Elbit Imaging Ltd · 20-F · For 12/31/05

Filed On 6/30/06 3:08pm ET   ·   SEC File 0-28996   ·   Accession Number 950123-6-8462

Annual Report of a Foreign Private Issuer   ·   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer            287   1.53M 
 2: EX-4.15     Ex-4.15: Framework Transaction Agreement             182    737K 
 3: EX-4.16     Ex-4.16: Share Sale and Purchase Agreement            20     57K 
 4: EX-4.17     Ex-4.17: Unofficial Translation of Deed of Trust      47    177K 
 5: EX-4.18     Ex-4.18: Unofficial Translation of Deed of Trust      47    176K 
 6: EX-4.20     Ex-4.20: Amended and Restated Loan Agreement          76    246K 
 7: EX-4.21     Ex-4.21: Lease Agreement                              59    144K 
 8: EX-4.22     Ex-4.22: Hotel Management Agreement                   64    135K 
 9: EX-4.23     Ex-4.23: Amended and Restated Loan Agreement          72    221K 
10: EX-4.24     Ex-4.24: Amended and Restated Loan Agreement          71    210K 
11: EX-10.1     Ex-10.1: Consent of Brightman Almagor & Co.            1      8K 
12: EX-10.2     Ex-10.2: Consent of Plaza Centers (Europe) B.V.        1      8K 
13: EX-10.3     Ex-10.3: Consent of Bea Hotels N.V.                    1      8K 
14: EX-10.4     Ex-10.4: Consent of Gamida Cell Ltd.                   1      7K 
15: EX-11.1     Ex-11.1: Code of Ethics and Business Conduct           8     37K 
16: EX-12.1     Ex-12.1: Certification                                 2±    10K 
17: EX-13.1     Ex-13.1: Certification                                 1      7K 

20-F   ·   Annual Report of a Foreign Private Issuer
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================================================================================

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

----------

WASHINGTON, D.C. 20549

FORM 20-F(MARK ONE)                                                             

[ ]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES  
EXCHANGE ACT OF 1934                                                  

OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE   
ACT OF 1934                                                           

FOR THE FISCAL YEAR ENDED December 31, 2005                           

OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES        
EXCHANGE ACT OF 1934                                                  

FOR THE TRANSITION PERIOD FROM __________ TO __________               

OR

[ ]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     
EXCHANGE ACT OF 1934                                                  

DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT _____________       

COMMISSION FILE NUMBER 0-28996                                                  

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ELBIT MEDICAL IMAGING LTD.
(Exact Name of Registrant as specified in its charter)

ISRAEL
 (Jurisdiction of incorporation or organization)

 13 MOZES STREET, TEL-AVIV 67442, ISRAEL
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of
the Act:

                                                                [Download Table]

                       NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS:             REGISTERED:         
--------------------   ------------------------------
                                                     
        NONE                        NONE             

----------

Securities registered or to be registered pursuant to Section 12(g) of
the Act:
ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE

----------

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: 25,426,298 ordinary shares, NIS 1.0 par value per share                 

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

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 [ ] NO [X]                             

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 [X] NO [ ]                               

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

Large Accelerated Filer [ ]   Accelerated Filer [X]   Non-Accelerated Filer [ ] 

Indicate by check mark which financial statement item the registrant has elected
to follow: ITEM 17 [ ] ITEM 18 [X]                                              

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 [ ] NO [X]      

================================================================================

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 TABLE OF CONTENTS

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                                                                            Page
                                                                            ----
                                                                                
ITEM 1.   Identity of Directors, Senior Management and Advisors                3
ITEM 2.   Offer Statistics and Expected Timetable                              3
ITEM 3.   Key Information                                                      3
ITEM 4.   Information on the Company                                          21
ITEM 4A.  Unresolved Staff Comments                                           52
ITEM 5.   Operating and Financial Review and Prospects                        52
ITEM 6.   Directors, Senior Management and Employees                          86
ITEM 7.   Major Shareholders and Related Party Transactions                   94
ITEM 8.   Financial Information                                               98
ITEM 9.   Offer and Listing                                                  101
ITEM 10.  Additional Information                                             103
ITEM 11.  Quantitative and Qualitative Disclosure About Market Risks         116
ITEM 12.  Description of Securities Other than Equity Securities             122
ITEM 13.  Defaults, Dividend Arrearages and Delinquencies                    122
ITEM 14.  Material Modifications to the Rights of Security Holders and          
          Use of Proceeds                                                    122
ITEM 15.  Controls and Procedures                                            122
ITEM 16A. Audit Committee Financial Expert                                   123
ITEM 16B. Code of Ethics                                                     123
ITEM 16C. Principal Accountant Fees and Services                             123
ITEM 16D. Exemptions From Listing Standards for Audit Committees             124
ITEM 16E. Purchases of Equity Securities by the Company and Affiliated          
             Purchasers                                                      124
ITEM 17.  Financial Statements                                               124
ITEM 18.  Financial Statements                                               124
ITEM 19.  Exhibits                                                           125

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CURRENCY TRANSLATION                                                            

For the reader's convenience, financial information for 2005 has been 
translated from various foreign currencies to the U.S. dollar ("$" or U.S.      
dollar), as of December 31, 2005 in accordance with the following exchange      
rates:                                                                          

                                                                [Download Table]

           DECEMBER 31, 2005
CURRENCY           $        
--------   -----------------
                            
1 EURO            1.18      
1 GBP             1.73      
1 HUF             0.04      
1 RAND            0.11      
1 PLN             0.31      

   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.          

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                   

Not Applicable.                                                       

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                 

Not Applicable.                                                       

ITEM 3. KEY INFORMATION                                                         

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 2005 consolidated financial statements and are set
forth below in table format. Our 2005 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    
2005 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.                           

Through December 31, 2003, our financial statements were prepared in  
adjusted values (in NIS of constant purchase power), on the basis of changes in 
the consumer price index ("Inflation" and "CPI"), in accordance with Israeli    
GAAP. On January 1, 2004, Accounting Standard No. 12 of the Israel Accounting   
Standards Board ("IASB") came into force and effect ("Standard 12"). In         
accordance with the provisions of Standard 12, adjustment of financial          
statements to inflation shall cease 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     
periods commencing January 1, 2004 were, therefore, included in values to be    
hereinafter referred to as "Reported amounts".                                  

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 CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                                        [Enlarge/Download Table]

                                                          FOR THE YEAR ENDED DECEMBER 31                   
                                        ------------------------------------------------------------------ 
                                            2005                                                           
                                          Reported                                                         
                                        Convenience     2005       2004       2003       2002       2001   
                                        Translation   Reported   Reported   Adjusted   Adjusted   Adjusted 
                                        -----------   --------   --------   --------   --------   -------- 
                                           $'000                        (In Thousand NIS)                  
                                                                                                           
REVENUES                                                                                                   
Sale of real estate assets and                                                                             
   investments, net                        61,191     281,661     131,921         --        --          -- 
Commercial centers operations              31,057     142,957     311,893    347,056   279,776     132,212 
Hotels operations and management           58,670     270,057     218,365    189,205   206,679     139,226 
Sale of medical systems                    16,449      75,713      44,049         --        --          -- 
Realization of investments                    425       1,958      16,415     45,129    24,710          -- 
Other operational income                    9,648      44,409      13,238     13,495     1,509      10,030 
Other income                                   --          --          --         --    30,760      54,394 
                                          -------     -------     -------   --------   -------    -------- 
                                          177,440     816,755     735,881    594,885   543,434     335,862 
                                          -------     -------     -------   --------   -------    -------- 

COSTS OF EXPENSES                                                                                          
Commercial centers operations              34,248     157,640     271,392    257,913   218,673      85,786 
Hotels operations and management           56,331     259,293     207,152    188,672   205,635     133,652 
Cost and expenses of medical systems                                                                       
   operation                               10,771      49,577      26,039      8,720     8,015       7,023 
Other operational expenses                 10,166      46,793       3,655      3,510     1,392       7,311 
Research and development expenses, net     12,796      58,899      38,158     43,719    28,454      24,198 
General and administrative expenses         8,025      36,939      43,627     42,144    44,070      42,839 
Share in losses of associated                                                                              
   companies, net                           2,613      12,028      15,968     20,951     2,906       9,712 
Financial expenses (income), net           26,574     122,321      53,569    211,821     5,440    (101,559)
Other expenses                             12,406      57,106      51,428     10,477    45,965      20,317 
                                          -------     -------     -------   --------   -------    -------- 
                                          173,930     800,596     710,988    787,927   560,551     229,279 
                                          -------     -------     -------   --------   -------    -------- 

PROFIT (LOSS) BEFORE INCOME TAXES           3,511      16,159      24,893   (193,042)  (17,117)    106,583 
Income taxes (tax benefits)                 1,694       7,798      15,804    (20,217)   21,711      13,596 
                                          -------     -------     -------   --------   -------    -------- 
PROFIT (LOSS) AFTER INCOME TAXES            1,816       8,361       9,089   (172,825)  (38,828)     92,987 
Minority-interest in results of                                                                            
   subsidiaries, Net                       15,922      73,287      27,448     48,671    24,490      (5,915)
PROFIT (LOSS) FROM CONTINUING                                                                              
   OPERATIONS                              17,738      81,648      36,537   (124,154)  (14,338)     87,072 
Profit from discontinued operations,                                                                       
   net                                      1,285       5,917       6,810     12,073    54,752      18,759 
Cumulative effect of accounting change                                                                     
   at the beginning of the year              (135)       (622)         --         --        --          -- 
                                          -------     -------     -------   --------   -------    -------- 
NET INCOME (LOSS)                          18,888      86,943      43,347   (112,081)   40,414     105,831 
                                          =======     =======     =======   ========   =======    ======== 

                                                        [Enlarge/Download Table]

                                                                     (In NIS)                             
                                        ------------------------------------------------------------------
                                                                                                          
EARNINGS (LOSS) PER SHARE                                                                                 

From continuing operations                   0.80        3.66        1.59      (5.56)    (0.64)       3.92
From discontinued operations                 0.06        0.27        0.30       0.54      2.45        0.84
Cumulative effect of accounting change                                                                    
   at the beginning of the year             (0.01)      (0.03)         --         --        --          --
                                          -------     -------     -------   --------   -------    --------
Basic earnings (loss) per share              0.85        3.90        1.89      (5.02)     1.81        4.76
                                          =======     =======     =======   ========   =======    ========
Dividend declared per share                  2.69       12.39*         --         --        --          --
                                          =======     =======     =======   ========   =======    ========

*    We declared distribution of dividends twice during 2005, see "Item 4.      
  Information on the Company - A. History and Development of the Company -
Recent Developments" below.                                           

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INCOME STATEMENT DATA                                                           
AS PER U.S. GAAP (*):                                                           

                                                        [Enlarge/Download Table]

                                                              YEAR ENDED DECEMBER 31                       
                                        ------------------------------------------------------------------ 
                                        Convenience     2005       2004       2003       2002       2001   
                                        Translation   Reported   Reported   Adjusted   Adjusted   Adjusted 
                                        -----------   --------   --------   --------   --------   -------- 
                                           $'000                        (In Thousand NIS)                  
                                                                                                           
A) NET INCOME (LOSS) AND COMPREHENSIVE                                                                     
   INCOME:                                                                                                 
Net income (loss) according to U.S.                                                                        
   GAAP                                    21,800      103,344    (92,446)  (19,251)   (27,747)    (21,112)
Total comprehensive income (loss)                                                                          
   according to U.S. GAAP                  26,816      123,429   (149,915)   35,545    143,360      16,373 
Basic earning (loss) per ordinary                                                                          
   share as per U.S. GAAP (NIS)              0.98         4.53      (4.02)    (0.86)     (1.24)      (0.94)
Diluted earning (loss) per ordinary                                                                        
   share as per U.S. GAAP (NIS)              0.98         4.53      (4.02)    (0.86)     (1.35)      (0.96)

Weighted average of number of shares                                                                       
   and share equivalents under U.S.                                                                        
   GAAP (thousands)                        22,154       22,154     23,025    22,337     22,337      22,224 

(*)  For further information as to the differences between Israeli and U.S.     
   GAAP, as applicable to the Company's financial statements, see Note 25 to
our consolidated financial statements, included in Item 18 below.     

