtain coverage and sufficient reimbursement from third party healthcare payors for treatment procedures using the ExAblate 2000, InSightec may be unable to generate sufficient sales to support its business.

     Demand for the ExAblate 2000 is likely to depend substantially on the extent to which sufficient reimbursement for treatment procedures using InSightec’s system will be available from third party payors such as private health insurance plans and health maintenance organizations and, to a lesser degree, government payor programs such as Medicare and Medicaid. In the United States, the assignment of a Current Procedural Terminology, or CPT, code is generally necessary to facilitate claims for reimbursement. In July 2004, two CPT III codes were implemented allowing tracking of the use of the ExAblate 2000 system to treat uterine fibroids. However, the assignment of these codes does not require third party payors to provide reimbursement for procedures performed with the ExAblate 2000. InSightec believes that third party payors will not provide reimbursement on a national basis for treatments using the ExAblate 2000 unless InSightec can generate a sufficient amount of data through long-term patient studies to demonstrate that such treatments produce favorable results in a cost-effective manner relative to other treatments. Furthermore, InSightec could be adversely affected by changes in reimbursement policies of private healthcare or governmental payors to the extent any such changes affect reimbursement for treatment procedures using the ExAblate 2000. If physicians, hospitals and other healthcare providers are unable to obtain sufficient coverage and reimbursement from third-party payors for treatment procedures using the ExAblate 2000, InSightec may be unable to generate sufficient sales to support its business.

     InSightec’s success in non-U.S. markets also depends on treatment procedures using the ExAblate 2000 being eligible for reimbursement through government-sponsored healthcare payment systems, private third-party payors and labor unions. Reimbursement practices vary significantly from country to country and within some countries, by region. Many non-U.S. markets have government-managed healthcare systems that control reimbursement for new products and procedures. Other non-U.S. markets have private insurance systems; labor union-sponsored programs and government-managed systems that control reimbursement for new products and procedures. To date, only one third party payor, a health maintenance organization in Israel, has approved reimbursement coverage for treatments using the ExAblate 2000. We cannot assure you that such coverage will be approved by additional payors in other markets in a timely manner, if at

all, thereby materially adversely affecting InSightec’s results our operation. In the event that InSightec is unable to timely obtain acceptable levels of reimbursement coverage in its targeted markets outside of the United States, InSightec’s ability to generate sales may be adversely affected.

InSightec’s future growth substantially depends on its ability to develop and obtain regulatory clearance for additional treatment applications for the ExAblate 2000.

     InSightec has received regulatory approvals to market the ExAblate 2000 in the United States, Israel, Canada, Russia, Brazil, Mexico, Korea, Taiwan, Australia, Singapore and the European Union Economic Area, or EEA, which is comprised of the member nations of the European Union and certain additional European nations, solely for the treatment of uterine fibroids. In addition, InSightec has received in May 2007 the CE-marking (approval to market in the EEA) for pain palliation of bone metastases. However, clinical experience for this application is still in early stages and therefore commercial acceptance is expected to take some time. InSightec’s objective is to expand the use of the ExAblate 2000 by developing and introducing new treatment applications. InSightec is currently in various stages of product development and clinical studies for a number of new treatment applications for the ExAblate 2000. It will be required to obtain FDA approval in the United States and other regulatory approvals outside of the United States before marketing the ExAblate 2000 for these additional treatment applications. Furthermore, InSightec cannot guarantee that InSightec’s product development activities for these other applications will be successful and in such event, InSightec’s future growth will be harmed. In particular, InSightec’s future curative oncology treatment applications are subject to significant risks since these applications must be able to demonstrate complete ablation of malignant tumors. If InSightec is unable to demonstrate this degree of efficacy, its future curative oncology treatment applications may not prove to be successful. In addition, assuming product development is successful, the regulatory processes can be lengthy, lasting many years in some cases, and expensive. We cannot assure you that FDA approval or other regulatory approvals will be granted.

     In order to obtain FDA clearance and other regulatory approvals, and to obtain reimbursement coverage for use of the ExAblate 2000 treatment for additional applications, InSightec is required to conduct clinical studies to demonstrate the therapeutic benefits and cost-effectiveness of these new treatment applications and products. Clinical trials are expensive and may take several years to complete. If future clinical trials indicate that the ExAblate 2000 is not as beneficial or cost-effective as existing treatment methods, or that such products cause unexpected complications or other unforeseen adverse events, InSightec may not obtain regulatory clearance to market and sell the ExAblate 2000 for these additional treatment applications or obtain reimbursement coverage, and InSightec’s long-term growth would be seriously harmed.

     The product development and regulatory approval process for each of InSightec’s future applications is subject to a number of application-specific risks and uncertainties. For example, the life expectancy from existing surgical treatment options for breast cancer is long and the survival rate is relatively high. As a result, InSightec will have to conduct extensive clinical trials, which may include several thousand participants and extend over several years of follow-up. This may delay the commercial introduction of InSightec’s applications by several years. In addition, InSightec is still in the process of developing and improving clinical prototypes for its liver, bone metastasis tumors, prostate, and brain treatment applications. If it is unable to surmount these challenges, as well as the challenges relating to its other future applications, its business and results of operations may be adversely affected.

     The ExAblate 2000 is compatible only with certain of GE Healthcare, a division of the General Electric Company (“GE”) Healthcare’s Magnetic Resonance Imaging (MRI) systems, which may limit InSightec’s potential market. A significant portion of the MRI systems in use in the United States and elsewhere are not GE MRI systems. InSightec has no current plans to develop a system that would be compatible with MRI systems manufactured by companies other than GE and is, therefore, limited in its target market to potential customers who already own or otherwise have access to a compatible GE MRI system, or are willing to purchase such a system in order to use the ExAblate 2000. In addition, in the event that GE is unable to effectively market its MRI systems, InSightec’s

ability to generate additional sales of the ExAblate 2000 may be adversely affected.

     InSightec depends on its collaboration with GE to ensure the compatibility of the ExAblate 2000 with new models of GE MRI systems and upgrades to existing GE MRI systems. GE regularly develops new models of its MRI systems, as well as new capabilities for its existing MRI systems, which could affect their compatibility with the ExAblate 2000. If InSightec is unable to receive information regarding new models of the GE MRI systems or upgrades to existing GE MRI systems, and coordinate corresponding upgrades to the ExAblate 2000 to ensure continued compatibility with new and existing GE MRI systems, its ability to generate sales of its system will be adversely affected. In addition, If InSightec is unable to coordinate new applications or upgrades with GE’s research and development team, it may be unable to develop such applications or upgrades in a timely manner and its future revenue growth may be seriously harmed.

     In addition, InSightec entered into a five year exclusive worldwide (excluding Japan and Russia) sales and marketing agreement with GE with respect to the ExAblate 2000. Although the agreement does not prohibit InSightec from marketing and selling the ExAblate 2000 directly, InSightec expects that a substantial portion of its sales of the ExAblate 2000 will be developed through this agreement with GE. Since InSightec currently has no direct control over GE’s sales and marketing personnel, InSightec must rely on incentives provided by GE to its personnel to encourage effective marketing of the ExAblate 2000, as well as contractual provisions contained in the agreement. In addition, GE has a right of first negotiation with respect to the distribution, of our focused ultrasound products, and the design and supply of imaging devices to be used in connection with our current and future Magnetic Resonance Guided Focused Ultrasound (“MRgFUS”) products. These rights continue until five years after the sale by GE of all of Insightec’s ordinary shares that it holds or, with respect to any distribution agreement, until the earlier of three years after such sale of our ordinary shares or the date on which GE fails to meet minimum thresholds provided in such distribution agreement. We cannot assure you that GE will be successful in efforts to generate sales of the ExAblate 2000 or any other products developed by us as to which it obtains distribution rights. In such event InSightec’s results of operation may be materially adversely affected.

     The sales and marketing agreement does not prohibit GE from marketing or manufacturing other focused ultrasound-based products that may compete with the ExAblate 2000. In addition, GE retained the right to use certain focused ultrasound-related patents which it assigned to InSightec at the time of its formation and InSightec has granted to GE a non-exclusive license to certain of our patents derived from technology and patent rights licensed to InSightec by GE. GE may use such patents to develop its own focused ultrasound based products without InSightec’s consent. In the event that GE chooses to distribute or manufacture medical devices that may compete with the ExAblate 2000 or other products based on the MRgFUS technology, InSightec’s sales may be adversely affected.

If InSightec is unable to protect its intellectual property rights, its competitive position could be harmed. Third-party claims of infringement could require InSightec to redesign its products, seek licenses, or engage in future costly intellectual property litigation, which could impact InSightec’s future business and financial performance.

     InSightec’s success and ability to compete depends in large part upon its ability to protect its proprietary technology. InSightec relies on a combination of patent, copyright, trademark and trade secret laws, and on confidentiality and invention assignment agreements, in order to protect its intellectual property rights. A few of InSightec’s patents were transferred to InSightec from GE at the time of its formation, and GE retains a non-exclusive license to make, use and sell products covered under these patents in the imaging field only without InSightec’s permission. Prior to the transfer, GE had entered into cross-license agreements with respect to these patents with a number of companies, including some that may be potential competitors of InSightec. As a result of these cross license agreements, InSightec may not be able to enforce these patents against one or more of these companies.

     The process of seeking patent protection can be long and expensive, and there can be no assurance that InSightec’s existing or future patent applications will result in patents being issued, or that InSightec’s existing patents, or any patents, which may be issued as a result of existing or future applications, will provide meaningful protection or commercial advantage to InSightec. Any

issued patents may be challenged, invalidated or legally circumvented by third parties. InSightec cannot be certain that its patents will be upheld as valid, proven enforceable, or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with InSightec’s product, which could decrease its sales and diminish its ability to compete.

     Claims by competitors and other third parties that InSightec products allegedly infringe the patent rights of others could have a material adverse effect on InSightec’s business. The medical device industry is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and expensive, and the outcome of this type of litigation is difficult to predict. Any future litigation, regardless of outcome, could result in substantial expense and significant diversion of the efforts of InSightec’s technical and management personnel. An adverse determination in any such proceeding could subject InSightec to significant liabilities or require InSightec to seek licenses from third parties or pay royalties that may be substantial.

Our Mango business is dependent on a single franchise and supplier which could cause delays or disruptions in the delivery of our Mango products, which could harm our business and results of operations.

     Mango, an apparel company which we acquired in May 2005, depends on its franchise with and supply of products from Punto Fa, S.L., a contemporary women’s apparel company, and its international brand name MANGO-MNG™ (which supplier we refer to collectively herein as Mango International). If Mango International ends its relationship with Mango or enters into liquidation, Mango’s business in Israel will be terminated. In addition, Mango relies on the supply of its products from Mango International and may face a shortage of inventory if there is a worldwide excess demand for Mango International’s products. If either of these events occurs, our results of operations may be materially adversely affected.

     Mango relies mainly on minimum wage employees. The Israeli government increased the applicable minimum wage effective as of July 2006. If wage levels generally, and particularly the minimum wage in Israel, increase, Mango’s results of operations could be harmed.

The apparel industry is subject to changes in fashion preferences. If the manufacturer of Mango products misjudges fashion trends, or if we fail to choose from the Mango International inventory design products that appeal to our customers, our sales could decline and our results of operations could be adversely affected.

     Neither Mango International nor Mango may be successful in anticipating and responding to fashion trends in the future. Customer tastes and fashion trends change rapidly. Our success depends in part on Mango International’s ability to effectively anticipate and respond to changing fashion tastes and consumer demands and to translate market trends into appropriate, saleable product offerings far in advance. If Mango International is unable to successfully anticipate, identify or react to changing styles or trends and misjudges the market for its products or any new product lines, or if we fail to choose from the Mango International inventory design products that appeal to our customers’ changing fashion preferences, Mango’s sales will be lower and we may be faced with a significant amount of unsold finished goods inventory. As a result, we may be forced to increase our marketing promotions or price markdowns, which could have a material adverse effect on our business. Our Mango brand image may also suffer if customers believe merchandise misjudgments indicate that Mango no longer offers the latest fashions.

A change in customs rates and custom and harbor strikes could adversely affect Mango’s financial results.

     Mango is subject to Israeli customs since all of its products are imported. An increase in customs rates on Mango’s products could adversely affect Mango’s ability to compete against local manufacturers or with products from countries which enjoy more favorable customs rates in Israel.

On the other hand, a reduction in customs rates may encourage entrance penetration of new competitors to the market. In addition, since most of Mango’s products are imported, custom and harbor strikes and delays could adversely affect Mango’s ability to meet customer demands and adversely affect Mango’s financial results.

Mango may be unable to compete favorably in the highly competitive women’s apparel industry, and Mango’s competitors may have greater financial, geographic and other resources.

     The sale of fashionable women’s apparel is highly competitive. Mango competes directly with a number of Israeli and international brands (such as Zara, Castro, Honigman, Renuar and Dan Casidi, some of which have longer operating histories and enjoy greater financial and marketing resources than Mango. For example, as a result of their greater financial and marketing resources, Mango’s competitors may have the ability to obtain better geographic locations for their stores in commercial centers, with better traffic flow and access to customers, which would have a positive impact on their sales.

     Increased competition could result in pricing pressure, increased marketing expenditures or loss of market share to Mango and adversely affect Mango’s revenues and profitability. There can be no assurance that Mango will be able to compete successfully against existing or new competitors.

Mango has no control over fluctuations in the cost of the raw materials it uses and a rise in costs could harm Mango’s profitability.

     Mango buys its entire inventory from Mango International, which is responsible for the design and manufacturing of all of Mango’s products. The prices of the inventory that Mango purchases from Mango International are dependent on the manufacturing costs of Mango International. Mango International’s manufacturing costs are substantially dependent on the prices of raw materials and level of wages in the countries where its products are manufactured. Therefore, an increase in the manufacturing costs of Mango International will cause an increase in Mango’s cost of goods sold and Mango may not be able to pass on the increased costs to its customers. Such increased costs would likely adversely affect Mango’s profitability, operational results and its financial condition.

A devaluation of the NIS against the Euro could harm Mango’s profitability.

     Mango buys its entire inventory from Mango International. The price of this inventory is denominated in Euros. Therefore, a devaluation of the NIS against the Euro will cause an increase in Mango’s cost of goods sold expressed in NIS, and Mango may not be able to pass the increased costs to its customers. This would likely adversely affect Mango’s profitability, operational results and its financial conditions.

Our venture capital investments are made in development stage companies and involve high risks.

     Investments in biotechnology development stage companies involve high risks. These companies are subject to various risks generally encountered by new enterprises, including costly, delayed or protracted research and development programs, the need for acceptance of their products in the market place, and the need for additional financing which might not be available. We cannot be certain that the assessments we made at the time of investment in our venture capital investments, as to the quality of the concept or the prototype, will prove correct, or that there will be an adequate return on investment, if at all. If our assessment of the venture capital investments are incorrect, our results of operations may be adversely affected.

Our venture capital investments are speculative in nature and we may never realize any revenues or profits from these investments.

     We cannot be certain that our venture capital investments will result in revenues or profits. Economic, governmental, regulatory and industry factors outside our control affect our venture capital investments. If our venture capital investments will not successfully implement its business plan we will not be able to realize any profits from it. Our ability to realize profits from these

investments will be dependent upon the management of these companies, the success of its research and development activities, the timing of the marketing of its products and numerous other factors beyond our control.

Security and economic conditions in Israel may affect our operations.

     EMI is incorporated under Israeli law and our principal offices are located in Israel. In addition our operations in our other lines of business, such as Mango and other venture capital investments operating in Israel. Political, economic and security conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, various armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Israel signed a peace treaty with Egypt in 1979 and a peace treaty with Jordan in 1994. As of the date of this annual report, Israel has not entered into any peace agreement with Syria or Lebanon. Since 1993, several agreements have been signed between Israel and the Palestinians, but a final agreement has not been achieved. Since October 2000, there has been a marked increase in hostilities between Israel and the Palestinians, characterized by terrorist attacks on civilian targets, suicide bombings and military incursions into areas under the control of the Palestinian Authority. These developments have adversely affected the peace process, placed the Israeli economy under significant stress, and have negatively influenced Israel’s relationship with several Arab countries. In January 2006, Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates is expected to be a major obstacle to relations between Israel and the Palestinian Authority, as well as to the stability in the Middle East as a whole. In addition, some neighboring countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of our business. In addition, we could be adversely affected by the interruption or curtailment of trade between Israel and its trading partners, a significant increase in the rate of inflation, or a significant downturn in the economic or financial condition of Israel.

Many of our directors, officers and employees are obligated to perform annual military reserve duty in Israel. We cannot assess the potential impact of these obligations on our business.

     Our directors, officers and employees who are male adult citizens and permanent residents of Israel under the age of 45 are, unless exempt, obligated to perform annual military reserve duty and are subject to being called to active duty at any time under emergency circumstances. The deteriorating security situation in the Middle East has caused, and will continue to cause, a sharp increase in the army reserve obligations of our directors, officers and employees who are subject to such reserve duty obligations. Although we have operated effectively under these requirements in the past, including during recent hostilities with the Palestinians and the war in Iraq we cannot assess the full impact of these requirements on our workforce or business if conditions should change, and we cannot predict the effect of any increase or reduction of these requirements on us.

     Effective as of January 2003, the Israeli Parliament has enacted a wide-ranging reform of the Israeli income tax system. These tax reforms have resulted in significant changes to the Israeli tax system. The main effect of this new tax reform on us is that we might be subject to additional tax arising from profits from our foreign companies which would be defined as “Controlled Foreign Companies” (CFC) in accordance with the provisions of the law. This may have adverse tax consequences for us.

Israeli courts might not enforce judgments rendered outside of Israel, which may make it difficult to collect on judgments rendered against us.

     EMI is incorporated in Israel. None of our directors and officers are residents of the United States and some of their assets and our assets are located outside the United States. Service of process upon our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us, and our directors and executive officers may be difficult to obtain within the United States.

     We have been informed by our Israeli legal counsel, that there is doubt as to the enforceability of civil liabilities under U.S. securities laws in original actions instituted in Israel. However, subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable if it finds that all of the following terms are met: (i) the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment; (ii) the judgment can no longer be appealed; (iii) the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and (iv) the judgment is executory in the state in which it was rendered or issued.

     Even if the above conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. An Israeli court will also not declare a foreign judgment enforceable in the occurrence of any of the following: (i) the judgment was obtained by fraud; (ii) there was no due process; (iii) the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel; (iv) the judgment is at variance with another judgment that was given in the same matter between the same parties and which is still valid; or (v) at the time the action was brought in the foreign court a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.

     The Israeli Companies Law of 1999 (the “Companies Law”) provides that an acquisition of shares in a public company must be made by means of a special tender offer if as a result of such acquisition the purchaser becomes a holder of 25% or more of the voting rights in the company. This rule does not apply if there already is another holder of 25% or more of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer, if as a result of the acquisition the purchaser becomes a holder of more than 45% of the voting rights in the company. This rule does not apply if another party already holds more than 45% of the voting rights in the company.