 SELECTED BALANCE SHEET DATA
(INCLUDING AS PER U.S. GAAP)

                                                        [Enlarge/Download Table]

                                                                   DECEMBER 31                              
                                     -----------------------------------------------------------------------
                                         2005                                                               
                                       Reported                                                             
                                     Convenience      2005        2004        2003        2002        2001  
                                     Translation    Reported    Reported    Adjusted    Adjusted    Adjusted
                                     -----------   ---------   ---------   ---------   ---------   ---------
                                        $'000                          (In Thousand NIS)                    
                                                                                                            
Current Assets                         188,058       865,632     736,339     577,687   1,006,237   1,132,194
Long term investments and                                                                                   
   receivables                          25,839       118,937     185,393     218,407     453,839     477,052
Hotels, commercial centers and                                                                              
   other fixed assets                  599,275     2,758,465   3,527,988   4,629,675   4,090,936   2,858,129
Other assets and deferred expenses       6,621        30,476      55,859      85,798      73,024      60,596
Assets related to discontinued                                                                              
   operations                            2,739        12,607      14,700      16,228     111,984     199,360
Total                                  822,532     3,786,117   4,520,279   5,527,795   5,736,020   4,727,331
Current Liabilities                    150,397       692,278     794,741   1,178,415   1,901,506   1,612,532
Long-term liabilities                  413,294     1,902,391   2,418,897   2,841,326   2,176,301   1,446,923
Liabilities related to                                                                                      
   discontinued operations              13,563        62,430      71,986      82,802     110,007     253,854
Convertible debentures                  13,514        62,159          --          --          --          --
Minority interest                        2,487        11,449     430,687     471,606     486,670     497,257
Shareholders' equity                   229,287     1,055,410     803,968     953,646   1,061,536     916,765
Total                                  822,532     3,786,117   4,520,279   5,527,795   5,736,020   4,727,331

Total assets according to U.S. GAAP    835,635     3,846,427   4,676,008   5,917,917   6,007,937   4,772,914
Total liabilities according to                                                                              
   U.S. GAAP                           608,633     2,801,532   3,905,673   4,891,985   5,040,903   3,955,945
Total shareholders equity                                                                                   
   according to U.S. GAAP              227,002     1,044,894     770,335   1,025,932     967,034     816,969

EXCHANGE RATES                                                                  

    The exchange rate between the NIS and U.S. dollar published by the Bank of
Israel was NIS 4.518 to the dollar on May 31, 2006. The exchange rate has       
fluctuated during the six months period beginning December 2005 through May 2006
from a high of NIS 4.725 to the dollar to a low of NIS 4.428 to the dollar. The 
monthly high and low exchange rates between                                     

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the NIS and the U.S. dollar during the six months period beginning December 2005
through May 2006, as published by the Bank of Israel, were as follows:          

                                                                [Download Table]

                      HIGH              LOW      
    MONTH       1 U.S. dollar =   1 U.S. dollar =
    -----       ---------------   ---------------
                                                 
December 2005      4.662 NIS         4.579 NIS   
January 2006       4.658 NIS         4.577 NIS   
February 2006      4.725 NIS         4.664 NIS   
March 2006         4.717 NIS         4.658 NIS   
April 2006         4.671 NIS         4.503 NIS   
May 2006           4.522 NIS         4.428 NIS   

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:                   

                                                                [Download Table]

               PERIOD                 EXCHANGE RATE
               ------                 -------------
                                                   
January 1, 2001 - December 31, 2001    4.219 NIS/$1
January 1, 2002 - December 31, 2002    4.738 NIS/$1
January 1, 2003 - December 31, 2003    4.544 NIS/$1
January 1, 2004 - December 31, 2004    4.483 NIS/$1
January 1, 2005 - December 31, 2005    4.488 NIS/$1

FORWARD LOOKING STATEMENTS                                                      

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") 
(collectively, the "Safe Harbor Provisions"). Forward-looking statements are    
typically identified by the words "believe," "expect," "intend," "estimate" and 
similar expressions. Such statements appear in this annual report and include   
statements regarding the intent, belief or current expectation of EMI or its    
directors or officers. 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 potential investors not to     
place undue reliance on such statements. 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.         

B.   CAPITALIZATION AND INDEBTEDNESS                                            

Not Applicable.                                                       

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS                                  

Not Applicable.                                                       

D.   RISK FACTORS                                                               

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 of this document is filed with the SEC. We  
take no responsibility to publicly update or revise such statements.            

  During 2005, our activities were divided into five principal fields: (i)
initiation, construction, operation, management and sale of shopping and        
entertainment centers in Israel and in Central and Eastern Europe; (ii)         
ownership, operation, management, and sale of hotels in major European cities;  
(iii) long term lease of real estate property, (iv) investments in the research 
and development, production and marketing of magnetic resonance imaging guided  
focused ultrasound treatment equipment, through InSightec Ltd. ("InSightec");   
and (v) other activities which consist of the distribution and marketing of     
women's fashion and accessories through our wholly-owned Israeli subsidiary,    
Mango Israel Clothing and Footwear Ltd. ("Mango") and venture-capital           
investments. In December 2005 we sold all of our holdings in the company holding
one of our hotels in London (referred to in clause (iii) above) which is subject
to a long term lease agreement.                                                 

The following is a list of the material risk factors that affect our  
business and our results of operation. We cannot                                

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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.                                                                      

RISKS RELATING TO THE SHOPPING AND ENTERTAINMENT CENTERS BUSINESS               

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.                                                                      

     Historically, most of the centers developed by us have been in Budapest and
other locations in Hungary. We do not currently believe that there are          
additional suitable locations for the development of shopping and entertainment 
centers in Hungary beyond those currently under development that satisfy our    
investment criteria. Therefore, our future success will depend in large part on 
our ability to identify locations and develop centers in other countries where  
we may have less experience and less market knowledge than in Hungary. As a     
result, we may not be as successful in the identification and development of    
future projects as we have been historically in Hungary.                        

ZONING RESTRICTION AND LOCAL OPPOSITION CAN DELAY OR PRECLUDE CONSTRUCTION OF A 
CENTER.                                                                         

  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. For example, a ministerial decision was issued in Greece
which changed the land use of certain property owned by our Greek subsidiary and
as a result thereof a shopping and entertainment center may not be built on such
land. See "Item 4. Information on the Company - B. Business Overview - Shopping 
and Entertainment Centers - Other Real Estate Properties" below. 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 DEPEND ON CONTRACTORS AND SUBCONTRACTORS TO CONSTRUCT OUR CENTERS.           

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 the construction phase 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.                                                                         

DELAYS IN THE COMPLETION OF CONSTRUCTION PROJECTS COULD AFFECT OUR SUCCESS.     

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 competition, 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:                                                                      

-    delays in obtaining zoning and other approvals;        

-    the unavailability of materials and labor;             

          -    the abilities of sub-contractors to complete work competently and
on schedule;                                      

        -    the surface and subsurface condition of the land underlying the
project;                                          

-    environmental uncertainties;                           

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-    extraordinary circumstances or "acts of god"; and      

    -    ordinary risks of construction that may hinder or delay the
successful completion of a particular project.    

    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 instances 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 ATTRACTING THIRD PARTIES TO ENTER INTO LEASE AGREEMENTS.    

     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 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 it. The failure of an anchor  
tenant to abide by these agreements may cause delays, or result in a decline in 
rental income (temporary or long term), the effect of which we may not be able  
to offset due to difficulties in finding a suitable replacement tenant.         

OUR RESULTS OF OPERATIONS MAY BE AFFECTED BY RETAIL CLIMATES AND TENANT         
BANKRUPTCIES.                                                                   

     Bankruptcy filings by retailers are normal in the course of our operations.
We are continually re-leasing vacant spaces arising out of tenant terminations. 
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.                                                 

GENERAL ECONOMIC CONDITIONS IN A REGION WILL AFFECT OUR TENANTS.                

    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 ARE DEPENDENT ON THE PRESENCE OF ANCHOR TENANTS.                             

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.                                                          

COMPETITION IS BECOMING MORE RAPID IN THE CERTAIN EASTERN EUROPEAN COUNTRIES.   

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.                                                    

RISKS RELATING TO THE HOTEL BUSINESS                                            

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                                       

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market conditions. Our hotels generally, and in particular, in London, Amsterdam
and Budapest, 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 over supply of rooms, such as in London, Amsterdam
and Budapest. Competitive factors within the industry include:                  

-    convenience of location and accessibility to business centers;             

-    room rates;                                                                

-    quality of accommodations;                                                 

-    name recognition;                                                          

-    quality and nature of service and guest facilities provided;               

-    reputation;                                                                

-    convenience and ease of reservation systems; and                           

-    the supply and availability of alternative lodging.                        

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 in particular in 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     
involves substantial risks, including:                                          

-    costs exceeding budget or amounts agreed to with contractors, because of   
several factors, including delays in completion of construction;      

-    competition for acquisition of suitable development sites from competitors,
who may have greater financial resources;                             

-    the failure to obtain zoning and construction permits;                     

-    unavailability of financing on favorable terms, if at all;                 

-    the failure of hotels to earn profits sufficient to service debt incurred  
in construction or renovation, or at all;                             

-    the failure to comply with labor and workers' union legal requirements;    

-    relationships with and quality and timely performance by contractors; and  

-    compliance with changes in governmental rules, regulations, planning and   
interpretations.                                                      

  As of May 31, 2006, we were involved in the following construction hotel
projects: (i) we commenced the renovation and the refurbishment of the Bucuresti
Hotel in Bucharest, Romania; and (ii) we commenced the internal renovation of   
the Ballet Institute Building in Budapest, Hungary. 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 the new or acquired 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 our newly acquired hotels will perform as we expect or   
that we will be able to realize projected cost savings.                         

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CONTINUOUS DELAYS WITH RESPECT TO RENOVATIONS OF THE PHYSICAL ENVIRONMENT       
APPROXIMATE TO THE ASTRID PARK PLAZA HOTEL IN BELGIUM MAY CONTINUE TO HAVE AN   
ADVERSE EFFECT ON ITS OPERATIONS.                                               

 The Municipality of Antwerp is engaged in extensive construction in the
Astridplein, located directly opposite the Astrid Park Plaza Hotel since 2000.  
The 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 DEPEND ON PARTNERS IN OUR JOINT VENTURES AND COLLABORATIVE ARRANGEMENTS.     

We own interests in seven operational hotels and are developing two   
additional hotels, in partnership with other entities, including in particular, 
the Red Sea Group of companies ("Red Sea") (for 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. 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, in which case we may 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 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 group (for the future management of two hotels, which   
are currently under construction and/or renovation: the National Ballet Building
in Hungary, which is intended to be operated under the "Regent" brand name, and 
the Bucuresti hotel in Bucharest, which 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. In order to comply with  
their requirements, or alternatively, to change a franchise affiliation for a   
particular hotel and disassociate ourselves from any of the "Park Plaza",       
"Regent" or "Radisson" tradenames, we may be forced to incur significant costs  
or make capital improvements.                                                   

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:  

   -    changes in global and national economic conditions, including global
or national recession;                                      

 -    a general or local slowdown in the real property, market which may
make it difficult to sell a property;                       

    -    political events that may have a material adverse effect on the hotel
industry;                                                   

 -    competition from other lodging facilities, and oversupply of hotel
rooms in a specific location;                               

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-    material changes in operating expenses, including as a result of 
changes in real property tax systems or rates;              

-    changes in the availability, cost and terms of financing;        

-    the effect of present or future environmental laws;              

-    our ongoing need for capital improvements and refurbishments; and

-    material changes in governmental rules and policies.             

OUR OWNERSHIP RIGHTS IN THE BUCURESTI HOTEL HAVE BEEN CHALLENGED.               

    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. To date, two claims have been filed challenging 
our ownership in the Bucuresti Hotel Complex both of which are currently pending
in the Bucuresti court of appeal (See "Item 8. Financial Information - Legal    
Proceedings" below). In addition, another appeal to the Romanian Supreme Court  
was filed requesting to nullify the public tender for the sale of Bucuresti     
shares, the privatization contract and the transfer of the Bucuresti shares to  
our Company, Domino. We anticipate, based on our legal counsel's advice, that   
the appeal will be rejected by the Supreme Court. Nevertheless, if any of the   
above appeals will be accepted, our results of operation will be materially     
adversely affected                                                              

RISKS RELATING TO BOTH THE SHOPPING AND ENTERTAINMENT CENTERS BUSINESS AND TO   
THE HOTEL BUSINESS                                                              

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 MAY BE HELD LIABLE FOR DESIGN OR CONSTRUCTION DEFECTS OF THIRD-PARTY         
CONTRACTORS.                                                                    

     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.                          

WE MAY BE AFFECTED BY SHORTAGES IN RAW MATERIALS AND EMPLOYEES.                 

   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 result in delay in  
the construction of the project and increase in the budget of the project and,  
consequently may 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 monetizing investments and from time to time, attempt to sell these 
identified properties and 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. 

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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:                   

  (i)  Absence of or modifications to permits or approvals. A construction
          permit may be revoked as a result of unauthorized delays in commencing
         construction; a construction permit may be cancelled altogether under
 certain circumstances, such as where the use of land does not
        correspond to the permitted usage; a need for a revised construction
     permit arises by reasons of governmental or other instructions to
        carry out modifications to our original architectural plans so as to
          comply, among other things, with environmental and traffic impact plan
   or obtain archeological clearance; new laws and regulations are
     enacted which limit the use of our land for structures other than
         centers or hotels; voluntary modifications to original plans where we
   encounter opportunities to substantially upgrade our project by
        acquisitions of adjacent land plots or expansion of original project
        or otherwise, may trigger the need for a revision to or modification
         of the issued construction permit if the permit becomes inapplicable;
        a revised construction permit may be required where changes occur to
          zoning plans which indirectly affect our proposed commercial center; a
      new, revised permit, when required, may nevertheless be denied for
  reasons beyond our control or following our failure to fulfill
preconditions or otherwise;                                 

(ii) Strategy in respect of long term lease commitments. In commercial
       centers, where a significant part of the rental areas is subject to
long term leases with a small group of retailers which is   
          distinguished (from other lessees) by a direct correlation between the
 rental fees paid by such retailer and the revenues from their
       respective rental areas, we may be exposed to a risk of rental fees
  rates being significantly lower than originally anticipated. A
       material decline in the long run in the business operations of such
     retailers may therefore, have an adverse affect on the results of
          operations of these commercial centers as well as on their recoverable
        amount. Other commercial centers, the rental areas of which have not
          been fully rented or which we have designated for an interim period as
        free of charge public areas, may be required to alter their original
      designation of use so as to serve, in the best optimal manner, our
        strategy for the center. Should these areas remain vacant or public,
       for a period longer than originally anticipated, our long-term cash
          flows may be negatively impacted and, as a result, it may decrease the
value of the center;                                        

  (iii) External Interruptions. Circumstances having significant impact on
       our real estate may include extensive and continuous infrastructure
          works carried out by municipalities or other legal authorities. Delays
         in completion of such works, beyond the anticipated target, may cause
         harm and damages to the results of operations of the real estate; and

(iv) Legal Issues and Other Uncertainties. Lawsuits that are pending, 
        whether or not we are a party thereto, may have a significant impact
          on our real estate assets and/or on certain of our shareholding rights
      in the companies owning such assets. Certain laws and regulations,
         applicable to our business in certain countries where the legislation
      process undergoes constant changes, may be subject to frequent and
    substantially different interpretations; agreements which may be
        interpreted by governmental authorities so as to shorten term of use
          of real estate, and which may be accompanied with a demand to demolish
the construction thereon erected, be that with or without   
        compensation, may significantly affect the value of such real estate
asset.                                                      

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.                             

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RISKS RELATING TO THE IMAGE GUIDED TREATMENT BUSINESS                           

INSIGHTEC IS CURRENTLY DEPENDENT ON SALES OF THE EXABLATE 2000 FOR THE TREATMENT
OF UTERINE FIBROIDS FOR VIRTUALLY ALL OF ITS REVENUE.                           

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 for this application to account for virtually all of its      
revenues for the foreseeable future, depending upon the timing of regulatory    
approval of 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 for this application 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 to track 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.                                                                  

Currently, InSightec has received regulatory approvals to market the  
ExAblate 2000 in the United States, Israel,                                     

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Russia, 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.      
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     
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       
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 metastatic     
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. 

INSIGHTEC IS DEPENDENT ON GENERAL ELECTRIC.                                     

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 estimates that there are over 2,400 GE MRI    
systems in the United States that are compatible with the ExAblate 2000 and     
InSightec estimates that there are a similar number of such GE MRI systems      
outside of the United States. 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 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, financing and servicing  
of our focused ultrasound products, and the design and supply of imaging devices
to be used in connection with our current and future MRgFUS products. These     
rights continue until five years after the sale by GE of all of our 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.                                 

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  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 Magnetic Resonance Guided Focused Ultrasound (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 depend 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.                                                                    

RISKS RELATING TO OUR OTHER ACTIVITIES                                          

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(TM) (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.                                                  

A RISE IN WAGE LEVELS IN ISRAEL COULD ADVERSELY AFFECT MANGO'S FINANCIAL        
RESULTS.                                                                        

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 the manufacturer of Mango products 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                                                               

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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, 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.                  

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RISKS RELATING TO ISRAEL                                                        

SECURITY AND ECONOMIC CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS.           

     We are incorporated under Israeli law and our principal offices are located
in Israel. In addition, the Arena shopping and entertainment center is located  
in Herzliya, Israel as well as our operations in our other activities segments, 
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.                                                       

AN INCOME TAX REFORM IN ISRAEL MAY ADVERSELY AFFECT 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. See "Item
10. Additional Information - E. Taxation - Taxation in Israel - Tax Reform in   
Israel" below. 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.                  

   We are incorporated in Israel. Some of our directors and officers are not
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 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                                           

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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.                       

ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT OUR SHAREHOLDERS.              

  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.                                            

RISKS RELATING TO OPERATIONS IN EASTERN EUROPE                                  

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
that 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         

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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 generally insist upon receiving 
an environmental report as a condition for purchase, or alternatively, conduct  
environmental tests during our due diligence investigations. Also, 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. Nevertheless, 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 have found sub-terranean oil storage tanks in our property in   
Rybnik, Poland, which caused a delay of eight months in the construction works  
of this center and an increase in construction costs.                           

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 (See "Item 3. Key
Information - D. Risk Factors - Risks Relating to the Hotel Business" above and 
"Item 8. Financial Information - Legal Proceedings" below).                     

GENERAL                                                                         

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.   
See also "Item 8. Financial Information - Legal Proceedings" below. 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.                          

WE HAVE SIGNIFICANT CAPITAL NEEDS AND ADDITIONAL FINANCING MAY NOT BE AVAILABLE.

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         

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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.                    

OUR HIGH LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.   

   We are highly leveraged and have significant debt service obligations. As
of December 31, 2005, we had total debts to banks and other financial           
institutions in the aggregate amount of NIS 2,258 million (approximately $491   
million). 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 borrowings        
outstanding 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 could be more vulnerable to general adverse economic and industry       
conditions;                                                           

-    we may find it more difficult to obtain additional financing to fund future
working capital, capital expenditures and other general corporate     
requirements;                                                         

-    we will be required to dedicate a substantial portion of our cash flow from
   operations to the payment of principal and interest on our debt, reducing
the available cash flow to fund other projects;                       

-    we may have limited flexibility in planning for, or reacting to, changes in
our business and in the industry; and                                 

-    we may have a competitive disadvantage relative to other companies in our  
business segments with less debt.                                     

    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.                                           

RESULTS OF OPERATIONS FOR US FLUCTUATE DUE TO THE SEASONALITY OF OUR VARIOUS    
BUSINESSES.                                                                     

    The annual revenues and earnings of our shopping and entertainment centers
business, hotels business and Mango, 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, 2006, Mordechay Zisser, the Executive Chairman of our board
of directors, held, directly or indirectly, approximately 48.73% 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 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.                                  

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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 
in order to sell 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.                

ITEM 4. INFORMATION ON THE COMPANY                                              

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     
National Market (ticker symbol: EMITF) and on the Tel Aviv Stock Exchange. Our  
executive offices are located at 13 Mozes Street, Tel-Aviv 67442, Israel. You   
may reach us by telephone at (972-3) 608-6010 or by fax at (972-3) 695-3080. 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 during
2005:                                                                           

   -    Initiation, construction, operation, management and sale of shopping
          and entertainment centers in Israel and in Central and Eastern Europe.

-    Hotels ownership, primarily in major European cities, as well as 
operation, management and sale of same.                     

-    Long-term lease of real estate property.                         

    -    Investments in the research and development, production and marketing
     of magnetic resonance imaging guided focused ultrasound treatment
equipment, through InSightec.                               

-    Other activities consisting of the distribution and marketing of 
    women's fashion and accessories through our wholly-owned Israeli
subsidiary, Mango, and venture-capital investments.         

    In December 2005 we sold all of our holdings in the company holding one of
our hotels in London (referred to in clause (iii) above) which is subject to a  
long term lease agreement.                                                      

The following are the highlights of our main business activities and  
investments during 2005 and through the date of this filing by order of         
occurrence:                                                                     

-    PRIVATE ISSUANCE OF UNSECURED NON-CONVERTIBLE DEBENTURES                   

Between February and June 2006 we have issued two series of unsecured 
non-convertible debentures to investors in Israel in the aggregate principal    
amount of approximately NIS 527 million (approximately $114 million). For       
additional information on the terms of this private issuance, including certain 
undertaking we have taken towards our investors. See "Item 5. Operating and     
Financial Review and Prospects - B. - Liquidity and Capital Resources -         
Liquidity" below.                                                               

-    APPROVAL OF THE TOWN PLAN ("KSZT") OF THE DREAM ISLAND PROJECT ON THE OBUDA
ISLAND IN THE DANUBE RIVER AND SIGNING OF A FRAMEWORK CITY REGULATION 
AGREEMENT WITH THE BUDAPEST CAPITAL 3RD DISTRICT AND BUDAPEST CAPITAL 
MUNICIPALITY                                                          

    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. Formal  
regulatory approvals of the KSZT modification contained in the Budapest General 
Assembly resolution are currently pending. The proposed plan of the Dream Island
project is to construct on approximately 3.2 million square feet of land located
on the Obuda Island in the Danube River, a tourist and entertainment area in    
central Budapest which includes designations for offices, commercial space,     
tourism, entertainment and leisure and hotels. See "- B. Business Overview -    
Shopping and Entertainment Centers - Other Real Estate Properties" below.       

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-    REFINANCING OF THREE HOTELS IN THE UNITED KINGDOM                          

On March 2, 2006, we (through our three jointly-controlled subsidiary 
companies) refinanced our three hotels in London (the Riverbank Park Plaza      
Hotel, the Victoria Park Plaza Hotel and the Sherlock Holmes Park Plaza Hotel)  
for a non-recourse refinancing loan in the amount of L195 million (in which our 
share amounted to approximately L97.5 million (approximately $168 million)). See
"Item 5. Operating and Financial Results and Prospects. - B. Liquidity and      
Capital Resources - Loans" below.                                               

-    DIVIDEND DECLARED AND PAID                                                 

On December 22, 2005, we declared a dividend in an aggregate amount of
approximately NIS 130 million (approximately $28.2 million). The dividend was   
paid on January 17, 2006 to shareholders of record as of January 4, 2006.       