     Furthermore, under the Companies Law, a person is not permitted to acquire shares of a public company or a class of shares of a public company, if following such acquisition such person holds 90% or more of the company’s shares or class of shares, unless such person conducts a tender offer for all of the company’s shares or class of shares (a “Full Tender Offer”). In the event that holders of less than 5% of the company’s issued share capital or of the issued class of shares did not respond to the tender offer, then such offer will be accepted and all of the company’s shares or class of shares with respect to which the offer was made will be transferred to the offeror, including all of the company’s shares or class of shares held by such non-responsive shareholders that will be transferred to the offeror by way of a compulsory sale of shares. In the event that holders of 5% or more of the issued shares did not respond to the tender offer, the offeror may not purchase more than 90% of the shares or class of shares of such company.

     At the request of an offeree of a Full Tender Offer which was accepted, the court may determine that the consideration for the shares purchased under the tender offer, was lower than their fair value and compel the offeror to pay to the offerees the fair value of the shares. Such application to the court may be filed as a class action.

     The Companies Law provides that for as long as a shareholder in a publicly held company holds more than 90% of the company’s shares or of a class of shares, such shareholder shall be precluded from purchasing any additional shares.

The violation of certain conditions under the Israeli Tax Ordinance and/or the pre-ruling

issued by the Israeli tax authorities in connection with the merger by way of exchange of shares between EMI and its subsidiary, Elscint may result in the merger not being treated as tax exempt by the Israeli tax authorities and the imposition of capital gains tax on the exchange of shares.

     In November 2005, a merger between Elscint Limited (“Elscint”), our subsidiary, and EMI was consummated pursuant to which EMI purchased the entire outstanding share capital of Elscint not already owned by EMI and by or for the benefit of Elscint, in consideration for 0.53 ordinary shares of EMI for each 1 ordinary share of Elscint. If any requirement or condition of the merger under the Israeli Tax Ordinance [New Version] of 1961, the regulations promulgated thereunder or the pre-ruling issued by the Israeli tax authorities in connection with the merger is breached and/or is not met, the merger will not be treated as tax exempt for Israeli tax purposes. As part of the final pre-ruling issued by the Israeli tax authorities, EMI, Elscint and their controlling shareholders were subject to certain restrictions and conditions. In that event, the Israeli tax authorities may impose, in accordance with the Ordinance, Israeli capital gains tax on EMI and on the former Elscint shareholders in respect of the exchange of shares under the merger.

We are subject to various risks related to our operations in Eastern Europe, including economic and political instability, political and criminal corruption.

     Many of the Eastern European countries in which we operate are countries which until the last decade, were allied with the former Soviet Union under a communist economic system, and they are still subject to various risks. Certain Eastern European countries, in particular those countries that are not expected to join the European Union in the near future, are still economically and politically unstable and suffer from political and criminal corruption, lack of commercial experience, and unpredictability of the civil justice system. Certain Eastern European countries also continue to suffer from high unemployment, low wages and low literacy rates. These risks could be harmful to us and are very difficult to quantify or predict. Although many governments of the Eastern European countries have liberalized policies on international trade, foreign ownership and development, investment, and currency repatriation to increase both international trade and investment, such policies might change unexpectedly. We will be affected by the rules and regulations regarding foreign ownership of real and personal property. Such rules may change quickly and dramatically and thus may have an adverse impact on ownership and may result in a loss without recourse of our property or assets. Domestic and international laws and regulations, whether existing today or in the future, could adversely affect our ability to market and sell our products and could impair our profitability.

     Certain Eastern European countries may regulate or require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a country’s balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad. Any such restrictions may adversely affect our ability to repatriate investment loans or to remit dividends. Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain emerging countries. In addition, in an attempt to control inflation, price controls at our hotels have been imposed at times in certain countries, which may affect our ability to increase our room rates.

Environmental issues are becoming of increasing significance in Eastern Europe which may result in delays in construction and increased costs.

     There is increasing awareness of environmental issues in Eastern Europe. This may be of critical importance in areas previously occupied by the Soviet Army, where soil pollution may be prevalent. We cannot be certain that all sites acquired will be free of environmental pollution. If a property that we acquire turns out to be polluted, such a finding will adversely affect our ability to construct, develop and operate a shopping and entertainment center on such property, and may cause us to suffer expenses incurred in cleaning up the polluted site which may be significant.

We are subject to various risks related to our operations in Romania including the unpredictability of the civil justice system.

     Our Bucuresti Hotel is generally affected by risks of doing business in Romania. Any foreign company or litigant may encounter difficulty in prevailing in any dispute with, or enforcing any judgment against, the Romanian government or any officers or directors under the Romanian legal system. If our ownership rights in the company that owns the Bucuresti Hotel Complex are successfully challenged this may affect our ability to obtain compensation for our original investment. We have faced several challenges to our acquisition under the privatization contract. In addition, the privatization process itself has been challenged as illegal. All of these claims have been dismissed

     While we believe that the skills and experiences that we have acquired through sourcing sites, and developing and selling shopping and entertainment centres in emerging markets in CEE can be applied successfully to projects in India and other countries in Asia, this cannot be guaranteed. The differences between emerging markets in CEE and emerging markets in India and other countries in Asia, such as differing legal structures, requirements and business cultures and restrictions on foreign ownership and control of real estate projects, may mean that our success in developing and selling shopping and entertainment centres in CEE may not be replicated in India and Asia.

     India has from time to time experienced instances of hostilities with neighboring countries, including Pakistan and China. Military activity or terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more difficult and such political tensions could create a greater perception that companies operating in India are usually involved in higher degrees of risk. Events of this nature in the future, as well as social and civil unrest within other countries in Asia, could influence the Indian economy and could have a material adverse effect on our financial condition and results of operations. In addition, India has from time to time experienced social and civil unrest due to religious strife.

     Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector and significantly reducing the roles of the state governments in the Indian economy as producers, consumers and regulators. The current Government of India, formed in May 2004, has announced policies and taken initiatives that support the continued economic liberalization pursued by previous governments. However, this trend of liberalization may not continue in the future. The rate of economic liberalization could change, and specific laws and policies affecting the civil infrastructure industry, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally, as well as our business.

     The current Indian government is a coalition of several parties. The withdrawal of one or more of these parties from the coalition could result in political instability. Any such instability could delay the progress of the Indian economy and could have a material adverse effect on us.

If we are characterized as a passive foreign investment company for U.S. federal income tax purpose, holders of ordinary shares may suffer adverse tax consequences.

     Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the our assets are held for the production of, or produce, passive income, we will be characterized as a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes. A determination that we are a PFIC could cause our U.S. shareholders to suffer adverse

tax consequences, including having gains realized on the sale of our shares taxed at ordinary income rates, rather than capital gains rates and could have an adverse effect on the price and marketability of our shares. See “Item 10. Additional Information — E. Taxation — Tax consequences if we are a Passive Foreign Investment Company” below.

We are subject to various legal proceedings that may have a material adverse effect on our results of operations.

     Certain legal proceedings have been initiated against us, including litigation in connection with the change of control of EMI and our subsidiary Elscint Ltd. in May 1999 and the acquisition of the hotel businesses by Elscint in September 1999, including motions to certify such claims as class actions. For details refer to our annual financial statements included in Item 18. A claim has also been made by an individual that a percentage of EMI and certain of our subsidiaries belongs to him. We cannot estimate the results of these proceedings. A determination against us in some or all of these proceedings may materially adversely affect our results of operations.

     The sectors in which we compete are capital intensive. We require substantial up-front expenditures for land acquisition, development and construction costs as well as certain investments in research and development. In addition, following construction capital expenditures are necessary to maintain the centers in good condition. As part of our growth strategy, we intend to acquire, renovate and redevelop additional hotels and to develop new hotels. In addition, in order for our hotels to remain competitive, they must be maintained and refurbished on an ongoing basis. Accordingly, we require substantial amounts of cash and construction financing from banks for our operations and require financing for the development, renovation and maintenance of our hotels. We cannot be certain that such external financing would be available on favorable terms or on a timely basis or at all. In addition, construction loan agreements generally permit the draw down of the loan funds against the achievement of pre-determined construction and space leasing milestones. If we fail to achieve these milestones, the availability of the loan funds may be delayed, thereby causing a further delay in the construction schedule. If we are not successful in obtaining financing to fund our planned projects and other expenditures, our ability to undertake additional development projects may be limited and our future profits and results of operations could be materially adversely affected. Our inability to obtain financing may affect our ability to construct or acquire additional centers and hotels, and we may experience delays in planned renovation or maintenance of our hotels that could have a material adverse affect on our results of operations.

     We are highly leveraged and have significant debt service obligations. In addition, we and our subsidiaries may incur additional debt from time to time to finance acquisitions or capital expenditures or for other purposes. We will have substantial debt service obligations, consisting of required cash payments of principal and interest, for the foreseeable future.

     Our lenders require us to maintain and comply with certain financial and operational covenants. Our ability to comply with these covenants may be affected by events beyond our control. A breach of any of the covenants in our debt instruments or our inability to comply with the required covenants could result in an event of default, which, if not cured or waived, could have a material adverse effect on us. In the event of any default under the loan agreements, the lenders thereunder could elect to declare all outstanding borrowings immediately due together with accrued and unpaid interest and other fees. Furthermore, in the event of any default under the loan agreements, such loans could be reclassified as short-term debt. Such classification in our financial statements may improperly reflect our working capital ratio as well as other financial indicators since the assets which were financed by these loans are classified as non-current assets. As a result of our substantial indebtedness:

     We cannot guarantee that we will be able to generate enough cash flow from operations or that we will be able to obtain enough capital to service our debt or fund our planned capital expenditures. In addition, we may need to refinance some or all of our indebtedness on or before maturity. We cannot guarantee that we will be able to refinance our indebtedness on commercially reasonable terms or at all. We have the ability under our debt instruments to incur substantial additional indebtedness and any additional indebtedness we incur could exacerbate the risks described above.

The Notes that we are listing for trade on the TASE are unsecured. As a result, there may be circumstances in which our secured indebtedness will be paid from assets that secure that indebtedness before payment is made on the Notes.

     Our obligations under our existing credit facilities are secured by certain first ranking fixed and floating charges over our rights, assets and property. The Notes that we are listing for trade on the TASE will be unsecured. We may also at any time create additional security interests with respect to our current or future indebtedness, subject to the terms of our credit facilities. If we default on our existing or future credit facilities, these Notes, or certain of our other indebtedness or enter bankruptcy, liquidation or reorganization, then all of our assets that secure our debts will be used to satisfy the obligations under such secured indebtedness before we could make any payments on the Notes. Therefore, there may only be limited assets available to make payments on the Notes if one of these events were to occur.

     Our ability to meet our debt obligations will depend on whether we can successfully implement our strategy, as well as on financial, competitive, legal, regulatory and technical factors, including some factors that are beyond our control. In addition, certain of our existing credit facility mature and our new credit facility will mature prior to the scheduled maturity date of the Notes. If we are unable to generate sufficient cash flow from operations to meet principal and interest payments on our debt, we may have to refinance all or part of our indebtedness. In addition, cash flows from our operations may be insufficient to repay in full at maturity the Notes, in which case the Notes may need to be refinanced. Our ability to refinance our indebtedness, including the Notes, will depend on, among other things:

     • our financial condition at the time,

     • restrictions in agreements governing our debt and

     • other factors, including market conditions.

     We cannot ensure that any such refinancing would be possible on terms that we could accept or that we could obtain additional financing. If refinancing will not be possible or if additional financing will not be available, we may have to sell our assets under circumstances that might not yield the highest prices, or default on our debt obligations, including the Notes, which would permit our noteholders and holders of other outstanding indebtedness to accelerate their maturity dates.

     From time to time we consider equity financings, either directly or through our subsidiaries. If we pursue equity financings directly or through our subsidiaries, our interest in those subsidiaries

would decrease. In addition, the ability of those subsidiaries to pay dividends to us may be impaired, which in turn, could limit our ability to make the required payment on the Notes.

     See also “Our high leverage could adversely affect our ability to operate our business” above.

     Our annual revenues and earnings are substantially dependent upon general business activity, vacation and holiday seasons and the influence of weather conditions. As a result, changes in any of the above have a disproportionate effect on the annual results of operations of our shopping and entertainment centers, hotels and Mango businesses.

One of our shareholders beneficially owns a substantial amount of our ordinary shares and, therefore, effectively controls our affairs.

     As of May 31, 2007, Mordechay Zisser, the Executive Chairman of our board of directors, held, directly or indirectly, approximately 49.42% of our issued share capital. As a result of such holdings he has the ability, in effect, to elect the members of our board of directors and to effectively control our business.

A loss of the services of members of the senior management of EMI, including in particular that of Mr. Mordechay Zisser, could materially adversely affect our business and results of operations

     We depend on the continued services of the members of our senior management team, including in particular that of Mr. Mordechay Zisser, our Executive Chairman of the board of directors. Any loss of the services of Mr. Mordechay Zisser or any other member of our senior management team could result in the loss of expertise necessary for us to succeed, which could cause our revenues to decline and impair our ability to meet our objectives.

Our annual and quarterly results may vary which may cause the market price of our ordinary shares to decline.

     We have experienced at times in the past, and may in the future experience, significant fluctuations in our quarterly and annual operating results which may cause the market price of our ordinary shares to decline. These fluctuations may be caused by various factors, particularly due to significant sales of our properties and the frequency of such transactions. During 2005, we changed our business strategy to the entrepreneurship and development of shopping and entertainment centers supported by short term management and operation activities with the principal objective of founding and stabilizing the centers with a view to selling them during their construction or as closely as possible to their completion. Our decision to sell properties is based on various factors, including market conditions, and we cannot predict when such sales will actually occur. Accordingly, investors should not rely on the results of any past periods as an indication of our future performance. It is likely that in some future periods, our operating results may be below expectations of public market analysts or investors. If this occurs, our share price may drop.

A. HISTORY AND DEVELOPMENT OF THE COMPANY

     Elbit Medical Imaging Ltd. was incorporated in 1996. EMI is a company incorporated under the laws of the State of Israel and is subject to the Israeli Companies Law 1999 — 5759 and the Israeli Securities Law 1968 — 5728 and any regulations published under these laws. Our shares are listed on the NASDAQ Global Market (ticker symbol: EMITF) and on the Tel Aviv Stock Exchange. Our executive offices are located at 2 Weitzman Street, Tel-Aviv 64239, Israel. You may reach us by telephone at (972-3) 608-6000 or by fax at (972-3) 6086054. Our U.S. agent is CSC Corporation Service Company, 2711 Centerville Road, Suite 400 Wilmington, DE 19808.

     The following is a summary of the principal fields of our businesses:

     For additional operations, see — “B. Business Overview” below.

     The following are the highlights of our main business activities and investments during 2006 and through the date of this filing:

• Initial Public Offering of shares of PC on the London Stock Exchange

     In October 2006, our subsidiary Plaza Centers N.V. (“PC”) has successfully completed an initial public offering of its shares and admission of the same for listing on the Official List of the UK Listing Authority and to trading on the London Stock Exchange. The offer price was set at 180 pence per ordinary share of PC. In November 2006, an over-allotment option was exercised, bringing the total gross proceeds of the IPO to approximately £166.2 million (approximately $323 million) and diluting EMI’s share in PC to approximately 68.4% generating gain of approximately NIS 668 million (approximately $158.1 million). See “- Business Overview” below.

     During 2006 we have issued three series of unsecured non-convertible debentures to investors in Israel in the aggregate principal amount of approximately NIS 1.1 billion (approximately $260 million). All such series of debentures were registered for trade on the Tel Aviv Stock Exchange.

     Between April and June 2007 we have issued an additional series of unsecured non-convertible debentures to investors in Israel which debentures will not initially be registered for trade on the Tel Aviv Stock Exchange or any other exchange, although EMI has undertaken to use its best efforts to register same for trade on the Tel Aviv Stock Exchange no later than August 30, 2007. The aggregate principal amount of these debentures totaled approximately NIS 620 million (approximately $146.7 million).

     All debentures were rated at a local rating of A1 or an equivalent rating of A+. For additional information on the terms of these private issuances see “Item 5. Operating and Financial Review and Prospects — B. — Liquidity and Capital Resources — Liquidity — Other loans” below.

     On May 25, 2006, a Framework City Regulation Agreement was signed with the Budapest Capital 3rd district and the Budapest Capital Municipality for the development and infrastructure of the Dream Island project in the Danube River, Budapest, in accordance with the city regulation plans and in the KSZT. On September 26, 2006, a final formal approval was issued by the Municipality of Budapest for a zoning plan of the Dream Island project, which allows the application for the receipt of a building permit. The proposed plan of the Dream Island project is to construct on an area of land located on the Obuda Island in the Danube River measuring approximately 3.2 million sq.ft., a tourist and entertainment area in central Budapest which includes designations for offices, commercial space, tourism, entertainment and leisure and hotels.

     In February 2007, PC completed an acquisition of a 75% interest in a Romanian limited liability company which executed a Public Private Partnership Agreement with the Government of Romania for the execution of the Casa-Radio Complex (Dambovita) in central Bucharest. Total cost of acquisition was approximately $40 million.

     On June 30, 2006, PC completed the construction of a Czech commercial center (the “Novo Plaza”) and consummated the sale thereof to Klepierre SA (“Klepierre”). The value of the Novo Plaza amounted to €43.9 million (approximately $57.8 million). Net consideration was €5 million (approximately $6.6 million).

     On May 8, 2007, PC completed the handover to Klepierre, of two shopping and entertainment centers in Poland, namely the Rybnik Plaza and the Sosnowiec Plaza. The parties agreed that subject to the fulfillment of certain conditions, the purchase price would increase by €18.6 million (approximately $24.5 million) reflecting total assets value of €90.1 million (approximately $118.7 million).

     On June 14, 2007, EMI’s wholly owned subsidiary, Elscint Ltd. together with its wholly owned subsidiary, have signed an agreement for the sale of the entire issued and paid up share capital of a company which owns and operates the Arena Shopping and Entertainment Center located at the Herzelia Marina in Israel. The transaction reflects an asset value of NIS 538 million (approximately $ 127.3 million) with a price adjustment of up to an additional NIS 10.5 million (approximately $ 2.5 million) to be paid subject to the attainment of certain conditions agreed upon between the parties. Consummation of transaction is scheduled to be carried out shortly.

     In February 2007, PC acquired a 50% stake in an Indian limited liability company (“JV1”), which owns the freehold of approximately 14 acres of land situated in the Kharadi district of Pune, Maharashtra State, India. The remaining 50% of the stake of JV1 is held by a leading property developer in Pune. Total cost of acquisition was €17 million (approximately $22 million).

     In addition EMI acquired a 50% interest in an Indian private limited liability company (“JV2”) which owns a plot of land measuring approximately 6 acres in the Koregaon Park, Pune. The remaining 50% interest in JV2 is controlled by another of Pune’s leading property developers. Total cost of acquisition was Rs. 440 million (approximately $9.9 million).

     Within the framework of a Sourcing Agreement (see “Item 4 — B. Business Overview — Shopping and Entertainment Centers — PC IPO” below), PC acquired EMI’s holdings in JV1 and JV2 to PC.

     EMI invested in a real estate project located in Cochin, for the construction of residential apartment buildings, a hotel, office spaces and a marina with a total built up areas of approximately 800,000 square meters (inclusive of parking places) (approximately 8.8 million square feet).

     On June 6, 2007 we have executed a Framework Heads of Terms for the establishment of a joint venture with one the leading real estate developers in Bangalore, India, to be held in equal shares (“JV3”). The consummation of the transaction is subject to fulfillment of certain agreed conditions, principally the satisfactory completion of due diligence investigations, and change of zoning to parts of the subject area. EMI intends to offer to PC to take up a 50% participation in EMI’s share of the JV3. PC’s participation requires the approval of its various corporate organs.

     On December 11, 2006, EMI has entered into a strategic joint venture to develop and operate a chain of multi-specialty tertiary hospitals in India. The first hospital in the chain is planned as a 1000 bed hospital and biotech research centre in Kolkata.

     On December 14, 2006, EMI’s jointly owned (50%) subsidiary executed an agreement with an unrelated third party for the acquisition of a historical office building with appurtenances and land located next to the Victoria Hotel in Amsterdam, with a view of refurbishing same as an extension to our Vitoria Hotel. The total purchase price was €14 million (approximately $18.4 million).

     On June 12, 2007, we consummated a transaction for the sale of our 50% interest in the “Ballet Institute Building” located at Budapest, Hungary. The transaction reflects an asset value of €30 million (approximately $40 million) with net consideration of approximately same amount.

     In May 2007, PC agreed on the sale of the Duna Plaza offices in Budapest, Hungary, to Klepierre for €14.2 million (approximately $18.7 million). Furthermore, PC agreed with Klepierre to proceed with the development of an extension to the Duna Plaza Centre on an adjacent area of land, which is anticipated to be completed by 2010.

• Investment in Insightec Ltd.

     In August 2006, Insightec issued convertible debentures in the aggregate principal amount of $15 million, to its shareholders. EMI’s share in such round of investment was $9.8 million.

     In March 2007, the U.S. Food and Drug Administration (FDA) approved Insightec’s software, the purpose of which is to significantly expedite the treatment time of its ExAblate® 2000 Magnetic Resonance guided Focused Ultrasound (MRgFUS) system, while ensuring the system’s high level of safety and efficacy. The FDA also approved use of the ExAblate 2000 with a 3.0 Tesla MRI scanner, in addition to the 1.5 Tesla.

     In June 2007, InSightec’s ExAblate® 2000 system received the CE Mark certification for pain palliation of bone metastases.

          In November 2006, Gamida Cell Ltd. (“Gamida Cell”) reached an agreement under a Special Protocol Assessment (SPA) with the FDA on the design of the global, pivotal, historical controlled, registration study of StemEx® for the treatment of hematological malignancies.

     PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES

          The following is a description of our capital expenditures and divestitures during the years 2004, 2005 and 2006 and capital expenditures and divestitures that are in progress (our share in each expenditure and divestment is 100% unless otherwise indicated):

          Currently, we are either in the process of making or are planning to make the following additional capital expenditures:

     Below is a description of our principal fields of activity:

     General

     The shopping and entertainment centers business includes mainly those shopping and entertainment centers which are currently under construction and/or development in various countries of Eastern and Central Europe. In addition, we have recently expanded our operations to the Asian market and have initiated several projects in India, which we believe to have a number of attractive characteristics. India is the world’s largest democracy with a population of over 1 billion in 2005. India has seen sustained growth over the last decade, and, as among the world’s largest 20 economies, India has had the second fastest rate of growth in 2005/2006. India is expected to remain an attractive destination for foreign investment, supported by attractive fundamentals and the ongoing gradual liberalization of its trade regime.

     In addition to the shopping and entertainment centers business, our real estate portfolio includes certain other real estate projects of various types including mixed-use projects which combine several element of operations.

     Construction or development of each of our real estate projects are generally conducted by us or by our subsidiary Plaza Centers N.V. (formerly known as Plaza Centers (Europe) BV -“PC”), through a special purpose project corporation.

     In October 2006, PC successfully completed an Initial Public Offering of its shares (“PC IPO”) on the Official List of the London Stock Exchange (“LSE”) the net proceeds of which (excluding related expenses) were €234.5 million (approximately $303 million). Following the PC IPO, EMI’s shareholdings in PC were reduced to approximately 68.4%.

     Sourcing Agreement

     On October 13, 2006, the Company entered into an agreement with PC, under which it undertook to offer to PC potential real estate development sites sourced by the former in India on behalf of PC. These sites will be suitable for shopping and entertainment centre development projects as well as mixed use projects (comprising offices, residential units, congress centers and leisure facilities). The projects may also involve the acquisition and renovation of existing shopping and entertainment centers. In ‘‘Integrated Shopping Centre Projects’’, the shopping and entertainment centre may not be the key element of the project.

     Under the agreement, EMI is obliged to offer PC the exclusive right to develop all of the shopping centre projects which EMI acquires during the 15-year term of the agreement. EMI will offer to PC the rights that it has acquired in a site, which may include an agreement to acquire rights in a site. PC must, within 30 days of receiving EMI’s offer, indicate to EMI whether it wishes to accept or decline the offer. PC can demand a 21-day extension to this period, and extensions thereafter by agreement. A failure to respond by will be deemed to be a rejection of the offer. If PC accepts the offer, both parties are under an obligation to do all that is necessary to facilitate the execution of the project by PC. In the case of Integrated Shopping Centre Projects, the parties must cooperate in order to achieve a contractual structure which most effectively promotes PC’s rights.

     The project management must be undertaken by one, but not both, of the parties. This must be decided between the parties on the basis of which party can most effectively provide comprehensive project management services. EMI has agreed to use the same standard of care in sourcing projects for PC that it uses in respect of the projects being developed by it.

     In respect of sites acquired by PC, it has agreed to pay EMI the cost of the site paid by EMI and EMI’s direct costs, subject to a cap of 5% of the cost of the site. PC has given a number of warranties under the agreement, in terms of its corporate standing and authorization. It has also

     Both parties have rights of termination in the event of a change of control by the defaulting party, material breach by the defaulting party and the occurrence of insolvency. The defaulting party has a 30-day rectification period within which to remedy its breach. The agreement contains a dispute resolution mechanism, under which any arbitration must be conducted before a sole arbitrator in London, in accordance with the Rules of Arbitration then in force of the London Court of International Arbitration.

     Relationship Agreement

     On October 27, 2006, we have entered into an agreement with PC (the ‘‘Relationship Agreement’’) pursuant to which we undertook that for so long as we hold at least 30% of the issued share capital of PC, neither EMI nor any person connected with it will compete with the business of PC in so far as that comprises the development of shopping and entertainment centres in Central and Eastern Europe or India or the development of the Dream Island or Casa Radio projects.

     Guarantee Agreement

     On 27 October 2006, PC agreed, with effect from January 1, 2006, to pay a commission to EMI in respect of all and any outstanding corporate and first demand guarantees which have been issued by EMI in favour of PC and which remain valid and outstanding (‘‘EMI Guarantees’’). The amount of the commissions to be paid will be agreed upon between EMI and PC at the beginning of each financial year, and will apply to all EMI Guarantees which remain outstanding during the course of that relevant financial year, subject to a cap of 0.5% of the amount or value of the relevant EMI Guarantee, per annum. The commission payable is exclusive of value added tax, if applicable, and will be paid annually in arrears. PC has the right to replace the EMI Guarantees at any time, either with its own corporate guarantees or with guarantees issued by third parties. In the event that an EMI Guarantee lapses, replaced, or is returned, during the course of the relevant financial year, then the commission is payable pro rata for the period during which it remained valid during that year.

     Transitional services Agreement

     EMI and PC have entered into a Transitional Services Agreement relating to the provision of legal and accountancy services by EMI to PC. The services are to be provided at a cost to be agreed between the parties from time to time, for a period of 24 months unless terminated earlier by PC on 60 days’ notice.

     Project Consultancy and Supervision

     During the planning and construction of our real estate projects, we receive consultancy and supervision services from Control Centers Ltd. (“Control Centers”), our indirect parent company. For further details see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements for the Purchase of Coordination Planning and Supervision Services over Construction Projects” below.

     Business Concept and Strategy

     Our main focus in this field of operations is construction of new centers and where there is significant redevelopment potential, to redevelop existing centers in both capital cities and important regional centers.

     In general, approximately 70% of the total constructed area of each shopping and entertainment center is set aside to be leased. The focus of our centers is on two principal elements: shopping and entertainment. The anchor tenants form the core of these elements, around which the smaller businesses and activities are introduced, and provide a wide range and choice of activities to patrons. The entertainment facilities generally include a cinema complex of between 8-12 screens, a

video and gaming arcade, bowling alleys, billiard halls, fitness centers, bars, discotheques, children’s playgrounds and, in some projects, and in some cases IMAX three-dimensional cinema screen. Each food court generally includes a range of restaurants, offering a variety of culinary opportunities from fast food to gourmet foods. The commercial activities focus on supermarket and department store anchor tenants, and are carefully monitored to allow an optimal mix of stores and services to cater for all requirements and to offer the maximum range of commodities to patrons.

     Our business concept and strategy for our shopping and entertainment centers business includes the following elements:

     Development: Develop modern Western-style shopping and entertainment centers in the capital and regional cities of selected countries, primarily in Central and Eastern Europe and India.

     Acquisitions: Acquire operating shopping centers that show significant redevelopment potential (either as individual assets or as portfolios) for refurbishment and subsequent re-sale.

     Pre-sale: Where prevailing market and economic conditions are favorable, pre-sell the centers prior to, or shortly after, commencement of construction or redevelopment.

     Where the opportunity exists, extend in developments beyond shopping and entertainment centers by leveraging our strengths and drawing upon our experience and skills to participate in residential, hotel, office and other development schemes where such developments form part of integrated large scale business and leisure developments, such as the Dream Island project.

     We will also assess and consider specific development opportunities that satisfy our development parameters and investment criteria in countries not previously targeted by us.

     While our current strategy is to dispose of a shopping and entertainment center upon completion, if economic conditions, including property yields, change such that retaining and operating a shopping and entertainment center on completion is likely to be more profitable to us than disposing of it, we will consider retaining and operating the completed shopping and entertainment center until economic conditions warrant a profitable sale. We currently plan to initially hold onto our Indian developments, once completed, because of the high potential cashflows and with the hope that the market will continue to re-rate such assets.

     Particulars

     Commencing in 2004, PC has executed a number of transactions with Klepierre — the second largest shopping and entertainment owner/operator in Europe, which owns more than 230 shopping centers in ten countries- for the sale to Klepierre of PC’s operating shopping and entertainment centers. To date, 19 of such centers have already been sold, and in respect of one additional center (Plzen Plaza in the Czech Republic), a presale agreement has been executed. In addition thereto, Klepierre has an option to acquire the Lublin Plaza shopping and entertainment center, see- “Shopping and Entertainment Center — Lublin Plaza” below.

     PC had also sold, in April 2005, 4 Hungarian shopping and entertainment centers to the Dawnay Day Group, one of the leading UK international property investors.

     For additional information on the above agreements see “Item 10. Additional Information — C. Material Contracts — Shopping and Entertainment Centers” below.

     We presently have, one operating shopping and entertainment center in Israel and thirteen other projects in various stages of planning and development in Poland, Hungary, the Czech Republic, Latvia, Greece, India and Romania.

     Set forth below is additional information with respect to our ownership of certain of the above projects as well as other commercial and entertainment centers not detailed above:

     Koregaon Park

     PC is a party to a joint venture and shareholders agreement with an unrelated third party (“Third Party Shareholder”) pertaining to the development of a shopping and entertainment centre at Koregaon Park, Pune, India subject to the necessary planning and building permits being obtained. This freehold development site is currently held by 24 separate companies in equal undivided shares (one of which is the JV Company owned by PC and the Third Party Shareholder — “JV Company”). Twelve of these companies (“Group B Companies”) have sold the development rights relating to their respective portions of the land to an affiliate of such Third Party Shareholder. The remaining 11 companies (“Group A Companies”) and the JV Company retain the development rights relating to their respective portions. Under the Agreement, PC is to subscribe for shares and convertible securities representing 50% of the JV Company, upon fulfillment of certain conditions precedent (“First Closing”) which are principally requiring the JV Company will acquire 100% of all the Group A and Group B Companies and conclude a development rights assignment agreement with the Third Party Shareholder, whereby the development rights to the Group B Companies’ land will be irrevocably assigned to the JV Company. The cash consideration payable by the JV Company is INR 440 million (approximately $9.9 million), payable in installments of which INR 310 million (approximately $7 million) were paid at First Closing and INR 130 million (approximately $2.8 million) are due on Second Closing (being the date within ten days after the issue of the necessary building permits on the site).

     PC has already invested an amount of INR 310 million (approximately $7.0 million) in the JV Company by means of shareholder equity and debentures bearing an annual interest of 14% and fully and compulsorily convertible into non-voting preference shares.

     Lublin Plaza

     PC owns 50% of a Polish company — Movement Poland S.A. (“MPSA”), which constructs the Lublin Plaza commercial and entertainment center in Lublin, Poland. Pursuant to a joint venture agreement signed with an unrelated third party, that owns the remaining 50% of MPSA (“JV Partner”), the parties have agreed that financing of the project is to be made equally by the parties, except for an initial $4 million investment which had been provided by PC. The agreement further provides for a buy-out mechanism in the event of certain deadlocks and a right of first offer as well as a tag along right in the event either party wishes to sell its rights in MPSA.

     Pursuant to a sale agreement, entered into with Klepierre in 2005, PC awarded an option to Klepierre to acquire 100% of the equity rights of MPSA, subject to the acquisition by PC of the entire interest of the JV Partner in MPSA, by not later than the end of May 29, 2007 (the “First Option”). In the event that PC shall fail to acquire the JV partner’s rights by that date Klepierre shall automatically have an additional option to acquire the 50% of such equity rights in MPSA which are held by PC (the “Second Option”).

     The exercise by Klepierre of the Second Option shall be subject at all times to the JV Partner’s rights of first offer and/or the tag-along right. In the event that the JV Partner shall exercise its rights of first offer to acquire PC’s shares in MPSA, as aforesaid, then the Second Option shall automatically lapse.

     PC undertook, for so long as the Second Option remains valid, not to amend, modify, and/or terminate the JV agreement, without the prior approval of Klepierre, and to abstain from taking any actions which may prejudice the rights and/or interests (present or future) of Klepierre under or in connection with this Second Option.

     In the event the transaction for the sale and transfer of all equity rights in MPSA to Klepierre fails to be consummated for any reason or in the event that the JV Partner shall exercise its first offer rights, PC shall pay to Klepierre a commitment penalty in the amount of €1.6 million (approximately $2.1 million), without prejudice to the rights of Klepierre to be further indemnified in the event that such non-consummation results from a breach by PC of its contractual obligations. In the event that Klepierre shall have elected to exercise the Second Option and the acquisition cannot

be fully consummated for any reason, then PC shall be obliged to pay to Klepierre a commitment penalty in a reduced amount of €0.8 million (approximately $1.0 million).

     In the event that the JV Partner shall exercise its tag-along rights and in the event that Klepierre actually acquires both the PC shares and the JV Partner shares, then and in such event PC shall be severally and jointly liable with the JV Partner with respect to the sale of the JV Partner shares and PC shall grant to Klepierre the same indemnifications provisions guarantee with respect to the JV Partner’s shares to the extent that the JV Partner fails or refuses to do so.

     Upon the exercise of either of the options abovementioned, PC shall assume full liability for the performance of the obligation made by MPSA in favor of the local municipality, in terms of the ground lease, to construct a hotel above or adjacent to the commercial center project (“Stage B Projects”) and shall furnish Klepierre with a full indemnity against such liability and/or against any harm which may be suffered by Klepierre and/or by MPSA in consequence of the failure to construct the hotel as aforesaid.

     On April 13, 2007, PC and the JV Partner have agreed to Spin-Off to a subsidiary of the JV Partner (“Project B Company”), MPSA’s obligation with respect to the Stage B Projects, in consideration for €3.5 million (approximately $4.6 million). The spin-off was executed in accordance with a Tenancy Agreement pursuant to which MPSA undertook to consent and fully cooperate so as to allow Project B Company to develop the Stage B Projects. MPSA and Project B Company had also executed a Preliminary Agreement for the future transfer, to the latter, of all rights in the Stage B Projects upon completion of same.

     The above agreement also provides an option awarded by Project B Company to PC, to subscribe to a 50% interest in Project B Company, in consideration for the amount equivalent to 50% of the share capital and shareholders loans invested by the JV Partner in Project B Company as at the date of consummation of the transaction. PC is entitled to exercise the option by no later than September 30, 2007.

     PC and the JV Partner have agreed, in addition to the above, to sell their respective holdings in MPSA to Klepierre, to be executed pursuant to the framework of the abovementioned Klepierre 2005 sale agreement.

     Riga Plaza

     In February 2004, PC and Development Capital Corporation (Latvia) (“DCC”) entered into a joint venture agreement pursuant to which PC purchased from DCC in consideration for approximately $2.7 million, 50% of the outstanding share capital of SIA Diksna (“SIA”), a Latvian corporation wholly owned by DCC. The agreement provides for a buy-out mechanism in the event of certain deadlocks. In addition, the joint venture agreement provides for certain limitations on the sale of each party’s holdings in SIA, including a right of first offer and a tag along right to all of each party’s shares. Future financing of the project will be provided by the parties as shareholder loans. In the event of failure by any party to provide such shareholder loans, the other party may elect to provide SIA with such shareholder loans at an increased interest rate or to invest the required amounts, while diluting the defaulting party’s holdings in SIA.

     Helios Plaza

     PC owns a plot of land measuring approximately 160,000 square feet located adjacent to the Piraeus Avenue in Athens, Greece. Following the issue of a ministerial decision which changed the land use along the Piraeus Avenue, the permitted land use applicable to this site do not permit the construction of a shopping and entertainment center.

     On March 31, 2005 PC filed a petition for annulment to the Administrative Court of Appeal of the City of Piraeus, asking for the annulment of the tacit rejection by the authorized Civil Planning Agency (of the City of Piraeus) to grant an extension to PC’s building permit to construct a shopping and entertainment center on the said plot of land. The petition was discussed on April 24, 2007, and the Court’s Rapporteur published a positive opinion. The Court’s decision is due.

     PC, together with its legal counsel and professional advisers, are examining alternative development opportunities for this site, should the Court declines its petition.

     Other Real Estate Properties and Mixed-Use Projects

     The Dream Island Project

     PC owns a 50% shareholding in a special purpose company (Ercorner) which has 60% interest in a development consortium known as “Dream Island”. The remaining 50% are held by MKB RT — a leading financing bank in Hungary. The consortium has recently been granted final planning approvals to develop an area of land of approximately 320,000 m² (approximately 3.5 million square feet) excluding parking which is located on an island in the Danube River in central Budapest, as a business and leisure resort. The current plan envisages a resort comprising 8-10 three, four and five star hotels, four apartment hotels, a convention centre, a casino an opera house, a theatre, a marina, a shopping and entertainment center, a Roman Cultural Museum and parking facilities for approximately 5,500 vehicles. As part of the final approval, Dream Island has undertaken to ensure the traffic connections to, from and within the island and to develop detailed landscape works. The additional investment required of Dream Island in consideration of the traffic connections and the development of landscape is estimated in HUF 14.5 billion (approximately $67.9 million).