-    SALE OF ONE OF OUR HOTELS IN LONDON                                        

 In December 2005, we, together with the remaining holders of Shaw Hotel
Holding B.V, sold all of our holdings (in which we were a 30% shareholder) in   
Shaw Hotel Holding B.V., the owner of one of our hotels in London, to an        
unrelated third party at an asset value of L74.8 million (approximately $129    
million). The net consideration received by us (after deduction of bank loans   
and other working capital items) was approximately L4 million (approximately    
$6.9 million). The hotel is located in London, the United Kingdom, and is       
subject to a long-term lease agreement executed in 2003 for a period of 25      
years. See "- B. Business Overview - Long Term Lease of Real Estate Property"   
below.                                                                          

-    PURCHASE OF A LAND IN KEREPESI STREET IN BUDAPEST, HUNGARY                 

 In November 2005, we (through our subsidiary) purchased a large area of
land measuring approximately 1.32 million square feet situated on Kerepesi      
Street in central Budapest, the former site of the Hypodrome. . The acquisition 
was carried out by the purchase of the entire equity rights of four companies   
holding all the freehold ownership and usage rights to the site. The purchase   
price of the entire equity rights represents a site value of approximately E21  
million (approximately $24 million), out of which E3.9 million is the quota     
(similar to shares) purchase price and the remaining are assumed liabilities.   

-    CONSUMMATION OF A MERGER BY WAY OF EXCHANGE OF SHARES WITH ELSCINT         

    On August 21, 2005, EMI and Elscint signed an Agreement and Plan of Merger
pursuant to which each ordinary share of Elscint (other than Elscint ordinary   
shares held by EMI and by or for the benefit of Elscint) was converted into 0.53
ordinary share of EMI. The merger was completed on November 23, 2005 and as of  
such date, Elscint ordinary shares have ceased to trade on the New York Stock   
Exchange and Elscint became a wholly-owned subsidiary of EMI. See "Item 10.     
Additional Information - Material Contracts - General" below.                   

-    SALE OF FOUR OPERATIONAL SHOPPING AND ENTERTAINMENT CENTERS IN POLAND AND  
ENTERING INTO AGREEMENTS FOR THE SALE OF ADDITIONAL FOUR CENTERS UNDER
DEVELOPMENT IN POLAND AND THE CZECH REPUBLIC                          

    In July 2005, our indirect wholly-owned subsidiary, Plaza Centers (Europe)
B.V. ("PC") sold to the Klepierre Group of France ("Klepierre"), one of the     
leading owners and operators of shopping centers in Europe, four operational    
shopping and entertainment centers in Poland as well as PC's management company 
in Poland at an aggregate asset value of approximately E204 million             
(approximately $241 million). The aggregate net consideration was approximately 
E73.8 million (approximately $88.7 million) which is subject to post closing    
adjustments. In addition, Klepierre has also undertaken, subject to the         
fulfillment of certain conditions, to acquire four additional shopping and      
entertainment centers in Poland and in the Czech Republic which are currently   
under construction, at a price calculated on the basis of the gross rentals on  
the date of delivery, capitalized at agreed yields. Klepierre was also awarded  
an option to acquire an additional shopping center presently under development  
in Poland, upon the fulfillment of certain conditions. For additional           
information regarding the agreement including its material terms, see "Item 10. 
Additional Information - C. Material Contracts - Shopping and Entertainment     
Centers" below.                                                                 

-    ACQUISITION OF MANGO                                                       

 In May 2005, Elscint completed the acquisition of the entire equity and
voting rights of Mango Israel Clothing and Footwear Ltd. ("Mango"), the Israeli 
distributor and retailer of the international retail brand name MANGO-MNG(TM) in
consideration for approximately E2.6 million ($3.1 million) and additional      
consideration paid for inventories and other working capital items. Concurrently
with the above agreement, Mango executed a distribution agreement with the      
owners of the MANGO-MNG(TM) brand name for a 10-year period.                    

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-    SALE OF FOUR OPERATIONAL SHOPPING AND ENTERTAINMENT CENTERS IN HUNGARY     

     On April 21, 2005, PC sold four shopping centers in Hungary to a subsidiary
of the Dawnay Day Group ("Dawnay Day"), a leading financial and property group  
in the United Kingdom, at an aggregate asset value of approximately E54.4       
million (approximately $64.3 million) determined as of the closing date. The    
aggregate net consideration (after deduction of bank loans and other working    
capital items) was approximately E17.2 million (approximately $20.7 million).   
See "Item 10. Additional Information - Material Contracts - Shopping and        
Entertainment Centers" below.                                                   

-    DIVIDEND DECLARED AND PAID                                                 

   On February 7, 2005, we declared a dividend in an aggregate amount of $37
million. The dividend was paid on March 17, 2005 to shareholders of record as of
March 2, 2005.                                                                  

PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES                                 

     The following is a description of our capital expenditures and divestitures
during the years 2003, 2004 and 2005 and capital expenditures and divestitures  
in progress (our share in each expenditure and divestment is 100% unless        
otherwise indicated):                                                           

FISCAL YEAR 2003                                                                

THE SHOPPING AND ENTERTAINMENT CENTERS BUSINESS                       

    -    Continuing investments in shopping and entertainment centers projects
    - Throughout 2003, we continued the construction of shopping and
    entertainment centers (mainly in the "Arena" center Herzliya and
          Poznan project) for a total investment of approximately $62.7 million.
      We financed the construction of the centers through long term bank
facilities and shareholder loans provided to the subsidiary.

THE HOTEL BUSINESS                                                    

   -    Riverbank Park Plaza Hotel - The total additional amount invested by
       our jointly controlled subsidiary in the Riverbank Park Plaza Hotel
          during 2003 was L22.6 million of which our share is 50%. These amounts
were expended principally on construction. We financed the  
       construction of the hotel through long term bank facilities and our
available funds.                                            

-    Aquatopia project - The total cost of the construction of the    
Aquatopia within the Astrid Park Plaza Hotel facility was   
          approximately E12.5 million. During 2003 our subsidiary invested E11.1
        million in this project. Elscint financed these costs mainly through
shareholder loans.                                          

-    Centerville Apartment Hotel - The total amount invested by our   
          subsidiary in the renovation of the Centreville Apartment Hotel in the
Bucuresti complex during 2003 was E3.1 million.             

FISCAL YEAR 2004                                                                

-    Klepierre transaction - Acquisition from PC by Klepierre of 12   
         shopping and entertainment malls owned and operated by PC in Hungary.
       The net consideration received by PC amounted to E94.1 million. See
       Item 10. Additional Information - Material Contracts - Shopping and
         Entertainment Center" below. Such investments were financed mainly by
bank loans and shareholder loans.                           

    -    Continuing investments in shopping and entertainment centers projects
  - During 2004, we were in the process of constructing, through
         subsidiaries, ten shopping and entertainment centers (Poznan, Rybnik,
       Sosnoweic, Bestes, Pilsen, Lublin, Riga, Lodz, Helios and Arena) as
      well as an extension to another center (Duna extension). The total
      additional amount invested in these projects was approximately $36
        million. These amounts were expended principally on construction. We
   financed the construction of the centers through long term bank
facilities and shareholder loans provided to the subsidiary.

THE HOTEL BUSINESS                                                    

   -    Riverbank Park Plaza Hotel - The total additional amount invested by
         our jointly controlled subsidiary in this project during 2004 was L34
  million of which our share is 50%. These amounts were expended
          principally on construction. We financed the construction of the hotel
       through long term bank facilities and shareholder loans provided to
the subsidiary.                                             

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-    Apartment Hotel Bucuresti Complex (Centerville)-The total amount 
          invested by our subsidiary in the renovation of the hotel apartment in
       the Bucuresti complex during 2004 was E2 million. We financed these
       costs through short-term facility and available free cash flow from
the operations of the Centreville apartment hotel.          

THE IMAGE GUIDED TREATMENT BUSINESS                                   

   In 2004, InSightec signed an agreement for an internal round of financing
totaling $21 million from its existing shareholders in which our share totaled  
$7.5 million. The convertible notes may be converted in whole or in part at any 
time into ordinary shares of InSightec at a conversion rate of $7.30 per share. 

FISCAL YEAR 2005                                                                

THE SHOPPING AND ENTERTAINMENT CENTERS BUSINESS                       

    -    Klepierre transaction - In July 2005 PC sold to Klepierre a portfolio
         that includes our four operational shopping and entertainment centers
         in Poland. The net consideration received by PC for the sale of these
        centers amount to E73.8 million ($87.1 million). In addition, PC and
      Klepierre have entered into an agreement for the future sale of an
     additional four centers under development in Poland and the Czech
      Republic. Klepierre also has an option to acquire a fifth shopping
    center under development in Poland, subject to the attainment of
certain conditions.                                         

-    Dawnay Day Transaction -In April 2005, PC sold four shopping and 
     entertainment centers in Hungary to the Dawnay Day Group ("Dawnay
      Day"), in the aggregate net consideration (after deduction of bank
         loans and other working capital items) of approximately E17.2 million
($20.7 million).                                            

    -    Continuing investments in shopping and entertainment centers projects
  - During 2005, we were in the process of constructing, through
         subsidiaries, ten shopping and entertainment centers (Poznan, Rybnik,
       Sosnoweic, Bestes, Pilsen, Lublin, Riga, Lodz Kerepesi and Helios).
The total additional amount invested in these projects was  
         approximately $63 million. These amounts were expended principally on
          construction. We financed the construction of the centers through long
          term bank facilities and shareholder loans provided to the subsidiary.

 -    Kerepesi Budapest project - In November 2005, we purchased a large
     area of land situated on Kerepesi Street in central Budapest, the
         former site of the Hypodrome. The purchase price of the entire equity
    rights represents a site value of E21 million (approximately $24
       million), out of which E3.9 million is the quota purchase price and
the remaining are assumed liabilities.                      

    -    Acquisition of the Remaining 50% of Sadyba Best-Mall - In May 2005 PC
      completed the acquisition of the 50% not owned by it in the Sadyba
         commercial and entertainment center in Warsaw, Poland, for a purchase
price of approximately $19.5 million.                       

THE HOTEL BUSINESS                                                    

     -    Sale of Shaw hotel - In December 2005, we sold all of our holdings (in
          which we were a 30% shareholder) in Shaw Hotel Holding B.V., the owner
         of one of our hotels in London, to an unrelated third party for a net
consideration of L4.0 million ($6.9 million).               

    -    Construction and renovation of the Centerville apartment hotels - The
      total amount invested in this project during 2005 was E7.0 million
          ($8.3 million). Such investments are in connection with the renovation
     of an additional 60 apartments as well as other facilities in the
    hotel. We financed this project through a bank facility and cash
resulted from operational activities.                       

    -    Riverbank hotel - The total amount invested by our subsidiary in this
        project was L18.6 million ($32.4 million) in which our share is 50%.
         We financed this project through a bank loan and shareholder loans to
the subsidiary.                                             

    -    Aquotopia project - During 2005 we invested an amount of E3.0 million
       ($3.5 million) in the refurbishment of the Aquotopia project within
the Astrid Plaza facility. We financed this project through 
shareholder loans to the subsidiary.                        

OTHER ACTIVITIES                                                      

   In May 2005, we completed the acquisition of the entire equity and voting
         rights of Mango in consideration for approximately E2.6 million ($3.1
million) as well as working capital adjustments.            

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PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES CURRENTLY IN PROGRESS           

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

SHOPPING AND ENTERTAINMENT CENTERS BUSINESS                           

     -    The additional estimated costs expected to be invested in our projects
      which are currently under construction (Rybnik, Sosnoweic, Pilsen,
Lublin, Riga, Lodz, Kerepesi and Helios) is E353 million. We
expect to finance these projects by long term bank loans and
      shareholder loans. We expect to complete the construction of these
projects in 2007 - 2009.                                    

-    Dream Island project - In May 2006, the Budapest General Assembly
          approved the amendment to the local town-planning scheme (KSZT), which
    approves the construction plans for this site. Formal regulatory
        approvals of the KSZT modification contained in the Budapest General
      Assembly resolution are currently pending. We plan to commence the
     construction of this Project in 2007 and we expect to complete it
          within six years. The total estimated costs expected to be invested in
this project is E1,100 million.                             

HOTEL BUSINESS                                                        

    Bucuresti Hotel Complex, Bucharest, Romania - In January 2006 we commenced
the renovation of the Bucuresti Hotel in order to enable compliance with the    
international standards required for a four star business hotel. The additional 
estimated costs expected to be invested in this project is E33 million. We      
expect to complete the construction of this project in late 2007. Such          
investment will be financed by bank loans.                                      

B.   BUSINESS OVERVIEW                                                          

  During 2005, our activities were divided into five principal fields: (i)
initiation, construction, operation, management and sale of shopping and        
entertainment centers in Israel and in Central and Eastern Europe; (ii)         
ownership, operation, management, and sale of hotels in major European cities;  
(iii) long term lease of real estate property, (iv) investments in the research 
and development, production and marketing of magnetic resonance imaging guided  
focused ultrasound treatment equipment, through InSightec Ltd. ("InSightec");   
(v) other activities consisting of the distribution and marketing of women's    
fashion and accessories through our wholly-owned Israeli subsidiary, Mango      
Israel Clothing and Footwear Ltd.; and venture-capital investments. In December 
2005, we sold all of our holdings in the company holding one of our hotels in   
London, which was the subject of the long term lease agreement referred to in   
clause (iii) above.                                                             

     Below is a description of our five principal fields of activity since 2005:

SHOPPING AND ENTERTAINMENT CENTERS                                              

  The shopping and entertainment centers business includes our operational
shopping and entertainment centers and other shopping and entertainment centers 
which are currently under construction and/or development. In addition, this    
business includes the Dream Island project, a tourist and entertainment area in 
central Budapest which includes designations for commercial space, tourism,     
entertainment and leisure hotels and apartments hotel, which is currently in    
preliminary stages of development as well as other income producing real estate 
properties and other properties.                                                

SHOPPING AND ENTERTAINMENT CENTERS - GENERAL                          

  We presently have one operating shopping and entertainment center in the
Czech Republic (which is expected to be sold to Klepierre effective as of June  
30, 2006, see "- material transactions in the shopping and entertainment        
centers" below), one in Israel and seven other projects in various stages of    
planning and development in Poland, Hungary, the Czech Republic and Latvia. The 
operations of each of our shopping and entertainment center projects are        
conducted through a special purpose project corporation.                        

     Generally, approximately 75% 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, an   
IMAX three-dimensional cinema screen. The food court consists of a range of     
restaurants, offering a variety of culinary opportunities from fast food to     
gourmet foods. Unless otherwise indicated in the tables below, we own 100% of   
each identified center.                                                         

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    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 shopping and entertainment centers business currently consists of the
following projects:                                                             

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Operational Centers                                                   

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                                                  APPROXIMATE                                                                       
                                     APPROXIMATE  CONSTRUCTED    APPROXIMATE     APPROXIMATE                                        
  NAME OF   COMMENCEMENT              LAND AREA       AREA        LEASEABLE     OCCUPANCY AT  PARKING                               
  CENTER    OF OPERATION    TITLE      (SQ.FT.)     (SQ.FT.)    AREA (SQ. FT.)    03/31/06     SPACES   ENCUMBRANCES   MISCELLANEOUS
  -------   ------------  ---------  -----------  -----------  ---------------  ------------  -------  -------------  --------------
                                                                                                                                    
NOVO PLAZA  March 2006    Freehold     355,500      591,800    Retail: 243,000  Retail: 92%      900   First ranking  Sub lease     
Prague,                                                        Offices &        Office &               mortgage on    rights for 25 
Czech                     Leasehold     86,080                 Storage: 35,000  Storage: 40%           the land and   years until   
Rep (1)                                                                                                on the         2024 with an  
                                                                                                       center. Two    option to     
                                                                                                       second         extend the    
                                                                                                       ranking        lease for     
                                                                                                       mortgages are  additional 25 
                                                                                                       currently      years which   
                                                                                                       being carried  expires in    
                                                                                                       out on the     2049.         
                                                                                                       land and on a                
                                                                                                       new building                 
                                                                                                       that is being                
                                                                                                       constructed.                 

ARENA       June 2003     Leasehold    269,000      830,000    Retail: 274,000  Retail: 95%    1,250   First ranking  Capitalized   
Herzliya,                                                      Offices &        Offices &              mortgage on    lease rights  
Israel                                                         Storage: 45,000  Storage: 56%           the land and   for 49 years  
                                                                                                       on the         until 2037    
                                                                                                       center.        with an option
                                                                                                                      to extend the 
                                                                                                                      lease for     
                                                                                                                      additional 49 
                                                                                                                      years which   
                                                                                                                      expires in    
                                                                                                                      2086. Lease   
                                                                                                                      may be        
                                                                                                                      terminated if 
                                                                                                                      Arena does not
                                                                                                                      meet the terms
                                                                                                                      of the lease. 

(1)  This center is the subject of a sale agreement with Klepierre. Delivery is 
expected on June 30, 2006. See below.                                 

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Centers under Development                                             

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                                                      LEASEABLE                                                                  
                                         APPROXIMATE     AREA     PARKING                                                        
                  SCHEDULED               LAND AREA    (SQ.FT.)   SPACES                                                         
NAME OF PROJECT    OPENING     TITLE      (SQ.FT.)       (1)        (1)      ENCUMBRANCES      PERMITS         MISCELLANEOUS     
---------------  ----------  ---------  ------------  ---------  --------  ---------------  ------------  -----------------------
                                                                                                                                 
LUBLIN PLAZA        2007     Perpetual     182,812     277,000      690    First ranking    All required  The property is subject
Lublin, Poland               Usufruct                                      mortgage on      permits were  to a joint venture     
(2)(3)                                                                     the building.    issued with   agreement, see below.  
                                                                                            respect to                           
                                                                           Certain          the first     Perpetual usufruct for 
                                                                           easements were   stage         99 years until 2097.   
                                                                           granted to       (congress     The perpetual usufruct 
                                                                           owners of        and           may be terminated if   
                                                                           adjacent         commercial    the use of the land    
                                                                           plots.           areas).       does not correspond to 
                                                                                            No permits    the approved usage, or 
                                                                                            were issued   in the occurrence of   
                                                                                            with respect  unauthorized delays. We
                                                                                            to the        undertook to complete  
                                                                                            second stage  the first stage of the 
                                                                                            (hotel and    project by August 31,  
                                                                                            office        2006 and to commence   
                                                                                            building).    the second stage by    
                                                                                            We are        September 30, 2009 and 
                                                                                            currently     ending it by the end of
                                                                                            not           2011. Failure to meet  
                                                                                            considering   these dates requires   
                                                                                            the           the payment of a       
                                                                                            development   penalty in the amount  
                                                                                            of the        of $0.8 million. If the
                                                                                            second        perpetual usufruct is  
                                                                                            stage.        terminated, we will be 
                                                                                                          entitled to            
                                                                                                          reimbursement of our   
                                                                                                          investment in the      
                                                                                                          construction of the    
                                                                                                          complex until the date 
                                                                                                          of termination.        
                                                                                                          We have the right to   
                                                                                                          acquire the land upon  
                                                                                                          completion of          
                                                                                                          construction in        
                                                                                                          consideration for up to
                                                                                                          approximately $2.6     
                                                                                                          million. If we choose  
                                                                                                          not to conduct the     
                                                                                                          second stage of the    
                                                                                                          transaction we are     
                                                                                                          required to pay a      
                                                                                                          penalty of             
                                                                                                          approximately PLN 2.5  
                                                                                                          million (approximately 
                                                                                                          $0.8 million)          

RYBNIK PLAZA        2007     Freehold      198,823     195,000      470    First ranking    All required                         
Rybnik, Poland                                                             mortgage on the  permits were                         
(4)                                                                        land.            issued.                              

SOSNOWIEC PLAZA     2007     Freehold      127,600     139,000      400           --        All required  Perpetual usufruct     
Sosnowiec,                                                                                  permits were  right until December   
Poland (4)                   Perpetual     16,170                                           issued.       17, 2092. The perpetual
                             Usufruct                                                                     usufruct may be        
                                                                                                          terminated before the  
                                                                                                          lapse of the specified 
                                                                                                          time if the pereptual  
                                                                                                          usufructee uses the    
                                                                                                          land in a manner       
                                                                                                          self-evidently         
                                                                                                          inconsistent with its  
                                                                                                          designation in the     
                                                                                                          agreement, in          
                                                                                                          particular if he has   
                                                                                                          not erected the        
                                                                                                          buildings or facilities
                                                                                                          specified in the       
                                                                                                          agreement. If the      
                                                                                                          perpetual usufruct is  
                                                                                                          terminated, we will be 
                                                                                                          entitled to claim the  
                                                                                                          reimbursement of our   
                                                                                                          investment in the      
                                                                                                          construction of the    
                                                                                                          complex.               

PILZEN PLAZA        2007     Leasehold    370,600 +    220,000      600           --        Building      Leasehold rights for 99
Pilzen, Czech                           561,000 as a                                        permits       years (and 97 years for
Republic (4)                                park                                            pending.      a land area of         
                                                                                                          approximately 89,523   
                                                                                                          square leased for the  
                                                                                                          construction of a      
                                                                                                          parking building) until
                                                                                                          2102.                  

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                                                      LEASEABLE                                                                  
                                         APPROXIMATE     AREA     PARKING                                                        
                  SCHEDULED               LAND AREA    (SQ.FT.)   SPACES                                                         
NAME OF PROJECT    OPENING     TITLE      (SQ.FT.)       (1)        (1)      ENCUMBRANCES      PERMITS         MISCELLANEOUS     
---------------  ----------  ---------  ------------  ---------  --------  ---------------  ------------  -----------------------
                                                                                                                                 
RIGA PLAZA          2007     Freehold      856,000     479,000     1,500   Undertaking to   City          The property is subject
Riga, Latvia                                                               encumber the     approval for  to a joint venture     
(2)                                                                        land upon        the plans     agreement, see below.  
                                                                           drawdown from    was received                         
                                                                           the facility     in May 2006.                         
                                                                           agreement.                                            

LODZ PLAZA        Not yet    Freehold      44,589           --        --   First ranking    Demolition    Perpetual usufruct     
Lodz, Poland     determined                                                mortgage on      permits were  right until December 5,
(4)                          Perpetual     311,964                         land.            issued.       2089.                  
                             Usufruct                                                                                            
                                                                                                          Tenancy for 30 years   
                             tenancy        2,636                                                         until August 29, 2031, 
                                                                                                          with two options to    
                                                                                                          extend for additional  
                                                                                                          30 years which expires 
                                                                                                          in 2061 and for 20     
                                                                                                          years which expires in 
                                                                                                          2081.                  

                                                                                                          This project 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.          

ARENA PLAZA         2007     Freehold   1.32 million   713,000     2,600   First ranking    All required                         
(KEREPESI)                                                                 mortgage on the  permits were                         
Budapest,                                                                  land             issued.                              
Hungary                                                                                                                          

(2)  Details provided in these items are presented according to the plans and   
designs of each respective center and may subsequently differ.        

(3)  PC has 50% interest in this project.                                       

(4)  This center is the subject of a purchase option awarded to Klepierre, see  
below.                                                                

(5)  This center is the subject of a sale agreement with Klepierre, see below.  