     The buildings presently located on these properties, measuring approximately 600,000 square feet are leased out as offices, restaurants and entertainment outlets, generating rental revenues of approximately €2.8 million (approximately $3.5 million) per year.

     The Dream Island consortium intends to commence the construction on the southern side of the site in the summer of 2007 and to complete the project in five to six years with an estimated total investment of approximately €1.06 billion ($ 1.4 billion).

     The Dream Island consortium is comprised of Ercorner (60%) and certain other parties, including ESI Associate Holdings Ltd., the management company of Dream Island (10%). Under a shareholders agreement the parties agreed on an equalization of voting rights in Dream Island and a “buy-out” option in certain events of default by a party.

     Casa Radio

     In February 2007, PC has consummated a transaction for the acquisition of a 75% interest in a company (the “Project Company”), which under a public-private partnership agreement with the Government of Romania is to develop the Casa Radio (Dambovita) site in central Bucharest. Casa Radio is located on the border of Sector 1 and Sector 6 in the city of Bucharest, which comprises a large area of the city center as well as a high proportion of residential apartments. The property comprises a site covering an approximate area of 92,000m2 (approximately 1 million square feet). The proposed scheme will include refurbishment of the existing building as well as the development of additional space annexed to the building and on adjoining land. The scheme will include a shopping and entertainment centre, offices, a hotel (including a convention center) an apartment hotel and car parking facilities. In accordance with the terms of the public-private partnership agreement, the purchasers (including PC) have undertaken to cause the Project Company to construct an office building measuring approximately 13,000 square meters for the government of Romania at the Project Company’s own costs. The latter intends to finance the construction of the project through bank loan. Additional financing for the Project (if needed) will be borne by PC and the other owner of the Project company pro-rata based upon their shareholdings in the Project Company.

     Kharadi

     PC is a party to an agreement for the acquisition of 50% of the rights in and to an Indian company which holds a 56,000 square meters (616,000 square feet) of land, and an option to acquire additional 22,000 square meters (242,000 square feet), all in the Kharadi area in Pune, India. PC intends to develop its plot of land through the construction of a project totaling approximately 2.4 million square feet (225,000 square meters) which will include: a shopping centre with a total area of approximately 1.3 million square feet (approximately 120,000 square meters);

an office complex measuring approximately 870,000 square feet (approximately 81,000 square meters) and; a serviced apartment facility of approximately 260,000 square feet (approximately 24,000 square meters). The total investment in the project is anticipated to be approximately $175 million.

     Cochin

     In September 2006, we, together with an Indian corporation (“Project SPV”) wholly owned by an unrelated third party (the “Third Party Shareholder”) entered into an agreement (as amended in January 2007) for the purchase of an agricultural land (“the Land”) measuring 41 acres and located in Cochin, India. In accordance with the terms of the agreement the Company and Project SPV will acquire 13 acres (“Property A”) for a total consideration of INR 1,495 million (approximately $33.6 million) payable subject to fulfillment of certain obligation by the seller in respect of the Land including obtaining all permissions required for construction thereon and making good and marketable title with regard to Property A and others (“Conditions Precedent”). An additional 28 acres (“Property B”) would be transferred by the seller to the Project SPV without any consideration and the seller will be entitled to receive 40% of the constructed area which will be built by the Project SPV. It was further agreed that all fees costs and expenses for construction on Property B will be borne by the Project SPV and that the Project SPV will have the entire control over the construction as well as the marketing of the entire project. The agreement also provides that if the seller fails to comply with the aforementioned Conditions Precedent, the Project SPV and the Company shall have the right to terminate the agreement and the seller will then refund all amounts paid under the agreement plus an interest of Libor +1%.

     On September 29, 2006, the Company, the Third Party Shareholder and the Project SPV entered into a share subscription agreement according to which the Company will transfer to the Project SPV its respective rights in and to the Land in consideration of 50% shareholding and voting rights in the Project SPV. The allotment of shares is subject to conversion of the land use to a non-agricultural land and the securing of sanctioned plans for the Land.

     Bangalore Project

     We have executed a Framework Heads of Terms for the establishment of a joint venture company (the “JV Company”), in equal shares, with one of the leading real estate developers in Bangalore, India. Subject to the fulfillment of certain conditions, the JV Company will acquire ownership and development rights in approximately 190 acres of land situated in an upscale section of Bangalore. Additionally, the Indian partner will assign to the JV Company joint development rights with the owners of an adjacent area of land measuring approximately 100 acres. The consummation of the transaction is subject to fulfillment of certain agreed conditions, principally the satisfactory completion of due diligence investigations, and change of zoning for parts of the subject area.

     Subject to the fulfillment of the conditions to closing, it is anticipated that EMI will invest an aggregate amount of approximately $180 million in the land acquisition transactions, of which $50 million has been paid as an advanced payment upon signature of the Heads of Terms. Such advance payment will be returned to EMI should the preliminary conditions of the Agreement not be fulfilled.

     EMI intends to offer to PC to take up a 50% participation in EMI’s share of the joint venture. PC’s participation requires the approval of its various corporate organs.

     The JV Company intends to develop these extensive land areas for the construction of a large scale residential project which is anticipated to include: high standard quality villas and apartments with a total area exceeding 21 million sq. ft. (approximately 2 million sq. m); a hotel and an apartment hotel of 300 — 400 rooms; a local shopping area; a 9-hole golf course; various amenities for the residents of the neighbourhood which will include a club house, swimming pools, sports facilities, recreation areas, etc.

     It is anticipated that construction of the project will be executed in stages to be completed over the course of the next 3 to 5 years.

     Arena Plaza Extension

     The Arena Plaza extension is a planned retail and residential addition to the Arena Plaza (Kerepesi) in Budapest, Hungary that will comprise approximately 53,000m² (approximately 583,000 square feet) gross, and approximately 13,500m² (approximately 148,000 square feet) rentable retail area arranged in three floors. In addition, there will be approximately 84 residential units extending to approximately 6,000 m² (approximately 66,000 square feet). The development will offer a modern market place for international retail boutiques as well as local vendors and artisans. The Arena Plaza extension will occupy part of the former historic Kerepesi trotting track. The project is in the preliminary phase and building permissions have not yet been obtained. The current zoning for the site will need to change for planning permission for the planned project to be obtained. PC intends to apply to receive approval for the revised and valid zoning plans in late 2007 when construction of the Arena Plaza should be complete.

     David House Building

     PC owns an office building known as “David House” on Andrassy Boulevard, a prestigious location and one of the most sought after streets in the center of Budapest. The façades of all buildings on the Andrassy Boulevard, including “David House” are listed in the “World Heritage” list. David House serves as the headquarters for the PC group while certain areas therein are leased out.

     Duna Plaza offices

     Within the framework of a sale agreement executed in 2004, Klepierre has acquired from PC all equity rights in Duna Plaza, Budapest, Hungary. Duna Plaza is the registered and legal owner of the entire rights, title and interest in and to the Duna Plaza Complex, which is comprised of Duna Plaza shopping center and the Duna Plaza Offices (“DPO”). Since DPO was specifically excluded from the framework of the 2004 transaction, Klepierre and PC have agreed to implement certain procedures to cause: (i) the registration of the DPO as a separate title unit in a condominium the rights of which shall initially be held by Duna Plaza; (ii) thereafter to implement a separation of Duna Plaza in such a manner that DPO will be recorded in the name of a new company to be incorporated under the separation (“DPO Owner”); and (iii) to cause the sale and transfer to PC of all equity and voting rights in DPO Owner.

     The separation procedure was finalized on December 31, 2006. In May 2007, PC agreed to sell DPO to Klepierre for €14.2 million (approximately $18.7).

     Duna Plaza Extension

     Subject to land assembly and building permits, PC has agreed to construct an extension to the Duna Plaza shopping and entertainment center. PC will be responsible for obtaining building permits for plans and designs to be approved by Klepierre and will be responsible for the construction of the extension. PC will also be responsible for letting the new units in the extension. In consideration for the construction and lease-up, Klepierre will pay PC an amount equivalent to the net rentals generated at completion (determined in accordance with an agreed formula) capitalized at a pre-agreed yield. During the construction, Klepierre will pay PC its construction costs plus 10% (subject to a cap of 80% of the total consideration) on account of the final consideration to be paid at completion. An adjustment of the consideration will be carried out nine months following completion on the basis of the net rentals prevailing on the adjustment date. In the event that Klepierre elects not to commission the construction of the extension, notwithstanding that all building permits have been obtained by December 2009, PC will be entitled to receive €10 million compensation for the unutilized building rights. The planning of this extension is in the preliminary stages and is subject to the acquisition of adjacent land and adoption of zoning modifications which allow for the construction for commercial and retail facilities.

     The Praha Plaza Commercial Complex

     PC owns a commercial complex comprised of a number of buildings located in the Third District of Prague, the Czech Republic, which currently operates as a logistical and commercial center (“Prague III”). The building’ strategic location allows for convenient transportation to the complex. The buildings are located on property totaling approximately 510,000 square feet with a

current gross leasable area of approximately 48,000 square feet. Part of the Prague III site is held by PC on a short lease from the local Municipality. Before developing Prague III, PC will need to negotiate a longer term interest in that part of the site.

     Hotels

     The goal of our hotel business is to acquire and manage, via management companies, four-star hotel properties which provide, at four star hotel prices, the business and vacation traveler with five star quality accommodations that are conveniently located near major transportation stations.

     Our ownership percentage in our hotels varies, and the remaining interests in those hotels that are not wholly-owned by us are owned by various unrelated third parties, including subsidiaries of the Red Sea group of companies (“Red Sea”) which is our business partner in some of our hotels. Red Sea is engaged, inter alia, in the initiation and development of residential and commercial real estate projects in Israel and in the operation of chain of hotels and income producing real estate abroad. Six of our seven operating hotels, are managed by Park Plaza Europe Ltd. (“Park Plaza”), which has received 5% or 10% of the equity rights in some of the companies holding these hotels. See “- Management of Hotels” below.

     We are currently developing one additional hotel in Bucharest — the Radisson Bucuresti — see Management of Hotels, below. For information on other hotels developed by us, within mix-use projects — see Other Real Estate Projects above. In October 2006, we sold our 33% interest in the Sandton Park Plaza Hotel located in Johannesburg, South Africa and in June 2007, we completed the sale of the Ballet Building located in Budapest in which Elscint held 50%.

     In December 2006, we acquired a historical building next to the Victoria Hotel in Amsterdam with the view of refurbishing it as an extension to Victoria Hotel — see Agreements with Respect to Ownership of the Hotels below.

     Set forth below is certain information relating to our operating hotels:

Operating Hotels

     Hotels under Development or Renovation

     In 2005, we commenced the renovation and refurbishment of the Bucuresti Hotel in order to enable compliance with the international standards required for a four star business hotel. We expect the renovation works in the Bucuresti hotel to be completed during the fourth quarter of 2007.

     Agreements with Respect to Ownership of the Hotels

     On October 17, 2006, we, together with the other owners of the Sandton Hotel, consummated an agreement for the sale of the entire issued share capital of Park Plaza Hotel Sandton (Pty) Ltd, the company owning the Sandton Hotel, Johannesburg, South Africa, in which we held 33.3%. This transaction reflects an asset value of the Sandton Hotel of approximately Rand 54 million (approximately $21 million). The net consideration received by us (following deduction of a bank loan and other expenses relating to the sale) was €800,000 (approximately $1.05 million).

     On June 12, 2007, we, together with Red Sea, completed the sale of the National Ballet Institute Building located in Budapest, Hungary. The transaction reflects an asset value of €30 million (approximately $39.5 million), of which EMI’s share was 50%.

     In December 2006, our subsidiary BEA Hotel NV (“BEA”) together with the Red Sea Group acquired a historical office building with appurtenances and land, in Amsterdam, the Netherlands. The 75 year old office building, which is considered a historical building for preservation under local laws, is located in the heart of Amsterdam’s business and entertainment centers and resides next to our four star Victoria Hotel. We intend to convert this property into an approximately 100 room hotel as an extension to the Victoria Hotel, following a restoration and an investment of approximately €10 million (approximately $13 million), and subject to receipt of all consents and permits (estimated to take approximately a year following building permit). The purchase price of €14 million (approximately $ 18 million) was fully financed through a bank loan.

     We are a party to a shareholder agreement with Red Sea dated February 15, 1993, as amended, with respect to our indirect ownership of the Victoria hotel in Amsterdam. Under the agreement, in the event we or Red Sea no longer controls the entities owning the Victoria hotel, then the party who ceased to control such entity must offer its holdings in the entities owning the Victoria hotel to the other party at value to be agreed upon by the parties.

     We are party to certain other shareholder agreements with Red Sea and Park Plaza, in respect of the Riverbank Park Plaza, the Victoria Park Plaza and the Sherlock Holmes Park Plaza. All agreements provide for any share held by Park Plaza to confer no voting rights until such time as it shall have provided and completed its full equity contribution (as defined in the agreements). BEA and Red Sea shall enjoy equal representation in the board of directors of each hotel company. The parties have agreed upon rights of first refusal, tag along and drag along rights, under terms and conditions as stipulated in the respective agreements.

     Construction and development of Hotels

     Elscint is a party to an agreement with Control Centers, our indirect parent, for the receipt of services consisting of coordination, planning, execution and supervision with respect to the renovation works of the Bucuresti Hotel complex. See “Item 7. Major Shareholders and

Related Party Transactions — B. Related Party Transactions — Agreements for the Purchase of Coordination Planning and Supervision Services over the Bucuresti Hotel Complex” below.

     Management of Hotels

     Management agreement with Park Plaza

     Most of our operating hotels have appointed Park Plaza, an unrelated third party management company, as their management company. Park Plaza owns the franchise to the “Park Plaza” brand name in the Benelux countries, the United Kingdom, various countries in Eastern Europe, South Africa and a number of countries in the Middle East. Park Plaza is responsible for the operation of the hotels, including the supervision of the local management and staff. Local management is employed by the respective company owning the hotel and not by Park Plaza, although Park Plaza does render hiring services.

     Each of our subsidiaries holding interests in the Victoria, Utrecht, Astrid, Sherlock Holmes, Victoria London and Riverbank hotels has entered into management agreements with Park Plaza, the principal provisions of which include:

     Additional transactions with Park Plaza

     BEA was granted an option in June 2001 from Park Plaza, exercisable until December 31, 2006, to purchase from Park Plaza 33% of the ownership and controlling rights in a company under its ownership, which was incorporated to acquire the business (including tangible assets, hotel management agreements, management rights, rights to use trade names, etc.) of the Park Plaza chain in Europe (the “Acquired Company”). As part of the agreement, BEA granted Park Plaza two loans in the aggregate amount of $5 million. The terms of the loans are as follows: (i) a loan of $1.67 million linked to the U.S. Dollar, which bears annual interest at the rate of Libor plus 1% due by December 31, 2006; and (ii) an additional loan of $3.33 million in exchange for an option to convert the principal of $3.33 million into shares of the Acquired Company, unless BEA elects not to convert the loan in which case it will be subject to the linkage and interest as above. As security for the repayment of the loans, we will hold back amounts payable to Park Plaza with respect to Park Plaza’s rights in our hotels, except for management fees of the hotels. In addition, we have further agreed to provide the Acquired Company with an additional loan of up to $2.25 million, if and to the extent this amount is required for the purchase of other assets by the Acquired Company. On December 28, 2006, BEA notified Park Plaza that it does not intend to exercise the option to convert the second loan to shares of the Acquired Company. Park Plaza undertook to repay the loan to BEA by no later than June 30, 2007, together with accrued interest as stipulated above.

     Management Agreement with the Rezidor Hotel Group

     On June 9, 2004, our indirect subsidiary, S.C. Bucuresti Turism S.A., the owner of the Bucuresti hotel (the “Owner”), which is currently undergoing renovation works, entered into an agreement with The Rezidor Hotel Group (through its subsidiaries) (the “Management Company”) regarding the future management of the Bucuresti hotel to be operated under the “Radisson SAS” trade name.

     Under the agreement the Owner undertook to pay the Management Company an annual base fee of 3.5% of the total revenue and an annual management fee of 10% of the gross operating profit. Both fees payable to the Management Company shall be no less than certain agreed minimum amounts depending on the relevant year. In addition, the Owner will pay the Management Company 2.5% of gross room revenue for marketing and advertising services as well as an agreed fee per room for reservations of rooms.

     Pursuant to the agreement, the Management Company had guaranteed to the Owner that the adjusted gross operating profit (the total revenue less expense, permitted deductions, management fee and property insurance) for the hotel operation, as and from the second year of operation, shall not be less than fixed annual amounts.

     Business Concept and Strategy

     Our business concept and strategy for our hotels includes the following elements:

     Location. Our hotels are generally situated in close proximity to major railway links into cities, such as the central railway station in Amsterdam (situated across from our Victoria Hotel), the central railway station in Antwerp (situated close to our Astrid Park Plaza hotel) and the Victoria railway station in London (situated close to our Victoria Park Plaza hotel). The London and Antwerp stations are scheduled to accommodate the services of the Train de Grand Vitesse (the “TGV”), when such services become operational in those areas.

     Service. Our hotels make considerable efforts to offer personal services at a five-star level but at four-star level prices.

     Customer base. Our hotels’ principal target customer base is the business traveler and the tourist industry, both individuals and groups.

     Management. Our hotels focus on strategic cooperation and affiliation with management companies with know-how and expertise in hotel management, which enables optimal use of a centralized reservation system, and which provides the advantage of a unified management system that promotes the efficiency of the operation and control of hotels in diverse locations.

     Strategy. Our strategy for our hotels business is to increase the number of hotel rooms in both Western and Eastern Europe, with emphasis on prime location while contemplating expansion of our hotel operation into the Indian market including, among other venues, by incorporating the hotel business into mix-use projects. The duration of our holding and managing of our hotel portfolio varies and is dependant upon business cycles, economic conditions, property yields, and trends affecting the hotel industry or capital market opportunities.

     All of our activities in the image guided treatment field are performed through InSightec.

     As of December 31, 2006, the principal shareholders of InSightec were EMI (69.27% shareholder and 51.15% shareholder on a fully diluted basis), GE (25.20% shareholder and 20.24% shareholder on a fully diluted basis) and MTA (3.87% shareholder and 6.74% shareholder on a fully diluted basis). Employees, directors and officers hold the remaining holdings of InSightec.

     We are a party to an amended and restated shareholders agreement together with GE and MTA dated August 9, 2006. For so long as we continue to beneficially hold 50.01% or more of the outstanding share capital of InSightec on a fully diluted basis, we are allowed to appoint three directors to serve on InSightec’s board of directors and no action shall be taken without the affirmative vote of a majority of our designated directors present. GE was granted veto rights over the execution of certain significant transactions or activities not in the ordinary course of business of InSightec. The parties have a right to participate in any new financing pro rata to their holdings.

     The agreement further provides for certain limitations on the transfer of each party’s holdings in InSightec, including, transfer to a competing entity and a right of first refusal granted to us and GE in the event of sale by either of us of its holdings. In the event we sell our holdings, GE and MTA have a right of co-sale. A change of control in us to a competing entity of GE in the focused ultrasound therapy or medical imaging business while we control or own 30% of InSightec’s outstanding shares on a fully diluted basis, grants GE and MTA a right

to sell their holdings in InSightec to us at fair value (in accordance with a mechanism provided in the agreement) or acquire our holdings in InSightec at fair value. Termination of the agreement by either us or GE following a material breach of the other party grants the other party a right to purchase the defaulting party’s securities at 90% of their fair value. If GE terminates the agreement as aforementioned, GE has a right to sell its holding to us at 110% of their fair value. If the rights to purchase or sell the other party’s holdings in the event of termination, as described above, is exercised, the terminating party who purchases the other party’s holdings has an option to include all of MTA’s holdings in the transaction. MTA has a right to include all of its holdings in such transaction under the same terms and conditions in the event a purchase transaction is consummated (upon termination as described above) without the exercise of the option.

     Business description

     InSightec has developed and markets the ExAblate 2000; the first FDA-approved system for Magnetic Resonance guided Focused Ultrasound Surgery (“MRgFUS”). InSightec’s objective is to transform the surgical environment for the treatment of a limited number of forms of benign and malignant tumors by replacing invasive and minimally invasive surgical procedures with an incision less surgical treatment solution. The system is designed to deliver safe and effective non-invasive treatments while reducing the risk of morbidity and potential complications, as well as the direct and indirect costs associated with conventional surgery. In October 2004, InSightec received FDA approval to market the ExAblate 2000 in the United States for the treatment of uterine fibroids, a type of benign tumor of the uterus. Prior to that, in October 2002, InSightec received authorization to affix the CE mark to the ExAblate 2000, enabling it to market the system in the European Economic Area, and certain Asian countries, for the treatment of uterine fibroids. InSightec also has regulatory approval for the ExAblate 2000 for uterine fibroids in Canada, Russia, Brazil, Mexico, Korea, Taiwan, Australia and Singapore. In May 2007 InSightec also received CE-marking (marketing approval in the EEA) for the pain palliation of bone metastases. InSightec is also in various stages of development and clinical research for the application of its MRgFUS technology to the treatment of other types of benign and malignant tumors. These additional applications are being developed to take advantage of the modular design of the ExAblate 2000, which enables it to function as a common platform for multiple MRgFUS-based surgical applications. Currently, InSightec has an installed base of 53 units around the world in academic hospitals, community hospitals, MRI clinics and physician-formed joint ventures. The ExAblate 2000 is operable only with certain MRI systems manufactured by GE. InSightec signed an exclusive worldwide (except for Russia) sales and marketing agreement with GE with respect to the ExAblate 2000. InSightec believes that its relationship with GE will enable it to leverage GE’s marketing and sales resources to accelerate its market penetration.

     InSightec’s MRgFUS technology integrates the therapeutic effects of focused ultrasound energy with the precision guidance and treatment outcome monitoring provided by MRI systems. Ultrasound is a form of energy that can pass harmlessly through skin, muscle, fat and other soft tissue, and is widely used in diagnostic applications. The ExAblate 2000 uses a phased-array transducer that generates a high intensity, focused beam of ultrasound energy, or a Sonication, aimed at a small volume of targeted tissue. The focused ultrasound energy provides an incision less therapeutic effect by raising the temperature of the targeted tissue mass high enough to ablate, or destroy it, while minimizing the risk of damage to overlaying and surrounding tissue.

     InSightec believes that by combining the non-invasive therapeutic effects of focused ultrasound energy and the precise “real-time” data provided by the MRI system, it has developed an effective, non-invasive treatment solution for uterine fibroids.

     InSightec also believes that its MRgFUS technology can be applied to the treatment of other medical conditions, providing similar advantages by presenting both physicians and patients with a safe and effective incision less surgical treatment option for several medical conditions, including a number of indications for which there are currently few effective treatment options.

     Distribution and Marketing

     InSightec distributes and markets its products directly and through the entering into distribution agreements with third parties.

     Business Concept and Strategy

     InSightec’s strategic objective in this area is to continue its follow-up studies for uterine fibroids, as well as its product development efforts and clinical studies for additional applications such ES (enhanced Sonication). If the results of its clinical studies are positive, InSightec intends to pursue regulatory approval in the United States and other targeted jurisdictions to market the ExAblate 2000 for these additional treatment applications.

     In addition, InSightec aims to become the market leader in MRgFUS systems, and to achieve a significant improvement in the quality and efficacy of the treatment while demonstrating cost effectiveness. To that effect InSightec completed the development of ExAblate®4000, a unique system targeted at non-invasive treatment of Brain tumors and CNS targets. As of May 2007, 2 such systems were installed, one in Europe and one in the US. In addition, research and development activities have been initiated towards implementing new product derivatives for treating bone and prostate cancer tumors. These new systems exploit InSightec new and proprietary dense acoustic array technology for better tumor control and treatment flexibility.

     The Neotia Elbit Healthcare in India

     On December 11, 2006, EMI entered into a strategic joint venture to develop and operate a chain of multi-specialty tertiary hospitals in India to address the emerging need of specialized medical care in India. It is anticipated that the chain will include hospitals in major metropolitan areas of India. The first hospital in the chain will be a 1,000 bed multi-specialty tertiary hospital and biotech research centre in Kolkata, to be named “The Neotia Elbit Healthcare”. The project will also include ancillary services such as a Biotech Research Center and a nursing training institute. The total build up area of the project is anticipated to be approximately 250,000 square meters (approximately 2.5 million square feet) and the capital investment in Kolkata project will be approximately INR 1,000 crores (approximately $230 million) over a period of several years. EMI share in this project is estimated to be 50%.

     We have established a strong professional team, headed by a medical doctor who specializes in healthcare management, to develop and manage this venture, together with our Indian partners. Additionally, through our various activities in the field of medical devices and biotechnology, we have ongoing relationships with numerous medical centers in Israel and abroad which enables us to build a strong advisory and support team to assist us in this venture. We anticipate that the new hospital chain in India will have close collaboration with both Insightec and Gamida Cell in the field of clinical trials and research and close ties with several medical centers in Israel and abroad for telemedicine, specialty treatments and training of personnel.

     Mango

     In May 2005, Elscint purchased from Punto FA the entire equity and voting rights in Mango Israel Clothing and Footwear Ltd., the Israeli distributor and retailer of the internationally renowned retail brand name MANGO-MNG™ for €2.85 million. Concurrently with the purchase agreement, Mango executed an exclusive distribution agreement for Mango products in Israel for a ten-year period. Under the agreement, Elscint has agreed to guarantee annual minimum purchases at rates and subject to terms and conditions specified in the agreement. Mango Israel has undertaken to pay Punto FA seasonal marketing, public relations, and store-support fees as specified in the agreement.

     Mango currently operates 13 stores in Israel.

     The key elements of Mango’s strategy are:

     Venture Capital Investments

     In addition to our core operations, we hold interests in the following companies. Our investments in these companies are not significant to our results of operations.

     Gamida Cell Ltd

     Gamida is engaged in the expansion of hematopoietic (blood) stem cells therapeutics in clinical development for cancer and autoimmune diseases, as well as future regenerative cell-based medicines including cardiac and pancreatic repair. We have acquired 29.1% of Gamida’s interest through a number of investment rounds and/or transactions (representing 24.8% on a fully diluted basis).

     On February 16, 2005, Teva Pharmaceutical Industries Ltd. (“Teva”) — one of Gamida’s shareholders, decided to exercise its option to enter into a joint venture (“JV”) with Gamida to develop and commercialize certain products based on StemEx®, Gamida’s developing technology. On February 12, 2006 Gamida, Teva and the JV signed a founders agreement which set forth the establishment, funding and management of the JV. The sole purpose of the JV is commercialization of StemEx® and obtaining all required registrations and marketing approvals. Teva shall make an equity investment in the JV of up to $ 25.0 million in consideration for up to 50% of the JV shares. Teva has, as of the date of this report, carried out part of its said investment. Pursuant to the agreement Gamida and the JV signed a license agreement according to which Gamida granted the JV a royalty free, worldwide license to exploit StemEx® and Gamida’s intellectual property in connection with developing, manufacturing sale and distribution of StemEx® and a royalty free, illimitable, worldwide exclusive license to manufacture, develop, market, offer for sale, distribute and sell StemEx® and the right to sublicense.

     As to a dispute between Elscint Bio Medical and its former CEO, see Note 17B(8) to the consolidated financial statements included in Item 18 below.

     Olive Software Inc.

     Olive Software Inc. (“Olive”), a Delaware corporation, is engaged in the development and marketing of products that enable a transparent link between the newspapers’ traditional printing systems and the world of e-publishing. These products enable newspapers and magazines to automatically present their printed edition on the Internet, while supporting e-commerce applications, personalization and interactive advertising. In addition, Olive develops and markets digital archive services for newspapers and libraries. Our current holdings in Olive represent 22.3% of its equity and voting rights (18.3% on a fully diluted basis).

     Easyrun Ltd.

     Easyrun Ltd. (“Easyrun”), an Israeli corporation, is engaged in the development and marketing of “call centers” solutions, which support under one platform, diversified infrastructure from historical telephony and up to futuristic telecom equipment (IP switchboards) and modern e-commerce applications (Web). We hold a total of 49.4% of the outstanding shares of Easyrun (47.8% on a fully diluted basis).

     Varcode Ltd.

     In September 2006 we have entered into an agreement, with an unrelated third party, for the establishment of an Israeli company (“Varcode”) in which EMI will invest an amount of $3.0 million (subject to fulfillment of certain milestones in accordance with the terms of the agreement) in consideration for approximately 46% of Varcode’s equity rights. Varcode is engaged in developing labels for improving shelf life of perishables.

     To date we have invested approximately $1.6 million in consideration of approximately 31% interest in Varcode and the remainder of the 46% equity share is held by a trustee and will be transferred to us upon execution of the additional investments in Varcode. Pursuant to the agreement, we are entitled to 50% of the voting rights in the general assembly and the right to appoint 50% of Varcode directors subject to certain time limitation and provisions as stipulated in the agreement. One of Varcode founders and shareholder has a casting vote in case of “dead lock” of Varcode’s board members.

     Pursuant to the agreement, we were granted an option to purchase additional 4% in Varcode share capital in consideration for $0.5 million. This option is exercisable for a period of 18 months following the date of this agreement.

     The following table sets forth our breakdown of revenues by each geographic market in which we operate, for each of the last three years (in thousands of NIS):

     The breakdown of revenue by business segments for each of the last three years is presented in the following table (in NIS thousands):

     Hotels

     The business activities of the various hotels, especially in Western Europe, are influenced by several factors that affect the revenues and gross operating profit. These factors include (i) fluctuations in business activity in certain seasons (which affects the volume of traffic in the business community), (ii) holiday seasons (such as Christmas and Easter), and (iii) weather conditions. In Western Europe, these factors generally cause the first and third quarters to be weaker than the second and fourth quarters.

     The first quarter, which is the period immediately following the Christmas season and the height of the European winter, is traditionally characterized by lower revenues and gross operating profit resulting from lower occupancy rates and reduced room rates. During the third quarter, there is generally a decrease in local business activities due to the summer holidays which, together with a tendency for local tourist traffic to seek out resort destinations, also generates slower results. This is offset somewhat by increase in international tourism but the impact of this increase is, in turn, offset by lower room rates, particularly for groups.

     However, during the second quarter, there is generally a marked increase due to more favorable weather conditions (spring to early summer), the Easter holiday and the corresponding revival of both business and tourist activity. The fourth quarter is usually the strongest period due to the Christmas and New Year’s holiday season and a significant year-end increase in business activities.

     Other activities

     Mango’s business is influenced by seasonal shifts in the apparel market. During the winter season (December — January) and summer season (June- July), the apparel market, including Mango, commences discount sales to the public which consequently increases Mango’s revenues and causes a decrease in the gross profit margin for such periods. In addition, Mango’s revenues may fluctuate due to seasonal purchasing by consumers especially in peak holiday seasons such as Passover generally in the second quarter, the Jewish New Year and other Jewish and national holidays generally in the third and fourth quarter.

     On June 21, 2006, PC was registered as the owner of a European Community Trademark “Plaza Centers + figures” number 002477602.

     Pursuant to our agreements with Park Plaza and the Rezidor Group for the management of our hotels we were granted rights to use the trade names “Park Plaza” “Regent” and “Radisson SAS”. See “- Hotels — Management of the Hotels” above.

     In December 1998, InSightec’s subsidiary acquired focused ultrasound technology from GE Medical Systems, and all relevant intellectual property including 14 United States patents, as well as 3 applications pending in other countries of which two have subsequently been approved, at an aggregate purchase price of $5 million and the minority interest in TxSonics Ltd. As of May 31, 2007, InSightec has submitted 83 additional patent applications, out of which 36 have already been approved (22 in the United States, 9 in various European countries, 3 in China and 2 in Japan), with another 47 that remain pending and in process.

     In addition, we use the MANGO-MNG™ brand name in accordance with our distribution agreement with Punto FA. See “- Other Activities — Mango” above.

     Shopping and entertainment centers

     There are a number of competitors in the Eastern and Central European countries in which we operate or intend to operate in the shopping and entertainment centers business, particularly in larger cities such as Budapest and Warsaw. The following factors, however, should be noted: (a) shopping centers which are not in close proximity and which do not draw their clientele from the same catchment areas are not considered as being competitive; (b) we believe that large retail centers (known as “power centers”), even if they compete with our centers directly merely by virtue of their proximity to our shopping and entertainment centers, are at a disadvantage because they do not offer the entertainment facilities that are offered at our shopping and entertainment centers, and which we consider to be a significant element in the attraction of our patrons; and (c) in the regional cities of Hungary, Poland, Latvia, Romania and the Czech Republic competitive activity is more limited.

     In addition to several ad hoc entrepreneurial projects, there are two significant groups operating a number of shopping and entertainment centers in the Eastern and Central Europe with whom we compete directly, namely the Tri-Granit based in Hungary and the ECE chain based in Germany. We compete with these chains, and with other developers, in the pre-development stage (for acquisition of suitable sites), in the cost of acquisition of such sites, in the development stage (in obtaining suitably qualified architects, consultants and contractors) and in the operational stage, if the centers compete for the patronage of the same population. We also compete for quality “brand name” tenants to occupy rental units. In locations where competing centers are being constructed simultaneously, the first center to open generally enjoys an advantage over its competitor, which is the reason behind our emphasis on the expeditious completion of construction operations.

     Our project in Lodz, Poland is in the preliminary planning and development stage as a shopping center integrated with a public market. Due to strong competition, we are currently assessing the scope and nature of this project.

     In most of the cities in Poland in which we operate or are developing shopping and entertainment centers, our centers are the only ones of their type in the city, and competition from other centers is minimal or non-existent. In these cities, we compete with traditional shopping outlets. These outlets lack the added benefit of the entertainment activities which our centers offer and, accordingly, we believe that they have difficulty competing with us.

     Hotels

     The lodging industry in Europe has traditionally been classified on a grading system, with five-star representing a luxury hotel and one-star a budget hotel. All of our hotels (except for the Centerville hotel apartments) enjoy a four-star grading, or qualify as four-star establishments, while some are designated as “Four Star Deluxe” establishments.

     Each of our hotels competes with other hotels in its geographic area for clientele, including hotels associated with franchisers, which may have more extensive reservation networks than those which may be available to us. We compete with other facilities on various bases, including room prices, quality, service, location and amenities customarily offered to the traveling public. Levels of demand are dependent upon many factors including general and local economic conditions and changes in levels of tourism and business-related travel. Our hotels depend upon both business and tourist travelers for revenues.

     Many of these other companies are larger than us. Our hotel in Utrecht, The Netherlands competes directly with the NH Utrecht (which is located directly opposite our hotel), the Mercure Hotel and the Carlton President Hotel. The Victoria Hotel in Amsterdam is located in the city center and is in direct competition with the Barbizon Palace, Swissotel, Golden Tulip Intell, Krasnapolsky and the Crown Plaza. Our Astrid Park Plaza hotel in Antwerp, Belgium competes directly with the Hilton, Holiday Inn, Crown Plaza and Park Lane hotels. The Victoria Park Plaza Hotel in London is in direct competition with a number of three-star plus and four-star rated hotels within relatively close proximity to the Victoria railway station, including the Thistle Grosvenor and the Victoria Holiday Inn hotels, both of which benefit from their close proximity to Victoria station, as well as the Thistle Royal Westminster, Rubens, Status Street, Jolly St Ermins, St. James’s Court and Merchant Court hotels. In addition, there is a considerable number of traditional budget hotels in the proximity of the Victoria Hotel. The Sherlock Holmes Park Plaza Hotel in London competes directly with a number of four-star rated hotels such as Dorst Square Hotel, Myhotel Bloomsbury, Radisson SAS and the Radisson Edwardian. The Riverbank Park Plaza in London is in direct competition with a number of four-star and five-star rated hotels in relative proximity to the River Thames, including the City Inn Westminster, Crowne Plaza Hotel, County Hall Marriott, Royal Lancaster and the Grosvenor House. The Radisson Bucuresti Hotel in Bucharest will compete with the Hilton situated directly across the street, the Intercontinental, and the Marriott Grand Palace hotel. We believe our hotels offer quality and value for competitive prices.

     The Image Guided Treatment Business

     The competition in the MRgFUS products field can be divided into two main categories: alternative Minimally Invasive Surgery methods (MIS) and competing image guided high intensity focused ultrasound systems (HIFUS).

     With respect to MIS methods, in general, there are already tissue ablation methods in various MIS versions (e.g., radio frequency electromagnetic energy inserted into the body by a special needle, laser and cryogenic, and embolization), which are potential competitors with InSightec’s application market. InSightec is not presently aware of any approved non-invasive method in the clinical applications of breast tumors, uterine fibroids or brain tumors. Although

these techniques might be somewhat less expensive, they are invasive and may be less accurate and less effective.

     InSightec faces competition from both traditional and minimally invasive solutions for the treatment of uterine fibroids and the other medical conditions that InSightec has targeted for its future applications. Traditional treatment methods for uterine fibroids and other medical conditions that InSightec has targeted for product development are more established and widely accepted among physicians. In addition, there are potential competitors developing alternative treatment options for various medical indications, some of which may be relevant for the treatment of uterine fibroids. However, we are not aware of any MRI-guided treatments for uterine fibroids or other medical conditions that are approved for commercial use or are in advanced stages of clinical trials. These potentially competitive technologies include laser therapies, radio frequency therapies, microwave therapies, cryogenic surgery, external beam radiation therapy, brachytherapy and radiation surgery.

     Recently GE’s main competitors, namely Philips and Siemens have started activity in the field of MR guided Focused ultrasound. Philips has installed a system for animal trials at a clinical/ research site in Bordeaux and claims to plan to install several clinical sites before the end of 2007. Siemens has issued a press release in 2006 jointly with HAIFU (one of the Chinese companies mentioned below) according to which the two companies plan to jointly develop an MR guided Focused Ultrasound system. At a conference in May 2007 first technical results of the joint work were shown.