    The expected future costs for the completion of each of the above shopping
and entertainment centers are detailed in "Item 4. Information on the Company - 
A. Business and Development of the Company - Recent Developments - Principal    
Capital Expenditures and Divestitures" above.                                   

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    Set forth below is additional information with respect to our ownership of
certain of the above real estate properties:                                    

LUBLIN PLAZA                                                          

  In May 2002, PC entered into a joint venture agreement with an unrelated
third party for the purchase of 50% of the ownership of Movement Poland S.A.    
("MPSA"), a company registered in Lublin, Poland, for a consideration of        
approximately $1.5 million.                                                     

   Under the joint venture agreement each party was granted a right of first
offer and a tag along right in the event the other party wishes to sell its     
rights in MPSA. The agreement further provides for a buy-out mechanism in the   
event of certain deadlocks. Financing of the project is to be made by both      
parties in equal share, except for an initial $4 million investment to be       
provided by PC. PC and the other party are currently in dispute regarding the   
shareholders loan required to be invested by the other party. The other party   
alleges that the increase in the project budget in comparison with the original 
one was caused by the acts or omissions of PC and, accordingly, that PC alone   
should bear all additional equity loans. PC disputes this allegation and has    
demanded the fulfillment of the agreement in accordance with its terms. PC      
decided, without waiving its right towards the other party, to provide MPSA with
an additional financing by way of equity loans. Through December 31, 2005, PC   
invested indirectly in MPSA a total amount of approximately $10.5 million.      

RIGA PLAZA                                                            

   In February 2004, PC and Development Capital Corporation (Lativa) ("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 Diskna ("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.        

  Material Transactions in the Shopping and Entertainment Centers business
during 2005                                                                     

     In April 2005, PC sold its entire equity and voting rights in the companies
owning four shopping and entertainment centers in Hungary (Pecs Plaza,          
Szombathely Plaza, Veszprem Plaza and Sopron Plaza) to a subsidiary of Dawnay   
Day. The aggregate net cash consideration paid to PC totaled approximately E17.2
million (approximately $20.7 million).                                          

During July 2005, PC entered into definitive agreements with Klepierre
which consisted of a two-stage transaction. Within the framework of first stage 
of the transaction, consummated on July 29, 2005, Klepierre acquired the entire 
equity and voting rights in the companies owning four operational shopping      
centers in Poland (Sadyba Best Center, Krakow Plaza, Ruda Slaska Plaza and      
Poznan Plaza) as well as the management company in Poland. The aggregate net    
consideration paid for the purchase of the above companies was approximately    
E73.8 million (approximately $88.7 million) which is subject to post closing    
adjustments. Under the second stage of the transaction, Klepierre has undertaken
to acquire the entire equity and voting rights in the companies presently       
developing two shopping centers in Poland (Rybnik Plaza and Sosnowiec Plaza) and
two companies developing shopping centers in the Czech Republic (Novo Plaza and 
Pilsen Plaza). Upon the completion and delivery of the shopping centers,        
Klepierre will pay a purchase price calculated on the basis of the gross rentals
on the date of delivery, capitalized at agreed yields. In addition, PC granted  
to Klepierre an option to acquire an additional shopping center presently under 
development in Poland (Lublin Plaza), upon the fulfillment of certain           
conditions.                                                                     

 On the same day, PC entered into an additional agreement with Klepierre
pursuant to which Klepierre purchased the remaining 50% of the equity and voting
rights in our Hungarian management company (in addition to the 50% of the equity
and voting rights already purchased by Klepierre from PC in 2004), in           
consideration for E0.9 million ($1.1 million).                                  

    For additional information on all of the above agreements, including price
adjustments and guarantees, see "Item 10. Additional Information - C. Material  
Contracts - Shopping and Entertainment Centers" below.                          

Project Management and Supervision                                    

During the planning and construction of our shopping and entertainment
centers, we enter into transactions with various contractors and subcontractors 
for the planning, design and construction of each shopping and entertainment    
centers. The supervision over the construction project is usually conducted by  
Control Centers Ltd. ("Control Centers"), our indirect parent, which provides us
services of coordination, planning, execution and supervision over construction 
projects of shopping and entertainment centers and other real estate projects   
initiated by us. 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. Immediately
following the completion and opening of each shopping and entertainment center, 
the subsidiary that constructed the center enters into a management agreement   
with one of our                                                                 

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subsidiaries which renders services relating to the ongoing administration,     
maintenance and operation of the shopping and entertainment center, and receives
service fees which are paid by the tenants of the center.                       

Business Concept and Strategy                                         

     The business concept and strategy of the shopping and entertainment centers
business include 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 focusing in the medium term on Poland, the Czech 
Republic and Romania. We are currently reviewing investments in various other   
selected countries including in 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. Pre-sell, where prevailing market and economic conditions are
favorable, 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 and other development
schemes where such development forms a 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.                            

OTHER REAL ESTATE PROPERTIES                                          

 In addition to our engagement in the shopping and entertainment centers
business, we own several other real estate projects of various types, as        
described below.                                                                

The Dream Island Project                                              

Dream Island 2004 Real Property Development Ltd. ("Dream Island"), a  
Hungarian company, owns approximately 3.5 million square feet of land located on
the Obuda Island in the Danube River, a leisure and entertainment area in       
central Budapest. The construction rights on this area are for approximately    
350,000 square (approximately 3.8 million square feet, with designations for    
offices, commercial space, tourism, entertainment and leisure and hotels. 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 E2.8 million (approximately $3.5    
million) per year.                                                              

    Approximately 67% of Dream Island was originally acquired by Ercorner, our
indirect subsidiary, in October 2003 through a privatization tender won by us.  
The purchase of the our holdings in Dream Island was made in consideration for  
approximately HUF 4.6 billion (approximately $21.5 million).                    

 We have obtained financing for the purchase by Ercorner of Dream Island
through an arrangement between PC (Ercorner's parent) and MKB Bank Nyrt.,       
pursuant to which MKB provided Ercorner with a loan in the amount of            
approximately HUF 3.7 billion (approximately $17.3 million), constituting       
approximately 80% of the purchase price for the acquisition of the interests in 
Dream Island by Ercorner. The loan was provided for a two-year period and was   
extended until March 2007. In addition, PC granted an option to MKB to acquire  
50% of the equity interest in Ercorner, which MKB exercised in 2004 in          
consideration for the same price per share paid by Ercorner to purchase the     
holdings in Dream Island.                                                       

    In April 2004, a shareholders agreement was signed between Ercorner, Obuda
Holdings Limited ("CPH"), an unrelated third party, which held at that time,    
approximately 33% of Dream Island's quotas, ESI Associates Holdings Ltd.        
("ESI"), the management company of Dream Island and Dream Island. Under the     
agreement, the parties agreed on the equalization of voting rights in Dream     
Island in consideration for which CPH paid Ercorner an aggregate amount of $1   
million. Ercorner and CPH further agreed to grant ESI 10% of their respective   
holdings in Dream Island in consideration for the same price per share paid by  
Ercorner to purchase the holdings in Dream Island. 80% of the above             
consideration was assigned to MKB decreasing the outstanding loan while CPH and 
Ercorner provided ESI with a loan, in equal shares, with regard to the remaining
20%. As of today, PC, MKB, CPH and ESI hold approximately 30%, 30%, 27% and 10% 
respectively directly or indirectly in Dream Island. A fourth unrelated company 
- Minesol Magyarorszag Vagyonkezelo Korlatolt Felelossegu, holds approximately  
3% of Dream Island's shares.                                                    

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    Under the above shareholders agreement, CPH was also granted a put option,
exercisable during the 3-year period after the closing of the agreement (April  
2005), to sell all its holdings in Dream Island to Ercorner at a price          
reflecting the cost of acquisition of the quotas by Ercorner plus interest less 
profits paid out by Ercorner until the date of sale. The parties have agreed to 
make necessary contributions with regard to any additional financing pro-rata to
their holdings.                                                                 

   In the event of a change of control in one of the parties or in the event
of a defaulting party, as stipulated in the agreement, a "buy-out" option is    
triggered for the benefit of the remaining parties pro rata to their holdings at
a price to be determined by the shareholders, or where the shareholder are      
unable to reach an agreement-by specified experts. The parties undertook certain
restrictions on the transfer of quotas within Dream Island during a period of   
two years from the closing of the transactions.                                 

  Dream Island has submitted applications to local planning authorities in
order to modify the permitted urban usage designations, so as to maximize the   
development potential of the area owned by Dream Island. As security for        
obtaining these permits, EMI has executed a corporate guarantee in favor of MKB.
In May 2006, the Budapest General Assembly approved the amendment to the local  
town-planning scheme (KSZT), which approves the construction plans for this     
site. Formal regulatory approvals of the KSZT modification contained in the     
Budapest General Assembly resolution are currently pending. As part of the above
approval provided, 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).                                                  

Plaza House Building                                                  

Plaza House Kft., our indirect wholly owned subsidiary, owns an office
building located on the prestigious Andrassy Boulevard, in the center of        
Budapest. The building is located on a property totaling approximately 6,600    
square feet and consists of four floors, an atrium and a basement, with a total 
constructed area of approximately 26,000 square feet. The site is located in an 
exclusive area of the city in which several foreign embassies are located. Parts
of the building have been leased to subsidiaries of PC. The building is also    
used as the headquarters of PC's management.                                    

Duna Plaza Offices                                                    

 Within the framework of the 2004 Klepierre sale agreement (as described
above), Klepierre has acquired from PC all of the equity rights in Duna Plaza.  
Duna Plaza is the owner of the Duna Plaza complex, which is comprised of Duna   
Plaza shopping and entertainment center and the Duna Plaza offices ("DPO"). The 
DPO are located on the third, fourth and fifth floors of the building and having
approximately 120,000 square feet leasable area of offices and approximately    
5,700 square feet leasable area of storage.                                     

    Since DPO was specifically excluded from the framework of the transaction,
Klepierre and PC have agreed to implement certain procedures to cause: (i) the  
registration of the DPO as a separate condominium unit the rights of which will 
be initially held by Duna Plaza; (ii) implementation of a de-merger of the Duna 
Plaza complex in such manner that DPO will be owned by a newly incorporated     
company; and (iii) the sale and transfer to PC of the of the new company that   
will hold the DPO. The assets of the Duna Plaza complex will be divided in such 
manner that Duna Plaza will retain ownership of the Duna Plaza shopping center, 
while the DPO will be owned indirectly by PC. The liabilities of Duna Plaza     
shall be divided in such a manner that Duna Plaza shall retain the liabilities  
associated with the sold center, while DPO Owner shall assume the liabilities   
associated with the DPO. PC shall indemnify Duna Plaza for the liabilities      
assumed by DPO Owner. All costs, liabilities and expenses incurred or to be     
incurred in connection with the de-merger procedures shall be at PC's sole cost.

During the interim period prior to the consummation of the de-merger  
procedures, PC shall be entitled to all rental and other revenues (excluding    
from the sale of utilities) which shall received by Duna Plaza from the DPO     
tenants, after deducting the aggregate amount of: (i) all direct costs and      
expenses and taxes which shall be incurred or paid by Duna Plaza which directly 
relate to the ownership, operation and management of the DPO; and (ii) that     
proportion of the general costs and expenses and taxes of the Duna Plaza        
Complex, which may reasonably be attributed and apportioned to the DPO. During  
the interim period, PC shall be responsible for and shall manage and operate the
DPO. Duna Plaza shall have a lien over DPO's funds, as security for payment of  
the DPO costs. PC will indemnify Klepierre for and against any cost, debt,      
actions, suits and liability, that may arise as a result of or in connection    
with the ownership, possession, operation and transfer of the DPO.              

 As of the date of this annual report, the condominium was registered in
June 2006 and we expect the de-merger to be completed by the end of 2006.       

The Praha Plaza Commercial Complex                                    

     Praha Plaza s.r.o., our indirect wholly-owned subsidiary, owns a commercial
complex comprised of a number of buildings located in the Third District of     
Prague, the Czech Republic. The building' strategic location allows for         
convenient transportation to the complex.                                       

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     The buildings are located on property totaling approximately 500,000 square
feet and consist of a five floor main building and a basement, an office        
building consisting of four floors and an office building of two floors. In     
addition, there are a number of other buildings of one floor each. The total    
leasable area of the buildings is approximately 477,000 square feet. The        
property is currently operating as a commercial complex with a 45% occupancy    
rate as at May 31, 2006.                                                        

    We are currently considering the construction of residential apartments on
the land.                                                                       

Helios Plaza                                                          

   We own a plot of land measuring approximately 160,000 square feet located
adjacent to the Piraeus Avenue in Athens, Greece. The book value of the         
investment in the land (including development and other costs) equaled on       
December 31, 2005, approximately E22.5 million (approximately $26.6             
million). Following the issue of a ministerial decision which changed the land  
use along the Piraeus Avenue, the permitted land use applicable to this site are
presently unclear. We have filed in April 2005 a petition in the Constitutional 
Court against this ministerial decision. We, together with our legal counsel and
professional advisers, are presently examining the ministerial decision and     
assessing the development opportunities for this site.                          

     In addition to the above, we own several other plots in Central and Eastern
Europe whose costs is not material to us.                                       

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     The following table summarizes the principle characteristics of each of the
real estate properties described above.                                         

                                                        [Enlarge/Download Table]

                                      APPROXIMATE                                                                                   
                         APPROXIMATE  CONSTRUCTED  LEASEABLE                                                                        
    NAME,                 LAND AREA       AREA        AREA    OCCUPANCY                                                             
   LOCATION      TITLE     (SQ.FT.)     (SQ.FT.)    (SQ.FT)      RATE      ENCUMBRANCES        PERMITS           MISCELLANEOUS      
   --------    --------  -----------  -----------  ---------  ---------  ----------------  --------------  -------------------------
                                                                                                                                    
DREAM ISLAND   Freehold  Estimated    Estimated    Estimated      --     First ranking     Amendment to    Scheduled opening is     
PROJECT                  at 3.5       at 3.5       as 3.8                mortgage on the   the local town  expected to be in 2002.  
Budapest,                million      million      million               land and on the   planning                                 
Hungary                                                                  buildings.        scheme (KSZT)                            
                                                                                           was approved.                            
                                                                                           Formal                                   
                                                                                           regulatory                               
                                                                                           approvals of                             
                                                                                           the KSZT                                 
                                                                                           modification                             
                                                                                           contained in                             
                                                                                           the Budapest                             
                                                                                           General                                  
                                                                                           Assembly                                 
                                                                                           resolution are                           
                                                                                           currently                                
                                                                                           pending.                                 

PLAZA HOUSE    Freehold      6,600       26,400      19,874      100%    First ranking           --                                 
BUILDING,                                                                mortgage on the                                            
Budapest,                                                                land and the                                               
Hungary                                                                  building.                                                  

DUNA PLAZA     Freehold  part of        147,000     120,157       81%    After de-merger         --        The Duna Plaza offices   
OFFICES                  the Duna                                        the real estate                   are currently owned by   
Budapest,                Plaza                                           will be                           Klepierre. Upon the      
Hungary                  center                                          mortgaged.                        completion of the        
                                                                                                           de-merger, Klepierre will
                                                                                                           maintain ownership over  
                                                                                                           the Duna Plaza center and
                                                                                                           we will own the Duna     
                                                                                                           Plaza Offices            

THE PRAHA      Freehold    538,000      505,720     484,000       45%    First ranking           --                                 
PLAZA                                                                    mortgage on land                                           
COMMERCIAL                                                               and buildings.                                             
COMPLEX,                                                                                                                            
Prague,                                                                                                                             
Czech                                                                                                                               
Republic                                                                                                                            

HELIOS         Freehold    160,000           --          --       --     Prenotation of          --        Due to changes in the    
PLAZA,                                                                   mortgage                          relevant zoning scheme   
Athens Greece                                                            (similar to a                     applicable to the        
                                                                         mortgage) on the                  project, we are presently
                                                                         land.                             re-assessing this        
                                                                                                           project.                 

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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 six of our eight operating hotels and in 
one of the hotels which is currently under development. 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. In certain hotels, Park Plaza received 5% or 10% of the     
equity rights in the companies holding these hotels. See "- Management of       
Hotels" below.                                                                  

   Set forth below is our percentage ownership and other certain information
relating to our hotels:                                                         

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OPERATING HOTELS                                                                

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                                                 AVERAGE                                      
                         APPROXIMATE            OCCUPANCY                                     
                         CONSTRUCTED              RATES                                       
 NAME AND RATE               AREA       TOTAL     DURING                                      
   OF HOTEL      TITLE    (SQ. FT.)     ROOMS      2005     OTHER INFORMATION    ENCUMBRANCES 
-------------- --------- ----------- ---------- --------- -------------------- ---------------
                                                                                              
VICTORIA       Freehold    220,000   305 (27        93%   -    business center Mortgage on the
HOTEL,                               Suites)                                   hotel.         
Amsterdam, The                                            -    health center                  
Netherlands                                                                                   
Four Star                                                                                     

UTRECHT PARK   Leasehold    55,880   120 (40        74%   -    11 conference   Pledge on long 
PLAZA HOTEL,                         executive                 rooms           term lease     
Utrecht, the                         rooms)                                    rights.        
Netherlands                                                                                   
Four Star                                                                      Mortgage on the
                                                                               hotel.         

ASTRID PARK    Freehold    223,300   229 (19        74%   -    includes        An undertaking 
PLAZA HOTEL,                         business                  an oceanarium   to mortgage the
Antwerp,                             suites)                   attraction      hotel. The     
Belgium                                                        (Aquatopia)     mortgage has   
Four Star                                                                      not yet been   
                                                          -    12 boardrooms   registered.    

                                                          -    18 conference                  
                                                               rooms                          

CENTERVILLE    Freehold    409,000   230            89%   -    fully           First ranking  
HOTEL                                                          operational     mortgage on the
APARTMENTS                                                     since May 2003. apartments     
Bucaresti,                                                                     hotel.         
Romania                                                                                       

SHERLOCK       Leasehold    67,460   119 (17        83%   -    fitness         First ranking  
HOLMES PARK                          executive                 center          mortgage on the
PLAZA HOTEL,                         studios,                                  land and the   
London, the                          3 split              -    main            hotel.         
United Kingdom                       level                     meeting room                   
Four Star                            "loft"                    for 600 people                 
                                     suites)                                                  
                                                          -    6 board                        
                                                               rooms                          


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                                                        [Enlarge/Download Table]

                                 APPROXIMATE                                                                                      
 NAME AND RATE OF                CONSTRUCTED                 AVERAGE OCCUPANCY                                                    
       HOTEL          TITLE    AREA (SQ. FT.)   TOTAL ROOMS  RATES DURING 2005    OTHER INFORMATION          ENCUMBRANCES         
------------------  ---------  --------------  ------------  ------------------  ------------------  -----------------------------
                                                                                                                                  
VICTORIA PARK        Freehold      242,000     287 (22              87%          - Executive lounge  First ranking mortgage on the
PLAZA HOTEL,                                   business                          - health center     land and the hotel.          
London, the United                             suite and 12                      - main conference                                
Kingdom                                        main suites)                        room for up to                                 
Four Star Deluxe                               and 12                              750 people                                     
                                               apartments                        - 13 additional                                  
                                                                                   conference rooms                               
                                                                                 - underground                                    
                                                                                   parking                                        
                                                                                   facilities                                     

RIVERBANK PARK      Leasehold      337,100     396 and an       soft opening     - full leisure      First ranking mortgage on the
PLAZA HOTEL,                                   additional     since April 2005     center            land and the hotel           
London, the United                             66 apartment                      - two main                                       
Kingdom Four Star                              hotel luxury                        conference                                     
Deluxe                                         suites                              rooms, each with                               
                                                                                   capacity of up                                 
                                                                                   to 650 people                                  
                                                                                 - 20 additional                                  
                                                                                   conference rooms                               

SANDTON PARK PLAZA   Freehold       99,000     138 (61              53%          business center     First priority mortgage on   
HOTEL, (1)                                     suites)                                               the hotel                    
Johannesburg,                                                                                                                     
South Africa                                                                                                                      
Four Star                                                                                                                         

(1)  Subject to a sale agreement, see below.                                    

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HOTELS UNDER DEVELOPMENT                                                        

                                                                [Download Table]

                               APPROXIMATE    APPROXIMATE                       
 NAME AND RATE OF                  LAND       CONSTRUCTED   TOTAL               
       HOTEL          TITLE   AREA (SQ.FT.)  AREA (SQ.FT.)  ROOMS   ENCUMBRANCES
------------------  --------  -------------  -------------  -----  -------------
                                                                                
BALLET BUILDING     Freehold     29,000         180,500      199         --     
PROJECT,                                                                        
Budapest, Hungary                                                               
FIVE STAR                                                                       

BUCURESTI HOTEL,                                                                
Bucharest, Romania  Freehold     80,700         484,000      438   First ranking
Four Star                                                          mortgage on  
                                                                   the hotel.   

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   During 2005, we opened the Riverbank Park Plaza Hotel located on the bank
of the River Thames in London, the United Kingdom. We also continued our plans  
for the development of two additional hotel projects described in the table     
above. In Hungary, we made progress on the project for the conversion of the    
former National Ballet Institute Building, centrally located on Budapest's      
prestigious Andrassy Boulevard, into a Western business oriented hotel. We      
commenced the renovation and the refurbishment, and expect to be completed by   
June 2008. However, we are currently re-assessing our development plans for the 
project in the light of offers for the sale of the premises which are currently 
under consideration. In addition, 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. 

   On May 30, 2006, we, together with the other owners of the Sandton Hotel,
have entered into an agreement for the sale of the entire issued share capital  
of Park Plaza Hotel Sandton (Pty) Ltd, the company owning the Sandton Hotel, and
assignment of all shareholder loans to an unrelated third party effective as of 
June 30, 2006. This transaction reflects an asset value of the Sandton Hotel of 
approximately Rand 52 million (approximately $8 million). The net consideration 
to be received by us is estimated at $1.6 million. The execution of the         
agreement is subject, inter alia, to the completion of a due diligence          
investigation to the satisfaction of the Purchaser.                             

AGREEMENTS WITH RESPECT TO OWNERSHIP OF THE HOTELS                    

   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 Park   
Plaza hotel in Amsterdam. Under the agreement, in the event Control Centers or  
Red Sea no longer controls the entities owning the Victoria Park Plaza hotel,   
then the party who ceased to control such entity must offer its holdings in the 
entities owning the Victoria Park Plaza hotel to the other party at value to be 
agreed upon by the parties. We are also a party to a shareholder agreement with 
all unrelated third parties that hold interests in the company owning the       
Sandton Hotel, dated April 1, 1999, with regard to the Sandton Hotel. The       
agreement includes right of first offer and tag along provisions applicable to  
all parties. For the sale of the company holding the Sandton Hotel, see above.  

With respect to all the other properties we have no written agreements
governing the operation of the hotels and the sale of our respective shares.    

HOTELS UNDER DEVELOPMENT                                              

   We are a party to an agreement with Control Centers, our indirect parent,
for the receipt of services of coordination, planning, execution and supervision
over with respect to the renovation works of the Bucuresti Hotel complex, which 
include the Bucuresti hotel and the Centerville hotel apartments. 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.                         

MANAGEMENT OF HOTELS                                                  

Management agreement with Park Plaza                                  

   Most of our operating hotels have appointed Park Plaza Europe B.V. ("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 a
restated management agreement with Park Plaza, the principal provisions of which
include:                                                                        

  -    Payment to Park Plaza of an annual incentive fee of 7% of the gross
          operating profit (as defined in the applicable agreement) of the hotel
("Incentive Fee").                                          

   -    Payment to Park Plaza of an annual base fee of 2% of the gross hotel
room revenues ("Annual Base Fee")                           

-    Reimbursement of reasonable out-of-pocket expenses, including    
       advertising expenses, office expenses (at a fixed amount) and other
          expenses incurred by Park Plaza in carrying out its duties of up to 3%
of the aforementioned gross operating profit.               