     We are currently aware of two Chinese companies; one French company and one U.S. Company, which offer ultrasound-guided focused ultrasound solutions, or ULSgFUS, for a number of medical conditions. We believe that InSightec’s magnetic resonance guidance solution is superior to the products offered by these competitors. In a non-MRI guided treatment, the operating physician cannot see the effects of the treatment in real time and must complete the treatment, follow up with diagnostic testing and then plan future treatment sessions. The ExAblate 2000 allows the operating physician to complete all of these steps within a single treatment session while also enabling the operating physician to alter treatment parameters to optimize the treatment outcome. None of these potential competitors have received FDA pre-market approval for the marketing of their products in the United States.

     At present, to our knowledge, the Chinese ULSgFUS companies have focused their marketing efforts in Asia, and have not received any regulatory approvals outside of Asia. One of the companies, China Medical (NASDAQ: CMED), has placed a system in the United States and announced plans to initiate clinical trials in the United States. The other company, HAIFU, has placed a system in the United Kingdom and obtained a CE mark approval for treating liver and kidney cancer. In addition, it has signed an agreement with Siemens AG to develop a MR-guided version of its product. The French (EDAP, NASDAQ: EDAP) and U.S. (Focus Surgery, NASDAQ: MSON) FUS companies focus on ultrasound-guided treatment of prostate cancer disease. To the extent InSightec enters the U.S. or European markets for the treatment of prostate cancer or other applications, it may face competition from both of these companies. These competitors may have access to greater resources allowing them to offer their products at lower prices and they may have other advantages. EDAP has now started a phase II/III trial in the United States while Focus Surgery has initiated a phase 1 trial, both for prostate cancer.

     Other Activities

     Mango

     Mango operates in a competitive market characterized by a large and increasing

number of international and local brand stores and independent stores in Israel. Mango’s direct competitors include brand stores such as Zara, Castro, Honigman, Renuar and Dan Casidi which are located in the vast majority of the shopping centers in Israel. Increased competition could result in pricing pressure or loss of market share and adversely affect Mango’s revenues and profitability. Mango’s competition strategy includes: attempting to be a fashion trend leader, investing in branding, maintaining a compatible pricing strategy and maintaining leadership in fashion trends.

     Venture Capital Investments

     Start up companies, including companies in the biotechnology field, tend to operate in a highly competitive environment. In order to succeed, the products or services require a unique “added value” factor, relatively brief concept to market parameters, and aggressive marketing. Our venture capital companies face competition from large international companies with access to financial resources and with well-established research and development capabilities. The biotechnology field, which is dominated by large multi-national conglomerates and may be affected by global pressures on the investment market, is more resilient to market trends than the more volatile high technology industry.

     Shopping and entertainment centers

     The development, construction and operation of shopping and entertainment centers are subject to various regulatory controls, which vary according to the country of activity. In addition, some countries such as Poland and the Czech Republic require that a developer carry out an environmental report on the land before building permit applications are considered.

     In certain countries, acquisitions of shares of a local company or of a foreign company that controls a local company in some instances require a permit from the Anti-Monopoly Office.

     In order to begin construction works in Poland an investor must obtain a construction permit. A prerequisite for applying for a construction permit is receipt of a decision stating the conditions for construction and development of a site (a site permit). The site permit is issued for specific real property and specifies the designated purpose of the real property, i.e, what kind of buildings and business activity may be carried out on the real property. However, in the case of areas for which local zoning plans have been established, an investor will be entitled to apply for a decision granting a construction permit based directly on the purpose of the real estate as determined in the local zoning plan. The following must be attached to the application for a construction permit: (i) a final and legally valid site permit — if there is no local zoning plan; (ii) proof of the investor’s right to use the land for construction purposes; and (iii) the technical design along with opinions, consents and permits required by detailed provisions of law.

     In the Czech Republic a planning decision and the construction permit must be obtained prior to beginning of construction. During the planning decision proceedings the building office examines the planned construction from the various perspectives (in co-operation with various other authorities, including without limitation the environment protection authorities). The owners of neighboring real estate property as well as organizations for environmental protection may also be parties to the proceedings and submit their opinions as to whether or not the building office should issue the planning decision in favor of the proposed construction. In the event the planning decision is issued, it is necessary

to apply for the construction permit with the building office within two years. During the construction permit proceedings the building office examines the compliance of the contemplated construction with the planning decision as well as various other aspects, including, without limitation, the environmental aspects. Owners of the neighboring real estate property as well as organizations for environmental protection may take part in the proceedings. If the zoning plan was already approved for the location in which the construction shall take place, the building office may join the planning decision proceedings with construction permit proceedings.

     In Hungary building permits are ordinarily issued in two stages. The first stage determines the “building conditions”, which addresses factors such as the proposed area to be constructed and its distribution over the floors of the building, the building “foot-print” within the plot, building lines, access routes, and conceptual design. Once the building conditions have been approved and have become lawful (see below), the application for the formal building permit is submitted, which includes detailed architectural building plans, sections, elevations etc. all of which must comply with the approved building conditions. Following the issuance of both the “building conditions” approval and the building permit approval, a period of time is allowed (which varies from country to country) for third parties whose rights are allegedly affected by the permits to file objections. Only in the event that this period passes without objection, or in the event that objections raised are dismissed by the competent authorities, do the permits become lawful, valid and available for execution. The rule described above applies also to Poland, where construction works may be commenced only once the construction permit becomes valid and binding. Such a situation occurs when no party to the proceedings, (which may be an investor and owners, perpetual usufructuaries or managers of the real properties situated within the area that might be affected by the constructed building), appeals against the construction permit within 14 days of issue or the competent authority dismisses the objections raised by the appealing party. In the Czech Republic the construction may begin once the construction permit becomes valid and effective. The validity of construction permit is two years.

     In Latvia, approval of a construction plan is ordinarily though not always also divided into two stages, such stages generally being the approval of sketch design stage and approval of technical design stage. However, for larger projects it may be required that an interim approval from the local construction authority be obtained before finalization of the sketch design. The number of stages is set out in the architectural planning authorization. Sometimes it may be necessary to work out a detailed plan of the intended development site. In order to initiate the approval procedure of a construction plan in Latvia, initially a construction application must be submitted to the local construction authority, which reviews it and issues an architectural planning authorization. Under some circumstances it may be required that public discussion be arranged prior to the issue of such authorization. The resulting construction permit is issued after the construction authority has approved the technical plan of the building. Sometimes it is possible to get a fast track construction permit for underground parts of the building only.

     In some instances where the applicable local plan scheme does not permit commercial activities of the type characterized by our centers, it is necessary to apply for an amendment to the zoning scheme, which may be a protracted process and may not necessarily be successful.

     Apart from the building permits which are required for the construction of the shopping and entertainment centers as mentioned above, the developers are required to obtain operating permits from the municipal authorities before the center can be opened to the public and commence operation. Such permits will typically address issues such as fire fighting

facilities, escape routes, mechanical integrity of systems, public sanitation, and compliance with the approved building conditions and building permits. In addition, the individual tenants are required to obtain operating or business licenses in order to commence business within the centers. This requirement is not applicable in Poland, since no special operating or business licenses are needed to carry out business activity within centers. In certain countries, video arcade operators may be required to obtain gaming licenses. The developers are also required to comply with local regulations governing the employment of its employees.

     In India, the term “real estate” has not been formally defined. A reference to this term is found in the National Industrial Classification Code, 1987 (“NIC Code”) under Group 820 which deals with purchase, sale, letting and operating of real estate such as residential and non-residential buildings, developing and sub-dividing real estate into lots, lessor of real property, real estate agents, brokers and managers engaged in renting, buying and selling, managing and appraising real estates on a contract or fee basis.

     A Foreign Direct Investment (“FDI”) in permitted in India (up to 100%) under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which includes, but is not restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure), subject to certain qualifications, including: minimum area; minimum capitalization; minimum capitalization; non-repatriation of original Investment; project completion schedule; conformance with local laws and applicable standards; obtaining necessary approvals; and Supervision by the local municipality.

     Hotels

     The development, construction and operation of hotels and leisure facilities, including advertising tariffs and hotels, health safety issues, activities conducted within the premises of the hotels (such as restaurants, bars, shops, health clubs, and in particular the sale of alcohol, food and beverage to the public), installations and systems operating within the hotel (elevators, sprinkler systems, sanitation, fire department etc.), terms of employing personnel, as well as methods of rating the hotels are all subject to various regulatory controls, which vary according to the country of activity.

     The lodging industry in Europe has traditionally been classified on a grading system, with five-star representing a luxury hotel and one-star a budget hotel. The rating of hotels is established based on, among other things, the following criteria: size of rooms; suite-to-room ratio; number of restaurants and other catering facilities; level of room service provided; level of room amenities provided; air-conditioning; guest facilities; and the quality and periods of food and beverage services provided. The rating of our hotels is conducted by various organizations which are either established by law, operate under the authorities and regulations of the tourism ministries in different countries, or conducted by the ministry of tourism. In some countries hotels that are not graded are prohibited from operating as a hotel. All of our hotels have received a four-star rating.

     In all the countries in which we operate, the operation of hotels requires licenses for the operation of the building as a hotel and the obtaining of local municipal and police approvals for the means of access to and egress from the hotel for motor vehicles. In addition, in most countries we are required to obtain licenses for the sale of alcohol on the premises and the operation of a restaurant and tourism services. Our hotels are also required to comply with regulations regarding food, hygiene, the operation and maintenance of the swimming pool, casino, elevators, health, sanitation, electricity and fire hazards prevention.

     In most of the countries in which we operate hotels we are required to comply with various regulations in connection with employees, in particular working hours’ regulations. For example: the hotel and restaurant industry in The Netherlands has a collective labor agreement which provides a grading system for employees in the hotel and restaurant industry. For each grade there is a minimum wage mandated. Among other things, the provisions of the collective labor agreement obligate the employer to provide money for employees for a number of funds. Also, the total obligations of companies that might arise from the termination of employees cannot be predicted.

     The Indian Hotels and Tourism Sector, permit 100% FDI under the automatic route. The term Hotels and Tourism Sector includes (a) travel agencies, tour operating agencies and tourist transport operating agencies; (b) units providing facilities for cultural, adventure and wild life experience to tourists; (c) surface, air and water transport facilities to tourists; (d) leisure, entertainment, amusement, sports, and health units for tourists; and (e) convention/seminar units and organizations.

     The Government of India granted automatic approval for foreign technical collaborations in the hotel industry provided: (a) up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. (b) up to 3% of the net turnover is payable for franchising and marketing/ publicity support fee, and (c) up to 10% of gross operating profit is payable for management fee, including, incentive fee.

     The Image Guided Treatment Business

     The testing, manufacture and sale of InSightec’s products are subject to regulation by numerous governmental authorities, principally the FDA, the European Economic Community (the “EEC”), and corresponding state and foreign regulatory agencies.

     The U.S. Safe Medical Devices ACT OF 1990 (the “SMDA”) includes various provisions which are applicable to each of the exiting products of InSightec and may result in the pre-market approval process (a process whereby the FDA approves a new system that has no predicate devices that have been approved in the past) for such products becoming lengthier and more costly. Under the SMDA, the FDA can impose new special controls on medical products. These include the promulgation of performance standards, post-market surveillance requirements, patient registries, and the development and dissemination of guidelines and other actions as the FDA may deem necessary to provide a reasonable assurance and effectiveness.

     In June 1993, directive 93/42/EEC for medical devices was adopted by the EEC. In June 1998, this directive replaced the local regulation and ensured free transfer of qualified medical equipment among member states. Medical devices that meet the established standards, receive certification represented by the symbol “CE”. There are two types of certifications that are granted: (1) general certification of a company and (2) certification for a specific product. Instead of choosing to comply with directive 93/42/EEC, InSightec decided to comply with them effective international Standard ISO 9001 (European standard EN 290001) EMTITLED “Model for Quality Assurance in Design, Development, Production, Installation and Servicing”, and its extension to medical products EN 46001 satisfies the medical device directive. On May 10, 2001, InSightec obtained a certification by the European Notified Body, that it complies with the requirements of ISO 9001 AND en 46001. ISO 9001 and EN 46001, have been replaced by international standard ISO 13485 entitled” “Medical Devices — Quality management systems — requirements for regulatory purposes”. InSightec obtained certification of compliance with the new standard in March 2004, and is subject to annual audits by the

European Notified Body to renew the certification in accordance with all applicable updates of the standard.

     Other Activities

     The principal regulatory requirements for the operation of Mango in Israel include: (i) compliance with the Israeli consumer protection law, (ii) maintaining various licenses and permits issued by governmental authorities (including receiving applicable standards from the Israeli consumer standard institute for certain imported accessories), and (iii) compliance with employment regulations.

     There are currently no pre-conditions or requirements to be fulfilled by an investor while investing in the Hospital Sector in India, and that 100% FDI under the automatic route is permitted in it. Accordingly, FDI into built up hospitals is permitted so as to give a boost to the health care industry in India and there is no requirement to develop a hospital as a greenfield project.

     EMI is a subsidiary of Europe-Israel (M.M.S.) Ltd. (approximately 49.42%⁽¹⁾ shareholder). Europe Israel is wholly owned by Control Centers Ltd., a privately held Israeli company, which is controlled by Mr. Mordechay Zisser, who serves as EMI’s Executive Chairman of the Board. EMI’s significant subsidiaries and companies in which EMI has a significant interest as of December 31, 2006 are as follows:

     In October 2006, EMI entered into an agreement with its controlling shareholder, Europe Israel, for the lease of approximately 1,900 square meters (including warehouse area and parking places) for management and administration purposes in an office building, then owned by Europe Israel, in Tel-Aviv, Israel. Aggregate rental fees (excluding VAT) paid by EMI for the period between October 2006 through December 2006, with respect to such lease were approximately NIS 482,556 (approximately $114,214).

     Mango leases approximately 255 square meter of office space (including parking places) in Tel Aviv, Israel, for its management and administration activities. Mango’s offices are

located in the above mentioned office building, owned by Europe Israel. The aggregate rental fees (excluding VAT) paid by Mango in 2006 with respect to such lease were approximately NIS 230,568 (approximately $54,572).

     Europe Israel had disposed of such office building on April 1, 2007, and assigned the rights to collect rental fees in respect of same, to an unrelated third party.

     As to previous lease agreements with Control Centers — see “Item 7 — Major Shareholders and Related party Transactions — Related Party Transactions — Lease”, below.

     We believe that the leased property is adequate for EMI’s and Mango’s needs in the foreseeable future.

     InSightec leases its main office and research and development facilities, located in Tirat Carmel, Israel, pursuant to a lease that expires in August 2010, with an option to renew the lease for up to five years. InSightec occupies approximately 51,250 square feet in Tirat Hacarmel and Or-Yehuda. Total annual rental expenses under these leases are $700,000. Insightec also leases spaces in Dallas, USA for an annual rent fee of $150,000. The leased property is adequate for InSightec’s needs in the foreseeable future.

     Not applicable.

Overview

     Our revenues from the sale of real estate assets and trading property are recognized upon consummation of the sale of real estate and/or the investments (see also below revenue recognition). Our revenues from operational shopping and entertainment centers derive primarily from leasing assets and management fees, both recognized pro rata over the respective term of the lease and/or the management services provided. Our revenues derive also from ownership of hotels owned by Elscint, which revenues are recognized upon performance of service. Operating lease fees, gradually received over the period of the lease, are recognized as revenues by the straight-line method throughout the period of the lease. In December 2005, we sold all of our holdings in the company holding one of our hotels in London, which was the subject of a long term lease agreement, and we are therefore no longer party to the long term lease. Revenues from sale of medical products are recognized provided the following factors are fulfilled: there exists persuasive evidence of an arrangement; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectibility is reasonably assured. As to arrangements with multiple deliverables, revenue therefrom will be recognized while consideration is allocated by and between the various items of the agreement.

     Our revenues from the sale of real estate and trading property are subject to executing sale agreement with potential purchasers and to consummation of the transaction. Generally, in period when we consummate a transaction for the sale of our real estate assets we record revenues in substantial amounts and as a result, we may experience significant fluctuations in our annual and quarterly results. We believe that period-to-period comparisons of our historical results of operations may not necessarily be meaningful and that investors should not rely on them as an indication for future performance.

     Our functional currency is NIS, and our financial statements are prepared in accordance with Israeli GAAP. Israeli GAAP and U.S. GAAP differ in certain respects, which are summarized in detail in Note 25 to our consolidated financial statements included in Item 18 below.

     Because our revenues and expenses are recorded in various currencies, our results of operations are affected by several inter-related factors, including the ratio between the value of the operational and functional currencies of the Company and the timing and amount of the devaluation of the Israeli currency compared to other functional currencies. For additional information relating to the impact of fluctuation on currency exchange rates, see “- Critical Accounting Policies and Estimates -Functional Currency of Investee Companies” below.

     Financial data included in this discussion were derived from our consolidated financial statements and analyses based on our general accounting records and published statistical data. Such financial data have been rounded to the nearest thousand.

     General

     The following discussion should be read in conjunction with our consolidated financial statements included in Item 18 and the accompanying Notes thereto (“Consolidated Financial Statements”).

     A “critical accounting policy”, is one that (i) is important to the portrayal of an entity’s financial condition and results of operations and (ii) requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our critical accounting policies, estimates and assumptions, the impact of which are material to our financial condition or operating performance, or the nature of which are material because of the level of subjectivity and judgment necessary for highly uncertain matters, are those described below.

     The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in Israel (“Israeli GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates, including, but not limited to, those related to impairment of real estate assets and investments, investments in non-marketable securities, allocation of the consideration within a business combination, assessment of the probable outcome of litigation matters in which we are involved and other contingent liabilities, determination of subsidiaries’ functional currency, revenue recognition, share based payment arrangements, current and deferred taxes and capitalization of costs. We base our estimates on past experience, on professional advice or on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities that are not readily apparent from other sources. In preparing the consolidated financial statements and forming our estimates and judgments with respect to certain amounts included therein, we have utilized available information including, among other factors, our past history as above mentioned, industry standards and the current economic environment, while giving due consideration to materiality. It is possible that the ultimate outcome, as anticipated by us in formulating our estimates inherent in these consolidated financial statements, will either not materialize or prove to be substantially different. Moreover, application of the critical accounting policies described below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, the actual outcome could differ from these estimates. Other companies may use different estimates, which may have an

impact on the comparability of our results of operations to those of companies in similar businesses.

     In July 2006 IASB published Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (“IFRS”)” (“Standard 29”). The initial implementation of IFRS will be effected along with the implementation of IFRS 1, “First Time Adoption of International Financial Reporting Standards”, for purposes of the transition. In accordance with the provisions of Standard 29 we are obliged to initially adopt IFRS in the financial statements as of March 31, 2008 but we are examining the possibility of early adoption of IFRS.

     Preparation of the financial statements in accordance with IFRS and especially preparation of the opening balance for IFRS proposes, as required by IFRS 1, will requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Some of these estimates and judgments are similar, in all material respect, to those described under Israeli GAAP while some of them are not.

     WE are currently examining the effects of the transition to IFRS but at this point we are unable to evaluate the effect on our financial statements.

     Issues regarding our consolidated financial statements, that (i) in accordance with Israeli GAAP, are subject to considerable judgment; and (ii) involve critical assumption and estimates, are in general similar to those under U.S. GAAP, except for the accounting treatment regarding derivative financial instruments embedded within non-derivative instruments, in accordance with SFAS No. 133.

     Impairment and depreciation of real estate properties

     We evaluate the existence of any other-than-temporary decline, and hence, the need for an impairment loss on our real estate assets (operating or under construction), when indicators of impairment are present. Our evaluation is based, on the higher of (i) our estimated selling price in the open market or (ii) the estimated value-in-use, based on discounted operational cash flows (before interest and income tax charges), expected to be generated by those assets (“cash flows”; and collectively — “recoverable amounts”).

     Fair value estimates represent the best estimates based on industry trends, market rates, prices and transactions. Our value-in-use estimation involves estimating the future cash flows expected to be derived from continuing use of the assets and from their ultimate disposal. Such value is based on reasonable and supportable assumptions as well as on historical results adjusted to reflect our best estimate of future market and economic conditions that we believe will exist during the remaining useful life of the assets. The discount rate used in measuring the value-in-use estimation reflects economic environment risks, current market assessments regarding the time value of money, industry risks as a whole and risks specific to the assets, and is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the enterprise expects to derive from the assets. Such rate is generally estimated from the rate implied in current market transactions for similar assets. When an asset-specific-rate is not directly available in the market, we use a substitute rate to estimate the discount rate, by evaluating, as much as possible, a market assessment of: (a) the time value of money for the periods through the end of the assets’ useful life; and (b) the possible risk that future cash flows will differ in amount or timing from estimates.

     Based on our estimates of future cash flows, our real estate assets were determined to be recoverable, with the exception of the provisions for impairment made by us in previous and current years. As for the current and accumulated provisions for impairment loss — see Notes 10A and 10C to our Consolidated Financial Statements.

     The recognition of an impairment to property and the potential impairment calculation are subject to a considerable degree of judgment, the results of which, when applied under different principles or different conditions or assumptions, are likely to result in materially different amounts and could have a material adverse impact on our consolidated financial statements. The evaluation of future cash flows expected to be generated by each property is subject to significant uncertainty in the estimation of future income and expenses of each hotel’s (including related operations) and/or each shopping and entertainment center’s operations, and the future capital expenditures. In preparing these projections, we make a number of assumptions concerning market share of the asset, benchmark operating figures such as occupancy rates, average room rate (in respect of hotels), rental and management fees rates (in respect of the shopping and entertainment centers), collection rates, market prospects, industry labor cost prospects, operating efficiency of the management companies and the scope of maintenance and other operating expenses as well as the value of similar real estate assets in the approximate area of our real estate assets having similar zoning and planning status to our real estate assets.

     Depreciation of real estate is based on the estimated useful life of the property, using the straight-line method. Changes in our estimates regarding the expected economic useful life of our assets might significantly affect our depreciation expenses.

     Under different assumptions or conditions, the asset impairment analysis or the depreciation rates may yield a different outcome, which may alter the impairment analysis on our assets, as well as the gain or loss on the eventual disposition of the assets.

     For information on the material differences between Israeli GAAP and US GAAP relating to impairment of real estate assets and/or investments in investee companies — see subsections A8 and A9 to Note 25 to our consolidated financial statements. In accordance with U.S GAAP, we should also use critical estimates by determining the useful life of each group of assets. An indication that an asset may be impaired may sometimes indicate that the remaining useful life, the depreciation rates or the residual value for the asset, needs to be reviewed and adjusted under accounting standards applicable to the asset, even if no impairment loss is to be recognized for the asset and vice versa.

     Equity securities

     We invest in non-marketable equity securities of private companies or companies, whose securities are traded in low volume trading markets, ranging from early-stage companies that are often still defining their strategic direction.

     Investments in non-marketable equity securities are inherently risky, and a number of these companies are likely to fail. Their success (or lack thereof) is dependent on product development, time-to-market factors, market acceptance, operational efficiency and other key business success factors. In addition, depending on their future prospects, these companies may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments are then likely to become impaired. In the current equity market environment, while the availability of additional funding from venture capital sources has improved, the companies’ ability to take

advantage of liquidity events, such as initial public offerings, mergers and private equity funding, nevertheless remains limited.

     We evaluate impairment on individual investments in our portfolio when an investment has experienced a sustained decline in fair value below the carrying amount as of the date of evaluation. Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case we write the investment down to its impaired value. However, for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. The indicators that we use and factors we consider in order to identify those events or circumstances include, but are not limited to the following: (a) the investee’s revenue and earnings relative to predefined milestones and overall business prospects which may indicate a significant under-performance of historical or projected operating results or under-achievement of business plan objectives and milestones; (b) the technological feasibility of the investee’s products and technologies; (c) the general market conditions in the investee’s industry or geographical area, including adverse regulatory or economic changes or a significant adverse industry or economic trend; (d) factors relating to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, burn rate of the investee’s cash and the general financial condition and prospects of the investee, including obtaining funding at a valuation lower than our carrying amount or which requires a new round of equity funding to stay in operation when funding does not appear imminent; (e) the value of each ownership interest in relation to the carrying amount and the length of time during which that value has experienced a decline; (f) the volatility inherent in the external markets for these investments; and (g) several other relevant factors and indicators. In such case, we presume that the investment is other-than-temporarily impaired, unless specific facts and circumstances indicate otherwise. In cases where securities of an investee are traded in the market, our evaluation is based principally on the shares’ market price and the trends thereof. These evaluations are subjective in nature. A permanent decline in value results in a charge, reducing the carrying amount of the investment to its fair value.

     Since market conditions and other parameters, which affect the recoverable amount, vary from time to time, the recoverable amount may not be adequate on a date other than the date the measurement was done (which is close to the balance sheet date). Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to generate the anticipated cash flow from holding the investee company and recover the carrying amount of the investments, thereby possibly requiring an impairment charge in the future not previously recorded.

     For the current and accumulated provisions for impairment loss — see Notes 9A. to our Consolidated Financial Statements.

     Business combinations

     We allocate the purchase price of acquired companies and properties to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. In order to allocate the purchase price attributed to each acquired company and/or asset (tangible and intangible; monetary and non-monetary) and liabilities, we identify and estimate the fair value of each of the main acquired tangible assets (land, building, improvement, other equipment and other monetary and non-monetary items) and estimate any other identifiable intangible assets. Such valuations require us to make significant estimates and assumptions. We believe that our estimates used as the basis for this allocation are reasonable under the circumstances. A different method of allocation may cause (i) an increase or decrease (as the

case may be) in our depreciation costs; (ii) the need to provide an impairment loss for each of the acquired companies’ assets, or to amend it; and (iii) an increase or decrease (as the case may be) in gain (loss) derived from the disposal of these assets.

     Litigation, other contingent liabilities

     We are currently involved in various litigation disputes in substantial amounts. We make provision for contingent obligations (including those in respect of discontinuing operation) when the obligations are probable and their amounts can reasonably be estimated. We include in our consolidated financial statements provisions which are based on, among other factors, legal consultation and past experience, and which in our opinion are deemed adequate to cover the costs and resources necessary to satisfy the potential liabilities under these claims. The outcome of such contingent liabilities may differ materially from our assessment. We periodically evaluate these assessments and make appropriate adjustments to our consolidated financial statements. In addition, as facts concerning contingencies become known, we reassess our position and make appropriate adjustments to our consolidated financial statements.

     We are involved in litigation matters, the amount or outcome of which may not be estimable (e.g., class actions). Due to the uncertainties related to the possible outcome and/or the amounts and/or ranges of losses in these litigation matters, neither our management nor our legal advisors are able to make a reasonable estimate of the liability that could result from an unfavorable outcome and accordingly no provision is provided for such claims in our consolidated financial statements. As additional information becomes available, we will re-assess the potential liability related to our pending litigation and will revise our estimates accordingly. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

     See also Note 17B, 17C to our Consolidated Financial Statements.

     Functional currency of investee companies

     In preparing our consolidated financial statements, we are required to evaluate the functional currency of certain subsidiaries operating outside of Israel (especially in central Europe). In principle, the functional currency is the currency which management believes, based on qualitative criteria, reflects the economic nature of the events and circumstances relevant to the operating subsidiary (“investee”) or currency that is extensively used in or has a significant effect on its activity. The functional currency is determined based on management’s judgment and involves consideration of all relevant economic factors and circumstances affecting each subsidiary (e.g., the currency of the financial environment that significantly influences management in determining, inter alia, selling prices and payment conditions, or the currency used by management for the purpose of decision making). Generally, the currency in which each subsidiary executed (denominated and settled) the majority of its financing and transactions, which include purchases, billings, collections and payments (i.e., currency in which receivables and payments from current activity are denominated and settled or in which they are retained following their conversion) and the currency in which a majority of costs pertaining to the supply of services (e.g,. payroll, maintenance, subcontractors expenses and other expenditures) are denominated and settled, may indicate the functional currency. In these instances, the nature of the subsidiary’s operations must also be considered. A significant change in the financial environment, or in the foregoing factors in whole or in part, may require management to re-assess its determination of the functional currency.

     When any subsidiary’s functional currency is deemed to be other than the reporting currency, then any gain or loss associated with the translation of that subsidiary’s financial statements, for consolidation purposes, is charged directly to a separate item in the shareholders’ equity, namely “cumulative foreign currency translation adjustments”. Exchange rate differences on net monetary items included in the subsidiary’s financial statements which are denominated in, or linked to, currencies other than the functional currency, are recorded directly to the statements of operations. In the event the functional currency changes into a currency other than the local one, the amount of the foreign currency translation adjustment and/or the net income in each reported year following the date the change was implemented could be materially affected (see below).

     As described in Note 2A. (3)(iii) to our consolidated financial statements, on May 1, 2004, several countries, among them Hungary, Poland and the Czech Republic, joined the European Union. The joining countries undertook to manage an economic policy that conforms to certain monetary and regulatory targets, aiming at implementing required conditions for the adoption of the Euro as the country’s legal currency. As a result, the PC Group companies that are incorporated and operate in these countries (the “Companies”) deemed it necessary to reconsider their settlement currency with lessees the nature and scope of protection of the value of their financial assets and liabilities, their currency risk management policy, etc. Following examination of the criteria stipulates in International Accounting Standard No. 21 (as revised) (IAS- 21) and SIC19 (given the absence of any specific standard in Israel as to the “functional currency” of autonomous foreign entities) and according to the nature of the Companies’ operations and the changes in the economic environment in which they operate, PC’s management is of the opinion that as of April 1, 2004 and thereafter, the Euro, rather than the local currency, reflects, more adequately, the business condition and the results of operations of the companies. Accordingly, the Euro serves as the functional currency of these companies starting from April 1, 2004.

     Revenue recognition

     Revenue recognition in the image guided treatment segment:

     Revenue recognition criteria. InSightec recognizes revenue from sales of the ExAblate 2000 in accordance with Standard 25 of the Israeli Accounting Standard Board (“IASB”) when all the following conditions have been satisfied: (a) InSightec has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) InSightec retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to it; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

     InSightec’s sales arrangements with customers may include a number of elements or multiple deliverables that represent individual units of accounting. These deliverables typically consist of system sales, installation at the customer’s site and training. For such sale arrangements revenue is recognized by reporting the consideration to the deliverables. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, InSightec allocates the arrangement consideration to the separate units of accounting based on their relative fair value. In instances in which there are objective and reliable evidence of the fair value of the undeliverable item in an arrangement but no such evidence for the delivered item, InSightec allocates the arrangement consideration to the deliverables using the residual method.

     The arrangements generally do not contain a right of return of the delivered system. Typically, the deliverables are considered separate units of accounting when there are independent third parties who can render the installation and training services. InSightec determines fair value for those services based on the prices required by third parties for the undelivered elements (i.e., installation and training) when they are sold separately. Currently, InSightec does not have fair value for the system sold. Therefore, InSightec uses the residual method to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item equals the total arrangement consideration less the aggregate fair value of the undelivered items. Assuming all the abovementioned criteria for revenue recognition have been met, InSightec recognizes revenue for system sales when delivery occurs and recognizes revenue for installation and training when the services are rendered.

     In cases where the deliverables in the arrangement do not constitute separate units of accounting InSightec recognizes revenue when all the deliverables that are considered essential to the functionality of the system has been delivered to the customer. This is generally deemed to have occurred upon the completion of installation and training.

     Revenue related to separately priced service contracts is recognized ratably over the service period. All costs associated with the provision of service and maintenance, including salaries, benefits, travel, spare parts and equipment, are recognized in cost of revenues as incurred.

     Warranty costs. Accrued warranty costs are calculated in respect of the warranty period on InSightec’s products, which is generally one-year. InSightec’s warranty reserves is based on its best estimate of the amounts necessary to settle future claims on products sold as of the balance sheet date, based on contractual warranty rights and its accumulated experience with regard to service of its products. InSightec may need to revise or reconsider its estimates in the future based on its additional accumulated experience, over time, with respect to warranty claims.

     Revenue recognition from sales of real estate asset investments and trading property:

     The Company recognizes revenues on sales of real estate assets and trading properties when all the following conditions are satisfied:

     For the company, these conditions are usually fulfilled upon the closing of a binding sales contract.

     As described in Note 9B9 (3) to our consolidated financial statements, we have entered into several sale agreements with Klepierre and the Dawny Day Group for the sale of our real estate assets. In the framework of these sale agreements we took upon ourselves to have continuing involvement in the form of a guarantee of a return on the buyer’s investment. Some of these guarantees are for limited period of time and some are for an extended period of time. In such instances, we generally recognize revenues when there is reasonable assurance that total estimated future rent receipts will cover operating expenses and debt service including payments due to the buyer under the terms of the transaction. In making this determination, total estimated future rent receipts of the property are reduced by a reasonable estimated exposure for loss related to the continuing involvement. If, according to the terms of the transaction, the Company will participate in future profit from the property without risk of loss, and the transaction otherwise qualifies for profit recognition under the full accrual method, the contingent future profits are recognized when they are realized.

     Measuring the expected loss which will result from our guarantee to the buyers involves considerable judgment, the results of which, when applied under different principles or different conditions or assumptions, are likely to result in materially different amounts and could have a material adverse impact on our consolidated financial statements. Generally, we estimate the loss which will result from the guarantee at the date we recognize revenues from the sale of the real estate asset. In the following reporting periods we are updating our estimation based on the most available information we have. Such information includes, among other, rent and management fee revenues from tenants, operating expenses of the commercial center sold and others. Since this information is not available to us in each reporting period we have to rely on information received from the buyer. Prior to the settlement of the liability towards the buyer we receive from the buyer an access to the information necessary in order to determine the amount of the continuing involvement and we are updating the provision included in the financial statements based on the most available information. Accordingly, during the interim period from the sale of the assets through the settlement of the liability, we can be exposed to material changes in the amount of the liability and it can significantly affect our financial results.

     Share based payment arrangements

     Commencing January 1, 2006 we apply the provisions of Standard No. 24 of the IASB - “Share-Based Payment” (“Standard. 24). The objective of Standard 24 is to specify the principles of financial reporting by an entity where it enters into a share-based payment arrangements. For equity-settled share-based payment, the goods or services received, and the corresponding increase in equity, are measured directly at the fair value of the goods or services received. If such fair value cannot reliably be estimated, their values, and corresponding increase in equity, are to be measured indirectly, by reference to the fair value of the equity instruments granted based on market prices if available. If market prices are not available, fair value of the equity instruments granted is estimated using a valuation technique consistent with generally accepted valuation methodologies for pricing financial instruments, taking into account the terms and conditions upon which those equity instruments were granted. For transactions with employees and others providing similar services, the fair value of the transaction is measured directly by reference to the fair value of the equity instrument granted, at the date of grant.

     Share based payment arrangements in which the terms of the arrangement provide the counterparty with the choice of whether the transaction will be settled in cash (or other assets)

or by issuing equity instrument, the fair value is measured by the goods or services acquired and the liability incurred at the fair value of the liability. Through the liability settlement, the Company shall re-measure the fair value of the liability at each reporting date and at the date of settlement, with any changes in the fair value is to be recognized in profit or loss for the period.

     In previous periods we did not recognize any expenses in respect of share based payments in the financial statements prepared in accordance with Israeli GAAP.

     Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense for all share-based payment awards is recognized using the accelerated multiple-option method.

     As stock-based compensation expense recognized for the year ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced by the estimated forfeitures. Standard 24 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

     As of December 31, 2006 EMI, PC and InSightec have several share base arrangement which are included in the scope of Standard 24. As for information in respect of these options plans see consolidate financial statements notes 9B(2) e,9B(3)(j) and 18C.

     Estimation of the fair value of share-based payment awards using an option-pricing model is affected by the stock price of the entity that granted the options as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but not limited to:

     For some of our option plans, we utilize the lattice — binomial model and for some we utilize the Black & Scholes model. The valuation of a significant part of our options plans was

done by professional advisers which provide us with their opinion as for the valuation of the options granted based on the options plan terms and other assumptions provided by us.

     Although the fair value of employee stock options is determined in accordance with Standard 24 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

     Management’s estimates of the compensation costs are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

     Accounting for income taxes

     As part of the preparation of our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves an estimate by us of our actual current tax exposure, together with assessing temporary differences resulting from different treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities that are included in our balance sheet. Considerable management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is probable that some portion or all of the deferred income tax assets could be realized. As of December 31, 2006 we recorded a valuation allowance for substantially all of our deferred tax assets (net, after provisions) primarily consisting of certain net operating losses, as well as other temporary differences between book and tax accounting, (see Note 16F. to our consolidated financial statements). The valuation allowance was recorded due to uncertainties surrounding our ability to utilize some or all of our deferred tax assets. In assessing the need for the valuation allowance, we consider future taxable income, the fulfillment of conditions stipulated in the certificates in respect of the “approved enterprise”, the time limitations on the utilization of losses (see Note 16D. to our consolidated financial statements), and ongoing, prudent and feasible tax planning strategies. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application and/or interpretation of complex tax laws, tax regulations, and tax treaties in respect of various jurisdictions in which we operate and which frequently vary.

     Tax authorities may interpret certain tax issues in a manner other than that which we have adopted. Should such contrary interpretive principles be adopted upon adjudication of such cases, our tax burden of the group may be significantly increased. If the realization of deferred tax assets in the future is considered probable, an adjustment to the deferred tax assets would increase net income during the period in respect of which such determination is made. In the event that actual results differ from these estimates or that we adjust these estimates in future periods, we may incur additional taxes, which could materially affect our financial position and results of operations. We have recorded liabilities for anticipated tax issues based on our estimate of whether, and the extent to which, we may become subject to additional tax payments. If we ultimately determine that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period of the determination. The computation of current and deferred tax liabilities does not include taxes that would have arisen in the event of a sale of the investments in investees (except those that are to be liquidated), or upon receiving the retained earnings as dividends, since in respect of some dividends from profits thereof and/or gains to be generated from their realization are tax exempt, and in respect of others, it is management’s policy not to dispose of such investments and/or not to offer, in the foreseeable future, their retained earnings as a dividend distribution or otherwise, in a manner causing a material tax burden on us (see Note 16B.(1)c. to our consolidated financial statements). In assessing the need to provide a tax liability in respect of

the abovementioned, we consider, among others, feasible tax planning strategies. Different assumptions or other policies adopted by management, might significantly affect our tax expenses.