-    In consideration for monthly royalties of up to 1.5% of the gross
       hotel-room revenues ("Franchise Fee"), our hotels may use the brand
  name "Park Plaza", certain Park Plaza trademarks, Park Plaza's
          international marketing network and international booking center, Park
Plaza's marketing and advertising material, Park Plaza's    

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         international hotel conferences, Park Plaza's assistance in planning,
   developing and applying its methods with respect to the hotels,
        training of staff and senior management of the hotels, and inclusion
       in the list of Park Plaza hotels worldwide. We design and refurbish
          our hotels in order to comply with Park Plaza's operational standards.

     -    Each management agreement is valid for an initial fifteen-year period,
      and renewable automatically for an additional period of ten years,
      subject to the right of either party to terminate the agreement by
        giving twelve months advance notice (or six months advance notice in
   the event that we decide on early termination of the management
     agreement). If any of the hotel-owning companies should decide on
   early termination of the management agreement, then it would be
       required to pay to Park Plaza an amount equal to the Incentive Fee,
      the Annual Base Fee and the Franchise Fee for the year immediately
         preceding the date of that sale. In the event the company holding the
       Victoria hotel (Amsterdam) sells the hotel or should the control of
        the hotel be transferred to third party, we are also required to pay
2.5% of any gain derived from the sale of the hotel.        

No formal agreement has been signed with Park Plaza in respect of the 
management of the Sandton Hotel in South Africa, although Park Plaza manages the
hotel on a de-facto basis on the same terms and conditions as the remaining     
operational hotels.                                                             

Park Plaza has been awarded 5% or 10% of the equity rights (excluding 
voting rights) in the companies holding the Riverbank (10%), Sherlock Holmes    
(10%) and Victoria London (5%) hotels.                                          

Option to purchase Park Plaza's Operations                            

    BEA Hotels N.V, our wholly owned indirect subsidiary, ("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% 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. As part of this agreement, if BEA decides not to
exercise the option, the additional loan of $3.33 million would have the same   
terms of the $1.67 million loan described 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 an additional $2.25 million, if and to the extent this 
amount is required for the purchase of other assets by the Acquired Company. As 
part of this agreement, in the event of exercise of the option by us, Park Plaza
has an option, exercisable at any time prior to December 31, 2006, in the event 
of disagreement between the parties regarding Park Plaza's rights, to acquire   
BEA's shares in the Acquired Company in consideration for the refund of the cost
of BEA's original investment.                                                   

Management Agreement with the Rezidor 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 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.                                                      

The Management Company guarantees the Owner that the adjusted gross   
operating profit (the total revenue less expense, permitted deductions,         
management fee and property insurance) for the hotel operation shall not be less
than fixed annual amounts.                                                      

     On the same day, our indirect subsidiary, Andrassy 25 kft, the owner of the
"Ballet Institute" building in Budapest (the "Owner"), which is currently under 
development, entered into an agreement with the Management Company regarding the
future management of the "Ballet Institute" to be operated under the "Regent"   
trade name.                                                                     

  Under the agreement the Owner undertook to pay the Management Company an
annual base fee ranging from 3.5% to 4.25% of the total revenue depending on the
relevant year, and an annual management fee ranging from 10% to 13% of the gross
operating profit depending on the relevant year. 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                              

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rooms.                                                                          

The Management Company guarantees the Owner that the adjusted gross   
operating profit (the total revenue less expense, permitted deductions,         
management fee and property insurance) for the hotel operation shall not be less
than fixed annual amounts.                                                      

BUSINESS CONCEPT AND STRATEGY                                         

The business concept and strategy of the hotels include 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 the hotels business is increasing the number of
hotel rooms in both Western and Eastern Europe, with emphasis on those cities in
which a shortage of rooms exists, or where a shortage of quality rooms exists.  
This strategy is being implemented both by the acquisition and renovation of    
existing operational hotels and by the construction and development of new      
hotels on land purchased or leased in optimal locations. Where appropriate, we  
may draw on the experience and resources of our group affiliates to develop     
integrated projects which will include hotels and shopping and entertainment    
centers, subject to applicable restrictions. When opportunities arise, we also  
seek to lease hotels or sell our interests in hotels.                           

LONG-TERM LEASE OF REAL ESTATE PROPERTY                                         

  In January 2003 one of our hotels in London, England owned by Shaw Hotel
Holding B.V (in which we are a 30% shareholder) was leased to a company engaged 
in the hotels business for a period of 25 years in consideration for fixed      
rental fees for each of the initial four years of the lease. Commencing the     
fifth year and throughout the term of the lease period, rental fees are to      
increase at an annual rate of 2.5%. Payment of the rental fees were guaranteed  
by a deposit in the amount of approximately L2.5 million (approximately $4.3    
million) (our part being approximately L0.75 million (approximately $1.3        
million)). The lessee was granted on option to extend the lease period by two   
consecutive periods of 15 years each.                                           

 In December 2005, we, together with the remaining holders of Shaw Hotel
Holding B.V, sold all of our holdings in Shaw Hotel Holding B.V., the owner of  
the above hotel, to an unrelated third party at an asset value of L74.8 million 
(approximately $129 million). The net consideration received (after deduction of
bank loans and other working capital items) was approximately L4 million        
(approximately $6.9 million).                                                   

THE IMAGE GUIDED TREATMENT BUSINESS                                             

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

   As of December 31, 2005, the principal shareholders of InSightec were EMI
(69.40% shareholder and 52.15% shareholder on a fully diluted basis), GE (25.25%
shareholder and 20.63% shareholder on a fully diluted basis) and MTA (3.87%     
shareholder and 6.87% shareholder on a fully diluted basis). The remaining      
holdings of InSightec are held by employees, directors and officers.            

   We are a party to an amended and restated shareholders agreement together
with GE and MTA dated September 27, 2004. 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.         

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   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 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           
incisionless 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 for the treatment
of uterine fibroids. InSightec also has regulatory approval for the ExAblate    
2000 for uterine fibroids in Russia, Taiwan, Australia and Singapore. 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 36 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 estimates that the ExAblate 2000 is compatible    
with approximately 2,400, or 34%, of the estimated 7,000 MRI systems installed  
in the United States. InSightec recently signed an exclusive worldwide (except  
for Russia and Japan) sales and marketing agreement with GE with respect to the 
ExAblate 2000. InSightec believes that its relationship with GE will enable us  
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 incisionless 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.                            

  Magnetic resonance imaging provides an effective guidance system for the
use of focused ultrasound energy in InSightec's therapeutic applications. Used  
in conjunction with the ExAblate 2000, the MRI system precisely maps the        
treatment area in three dimensions immediately prior to the treatment, providing
information on the location and shape of the targeted tissue mass. The          
high-quality images produced by the MRI system enable the operating physician to
easily differentiate between the targeted tissue mass and the surrounding       
tissue. Based upon this information, the operating physician delineates the     
targeted tissue mass and our system calculates an optimal treatment plan which  
is displayed to the operating physician. The operating physician is then able to
alter the pathway of the ultrasound beam by adjusting the position of the       
transducer before initiating the sonication of the targeted tissue mass. At     
three second intervals during the procedure, the MRI system provides "real-time"
imaging and other data that are used by the ExAblate 2000 to calculate and      
display temperature maps of the treatment area in what is known as a "closed    
loop process." This continuous stream of data enables the operating physician to
make adjustments during the treatment to achieve the desired outcome. At the end
of the procedure, the operating physician can initiate a MRI scan to immediately
assess the overall treatment outcome. 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.                           

Concurrent with FDA approval for the use of the ExAblate 2000 to treat
uterine fibroids, the FDA issued a "Talk Paper" stating that the ExAblate 2000  
provides significant advantages over existing uterine fibroid treatment options.
The FDA issues "Talk Papers" in situations where the FDA desires to increase    
awareness of certain issues or developments, including significant new product  
approvals. InSightec 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 incisionless  
surgical treatment option for several medical conditions, including a number of 
indications for which there are                                                 

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currently few effective treatment options.                                      

    The following table summarizes the current indications for which InSightec
has developed or is developing the ExAblate 2000:                               

                                                        [Enlarge/Download Table]

                             PRODUCT DEVELOPMENT                                                                     
   TREATMENT APPLICATION            STATUS                               CLINICAL STUDY STATUS                       
   ---------------------     -------------------                         ---------------------                       
                                                                                                                     
UTERINE FIBROIDS             Complete             FDA and CE mark approval received.  Follow-up studies underway.    

BREAST FIBROADENOMAS         Final stages         Feasibility study started in Japan.                                

BREAST CANCER                Final stages         Feasibility study finished outside the United States. Phase 2 study
                                                  to start in the United States soon.                                

METASTATIC BONE TUMORS       Ongoing              Feasibility study underway outside the United States.              

(PALLIATIVE TREATMENT ONLY)                                                                                          

LIVER CANCER                 Ongoing              Feasibility study underway outside the United States.              

PROSTATE CANCER              Prototype under      Phase I study in the United States in planning stages.             
                             development                                                                             

BRAIN TUMORS                 Ongoing              Feasibility study underway outside the United States; Phase I study
                                                  underway in the United States.                                     


Distribution and Marketing                                            

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

In June 2005, InSightec entered into a worldwide distribution and sale
representation agreement with GE granting GE the exclusive worldwide            
distribution rights to market and promote InSightec's product subject to the    
achievement of a minimum sales targets, except in territories where InSightec   
already has existing distributors and representatives (Russia and Japan as      
described below). Subject to the terms of the agreement, in consideration of the
services rendered, InSightec shall pay GE a commission on the net sales invoiced
and actual payments received by InSightec for each order for the sale of        
products from an end-user resulting from GE Healthcare's activities. InSightec  
undertook not to enter into any new arrangements with third parties for so long 
as GE maintains its exclusive rights as described herein. Nevertheless,         
InSightec retains the right to promote, market and sell its products to         
end-users directly, through its employees. In case GE desires to market or sell 
any competing MRgFUS product in a territory, which InSightec holds all          
authorizations required to market its product in, then GE will notify InSightec 
of such intention. If despite InSightec's objection, GE chooses to market such  
competing product, then its rights in such country, for InSightec's product will
automatically become non-exclusive. The agreement is for a five-year term ending
in June 2010, unless earlier terminated in accordance with the terms of the     
agreement. Thereafter, the agreement will automatically renew, each time, for an
additional year, unless either party provides a written notice of its intent to 
terminate the agreement.                                                        

  InSightec retains an exclusive distributor in Russia and a non-exclusive
distributor in Japan. Each of these distributors undertook not to distribute any
other systems, which compete or may compete with InSightec's FUS system for     
specific periods determined in the agreements.                                  

In addition, since September 2002, InSightec has been a party to an   
agreement with MTA, as amended, pursuant to which InSightect received advisory  
and consultation activities as well as marketing activities from MTA in         
consideration for a fixed monthly amount and a success fee commission of 2% of  
the value of any signed purchase order, for which MTA was involved. The         
agreement was terminated on April 1, 2006.                                      

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. 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.                               

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OTHER ACTIVITIES                                                                

MANGO                                                                 

In May 2005, Elscint has 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(TM) in consideration for E2.85 million. Under the agreement, Elscint  
has undertaken to develop at least two stores in Israel within five years and an
additional two stores during the five years thereafter. Under the agreement     
Punto FA is allowed to continue operating an additional store in Eilat and to   
sell the MANGO products in Israel via the Internet. Elscint was awarded an      
option to purchase the store in Eilat by February 2007 in consideration for     
E250,000 ($295,000).                                                            

Concurrently with the purchase