     The allocation of the proceeds in respect of properties sold at an aggregate amount (“package”) is based on an estimate of the fair value of each asset sold and on the basis of the provisions stipulated in the sale agreements. A different method of allocation may cause additional liabilities and/or expense. We believe that our estimates used as the basis for this allocation of proceeds is reasonable under the circumstances. Tax authorities may, at this stage, challenge our tax strategy, and thus our income or loss for tax purposes could be significantly affected, so that our tax expenses (current and deferred) may, therefore, increase. Furthermore, our tax strategy might be impacted by new laws or rulings.

     Capitalization of Costs (Tangible and intangible)

     We capitalize direct acquisition, construction and development costs, including initiation, pre-development and financing costs, as well as property taxes, insurance, and indirect allocated project costs, that are associated with the acquisition, development or construction of real estate projects, as and from the pre-acquisition stage until the time that construction of such real-estate project is completed and its development is ready for its intended use, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 67. Our cost capitalization method requires the use of management estimates regarding the fair value of each project component. We base our estimates on replacement costs, existing offers, past experience and other various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the fair market value of real estate assets. Management estimation is also required in determining whether it is probable that a real estate project in its pre acquisition stage or in its early stage would be executed. Actual results may differ from these estimates and anticipated returns on a project, as well as the gain or loss from disposition of individual project components, could vary significantly from estimated amounts. We are actively pursuing acquisition opportunities although no assurance can be provided as to which opportunity will succeed. Costs previously capitalized that relate to (i) an abandoned development opportunity; (ii) a project not reasonably expected to materialize; or (iii) a project the expected economic benefit of which is doubtful, are written off and charged to the statement of operations.

     Furthermore, should development and construction activities decrease substantially, or be interrupted or delayed for a lengthy period, a portion of financial costs and project expenses may no longer be eligible for capitalization, and would be charged to the statement of operations.

     We are capitalizing finance expenses to real estate assets under construction in accordance with the provisions of Standard No. 3 of the IASB. In accordance with Standard 3 an asset is considered a qualified asset if certain criteria are met among which the expected duration of the project construction, the scope of the project in relation to the Company operations and the like. Such determination requires us to use critical estimations and assumptions as well as management judgment to determine whether a specific asset under construction or development is qualified for capitalization. The date of commencement and/or the cessation of capitalization, the fulfillment of conditions, the period for suspension of capitalization (if any) and capitalization rate, are also subject to significant estimates and assumptions. Under other conditions or assumptions, the outcome might significantly differ.

     In valuing certain tangible and/or intangible assets (such as capital rental costs and costs incurred to obtain lease contracts or bank loans), we use critical estimates and

assumptions on what marketplace participants would use in making estimates of fair value. Capitalized rental costs directly related to revenue from specific operating leases are amortized over lease terms. Other capitalized rental costs (not related directly to revenue) are amortized over the period of expected benefit. The amortization period begins when the project is substantially completed and deemed available for occupancy. Capitalized costs for obtaining bank loans are amortized using the effective interest method. Estimated unrecoverable amounts of unamortized capitalized rental costs associated with a lease or costs of obtaining loans or a group of leases or loans, are charged to expenses when it becomes probable that the lease or the loans will be terminated or extinguished, as applicable. Our estimates of fair value are based upon assumptions believed to be reasonable, but which may be reversed due to changes in circumstances in the future (such as the assumptions regarding the period of time the obtained lease or loan will continue to be used in our portfolio or the level of judgment that should be used in determining whether a change or modification of a debt instrument should be considered as a debt extinguishments or not, etc.). Assumptions may not necessarily reflect unanticipated changes in circumstances that may occur.

Critical accounting policies which effect our U.S GAAP reconciliation Note:

     Derivative financial instruments

     We have adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS 149 (“SFAS 133”). Derivatives, as defined within SFAS 133 that are embedded within non-derivative instruments, must be bifurcated from the host instrument and accounted for when the embedded derivative is not clearly and closely related to the host instrument. However, rental for the use of leased assets and adjustments for inflation on similar property are considered to be clearly and closely related. Thus, the inflation-related derivative embedded in an inflation-indexed lease contract is not bifurcated from the host contract.

     In conformity with SFAS 133, foreign currency forward contracts that are embedded within a lease contract (“the host contract”) should be bifurcated and accounted for separately (“bifurcation”). The bifurcated forward contracts are recorded at their fair value while changes in their fair values are charged to the statement of operations and classified under financial income (expenses), net. An embedded foreign currency instrument is not bifurcated from the host contract, if (i) contracts in which specified volumes of sales of one of the parties to the contract serve as the basis for settlement (“underlying”); and (ii) the host contract is not a financial instrument and it requires payments denominated in the functional currency of any substantial party to that contract. The evaluation of whether a contract qualifies for the exception abovementioned should be performed only at inception of each contract.

     In determining the fair value of currency transactions, especially the fair value of derivatives, we are required to make critical estimates and judgments in respect of certain parameters, such as (i) lease contract firmness; (ii) interest rates; (iii) exchange rates (spot rates); (iv) forward rates; and (v) period of lease. When using our computation methodology, determination of fair value may not practically be carried out, without significant reliance upon critical estimations and judgment, mainly due to (a) the existence of many lease agreements between lessees (including anchor tenants) in each of our operating centers; (b) such leases are signed for various long term periods (between 5 to 20 years) to which volatility is highly sensitive; (c) the existence of different type of conditions in different leases (including (i) frequency of installments; (ii) options to extend the lease periods; and (iii) the right to withdraw from lease agreements or to reduce, in certain events, rent fees by significant amounts); (d) a major part of the leases were executed prior to the issuance of SFAS 133, thus causing us extensive burden in collecting some important unavailable market information;

     Lease agreements signed and executed while projects were under construction, and which are not yet operational, are considered a firm commitment following April 1, 2004 — the date of the change of the functional currency of the contracted companies from the local currency into the EURO (see Note 2A.(3)(iii) to our consolidated financial statements) — and therefore the embedded foreign currency instrument (the Euro) is not bifurcated from the host contract.

     Determination of whether an embedded foreign currency instrument is subject to bifurcation or is considered to be clearly and closely related to the lease agreement (mainly due to conditions according to which volume of sales of one of the parties to the agreement serve as the basis of settlement) requires significant judgment and critical reasonable estimates by management.

     The estimated fair values in our financial instruments have been determined by us, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts, and accordingly on the profit and loss accounts, in accordance with U.S. GAAP.

     The fair value estimates presented herein are based on pertinent information available to management as of each date of measurement or evaluation. Management is not aware of any factors that would significantly affect the estimated fair value amounts as of these dates. Future estimates of fair value and the amounts which may be paid or realized in the future may differ significantly from amounts presented.

     For information on recently issued accounting standards under US GAAP, see Note 25 A. to our consolidated financial statements.

     For information on recently issued accounting standards under Israeli GAAP, see Note 2 AA to our consolidated financial statements.

Presentation method of financial statements

     Significant recent global changes, particularly in the real estate business in which the Company operates, enable it to utilize its relative advantage therein. Such changes include,

     Following the consummation of the various “exit” transactions which commenced during 2004 and continued in 2005 and 2006, and in consequence of the change to the Company’s business model as specified above, the Company’s management believes that the presentation of its statement of operations in “Multiple — step form” is no longer an appropriate method. The Company’s management believes that all costs and expenses (including selling and marketing, general and administrative and financial expenses) should be considered as continuously contributing to the generation of the overall income and profits, and attributing only part of the expenses directly to revenues, would properly represent the Company’s results of operations. Management also believes that dividing those operational costs, which directly relate to identified operations, to separate items such as “cost of sales”, “selling and marketing expenses”, and “general and administrative expenses”, is no longer appropriate to the Company, (having a wide range of different activities), and alternative classification should be applied which recognizes two types of costs: (i) those directly related to revenues; and (ii) overhead expenses which serve the business in general and are to be determined as general and administrative expenses. Moreover, distinction between those costs, which are or are not taken into account in determining the gross profit, requires significant discretion, often entailing inconsistent and insufficiently reliable accounting classification. The Company’s management believes this new method of presentation reflects more appropriately and suitably the nature of the Company’s operations on a consolidated basis, in the light of the Company’s modified strategy and goals.

     Accordingly, from the third quarter of 2005, the Company has adopted a new method for the presentation of its consolidated statement of operations reports, whereby all expenses are presented in one group, which is deducted as a whole from the total revenues which are also, in turn, represented in one group (“Single — Step Form”), as opposed to the former presentation method (“Multiple — Step Form”).

     We distinguish between real-estate assets for self use such as hotels and headquarter building which are classified as fixed assets and real-estate assets that are being constructed or developed for future sale (inventory) which are classified as trading property.

     In addition part of the Company’s real estate assets (mainly real estate assets under construction which are designated to use as commercial centers) were reclassified from fixed assets to trading property (inventories) within the current assets and part of the long term bank loans related to these trading properties were also reclassified to short term credits within the current liabilities.

     Furthermore, cash flow from operating activities in 2006 include the acquisition and/or construction costs in respect of trading property as well as the proceed from the disposal of same as opposed to inclusion of these items within cash flows from investing activities in the cash flows of 2005 and 2004.

     In the view of our management, this new method of presentation more adequately and suitably reflects the nature of our operations on a consolidated basis, in the light of our modified strategy and goals.

     The following table presents for the periods indicated our statements of operation for the three years period the last of which ended December 31, 2006:

     Most of our businesses, which operate in various countries, report their operational results in their functional currency, being other than NIS (our reporting currency). We translate our subsidiaries’ result of operations into NIS based on the average quarterly exchange rate of the functional currency against the NIS. Therefore, a devaluation of the NIS against each functional currency would cause an increase in our reported revenues and the costs related to such revenues in NIS while a revaluation of the NIS against each functional currency would cause a decrease in our revenues and costs related to such revenues in NIS.

     Revenues

     Total consolidated revenues for 2006 were NIS 1,670.5 million ($395.4 million) compared to NIS 816.8 million for 2005, an increase of NIS 853.7 million, or 104.53%.

     Revenues from sale of real estate assets and investments, net, for 2006 were NIS 80.2 million ($19 million) compared to NIS 281.6 million in 2005.

     Revenues from sale of real estate assets and investments, net in 2006 were derived mainly from purchase price adjustments in respect of the Polish commercial and entertainment centers sold to Klepierre in July 2005.

     Revenues from sale of real estate assets and investments in 2005 were derived from (i) sale of four Polish commercial and entertainment centers to Klepierre in July 2005, which contributed net revenue of NIS 166.4 million; (ii) purchase price adjustment to the sale transaction of 12 Hungarian commercial and entertainment centers to Klepierre in July 2004, which contributed net revenues of NIS 53.4 million (iii) sale of four Hungarian commercial and entertainment centers to Dawnay Day in April 2005, which contributed net revenues of NIS 3.5 million and (iv) sale of our interest (30%) in Shaw in December 2005, which contributed net revenues of NIS 58.3 million.

     For further elaboration of these transactions see “Item 10. Additional Information — Material Contracts — Shopping and Entertainment Centers” below.

     Revenues from sale of trading property in the amount of approximately NIS 286.6 million (approximately $67.8 million) derived mainly from consummation and delivery of Novo Plaza commercial and entertainment center to Klepierre as part of an agreement signed in July 2005 for sale of 2 commercial and entertainment centers in the Czech Republic (Novo Plaza and Pilzen Plaza) and 2 commercial and entertainment centers in Poland (Rybnik Plaza and Sosnowiec Plaza) (“Stage B” transaction).

     Revenues from commercial and entertainment centers operations in 2006 were NIS 110.9 million ($26.2 million) compared to NIS 143.0 million in 2005, a decrease of NIS 32.1 million or 22.4%. Such decrease resulted mainly from (i) the sale of four operational centers in Hungary which were sold to the Dawny Day Group at the beginning of the second quarter of 2005, which contributed revenues of NIS 11.5 million in first quarter 2005 and which did not contribute any revenues in 2006; and (ii) the sale of four operational centers in Poland which were sold to Klépierre at the beginning of the third quarter of 2005 and which contributed revenues of NIS 40.0 million in the first half of 2005 and which did not contribute any revenues in 2006; and (iii) offset by revenues of NIS 13.2 million from the operations of the Novo Plaza commercial and entertainment center during the second quarter of 2006 (prior to its delivery to Klepierre in June 2006). As of December 31, 2006 we have only one operational commercial center (the Arena in Herzlia, Israel).

     Revenues from our hotel operations and management for 2006 were NIS 351.6 million ($83.2 million) as compared to NIS 270.1 million for 2005, an increase of NIS 81.5 million or 30.2%. The increase in revenues in the hotel division resulted primarily from (i) full scale operation of the Riverbank Park Plaza Hotel compared to part scale operation in 2005 , which contributed additional revenues of NIS 55.1 ($13.0 million) in 2006; (ii) an increase in revenues from the operations of our other hotels in the UK ,the Netherlands and Belgium mainly attributed to higher average room rate and/or higher occupancy rate and (iii) an increase in the revenues from Centerville apartments hotel in Bucharest attributable to increase in average rate per apartment and to increase of additional 60 apartments available from the end of 2005.

     Revenues from InSightec’s sale of medical systems in fiscal 2006 were NIS 85.8 million ($20.3 million) as compared to NIS 75.7 million in 2005. The sales in fiscal 2006 represent sales of 19 “ExAblate 2000” Systems as compared to 15 systems in 2005.

     Revenues from realization of investments in 2006 were NIS 697.4 million ($165.0 million) compared to NIS 2.0 in 2005. Revenues from realization of investments in 2006 derived from (i) gain from decrease in our shareholding (from 100% shareholding to approximately 68%) in Plaza Centers N.V. (“PC”) in the amount of NIS 668.0 million ($158.1 million) as result of Initial Public Offering of PC’s ordinary shares on the Official List of the London Stock Exchange; (ii)realization of capital reserve from foreign currency translation adjustment in the amount of NIS 29.4 million ($7.0 million) derived from repayment of monetary balances of a capital-nature as result of refinance loan provided to 3 hotels companies in the UK.

     Revenues from other operational income in 2006 were NIS 58.0 million ($13.7 million) compared to NIS 44.4 million in 2005. This increase is attributed to increase in retail activities preformed by Mango Israel Clothing and Footwear Ltd (“Mango”) which was initially consolidated in May 2005, offset by decrease in revenues from lease of assets as a result of the sale of the Shaw hotel in December 2005.

     Profits before Income Taxes

     Set forth is an analysis of our profits before income taxes and the analysis of the increase in our profits before income taxes from NIS 14.5 million in 2005 to NIS 521.0 million ($123.3 million) in 2006:

     Profit from the sale of real estate assets and investments is presented net, after cost of assets or investments sold, therefore; the profits from such sales are equal to the revenues derived therefrom.

     Revenues from sale of trading property less cost of trading property sold in 2006 were NIS 36.2 ($8.6 million) compared to no revenues or costs of trading property recorded in 2005. This gain is attributable to consummation and delivery of Novo Plaza commercial and entertainment center to Klepierre as part of Stage B transaction.

     Costs and expenses from commercial and entertainment centers operations less revenues from commercial and entertainment centers in 2006 were NIS 33.8 million ($ 8.0 million) compared to NIS 14.7 million in 2005. This increase was attributable mainly to:

     Revenues from hotel operations less costs and expenses related to such revenues in 2006 were NIS 45.2 million ($10.7 million) compared to NIS 10.8 million in 2005. This increase is attributable mainly to: (i) Riverbank Hotel operations which was operating on a full-scale basis in 2006 while in the previous year its fixed expenses (i.e.: rent, insurance, property tax, depreciation, etc.) corresponded to full-scale operations of such hotel, resulting in losses of approximately NIS 12 million from this hotel which are typical to hotel in its preliminary stages of operation; (ii) significant increase in the hotel’s revenues with no corresponding increase in the hotel variable costs and with no change in the hotels fixed costs (i.e. rent, insurance, property taxes and depreciation).

     Revenues from sale of medical systems less costs and expenses related to such revenues in 2006 were NIS 13.3 million ($3.2 million) compared to NIS 25.4 million in 2005. This decrease is attributable mainly to small growth in sales, as described in preceding paragraphs, offset by higher increase in selling and marketing expenses and general and administrative expenses attributable to sale of medical systems from NIS 31 million in 2005 to NIS 42.7 million ($10.1 million) in 2006. The increase in selling and marketing expenses was attributable to InSightec’s extensive efforts and resources devoted to expand its scope of sales and to an increase in InSightec’s headquarters personnel in order to expand InSightec’s activities. In addition cost of medical systems in 2006 include stock-based compensation expenses which were recorded according to standard 24 in the amount of NIS 4.7 million ($1.1 million) compared to NIS 0.8 million in 2005.

     Profit from realization of investments is presented net, after cost of the investments sold and therefore the profit from such item is equal to the revenues derived therefrom.

     Costs and expenses from other operational expenses less revenues from other operational income in 2006 were NIS 12.2 million ($2.9 million) compared to loss in 2005 of NIS 2.4 million which include the following: (i) gain from Shaw hotel activity in the amount of NIS 9.8 million in 2005 compared to no gain in 2006; (ii) costs and expenses of Mango less revenues of Mango of NIS 9.8 million ($2.3 million) in 2006 compared to NIS 4.4 million in 2005; (iii) project initiation expenses of NIS 2.4 million ($0.6 million) in 2006 compared to NIS 7.7 million in 2005 mainly relating to our initiation costs in East and West Europe.

     Research and development expenses, net in 2006 totaled to NIS 62.6 million ($14.8 million), after deducting NIS 9.4 million ($2.22 million) granted by the Israeli Office of the Chief Scientist (“OCS”), compared to NIS 59.8 million in 2005, after deducting NIS 3.9 million granted by the OCS. The increase in expenses attributable to: (i) InSightec expanded its scope of research and development in 2006 to new oncology applications as well as costs related to the developing of new systems; (ii) stock-based compensation expenses in the amount of NIS 4.1 million ($0.97 million) in 2006 compared to NIS 0.9 million in 2005.

     General and administrative expenses increased in 2006 to NIS 67.2 million ($15.9 million) from NIS 36.9 million in the previous year. This increase is attributable mainly to stock-based compensation expenses and bonuses in respect of employees and directors amounted to NIS 23.1 million ($5.5 million) and to an increase in professional services expenses mainly as a result of implementation of the Sarbanes Oxley act. General and administrative expenses include corporate executive, administrative, legal and accounting activities, rental expenses and professional fees. General and administrative expenses related directly to our operations are included in the cost and expenses of same operations, in accordance with the Single — Step Form, as described above.

     Share in losses of associated companies, net, totaled NIS 9.7 million ($2.3 million) in 2006, compared to NIS 12.0 million in 2005. Such losses are attributable mainly to our share in losses resulted from the operations of our venture capital investments: Gamida, Olive, Easyrun, Ercorner (the company holding the Dream Island project) and Varcode.

     Finance expenses, net increased to NIS 129.1 million ($30.6 million) in 2006 from NIS 122.3 million in 2005. Such increase resulted from a combination of the following factors: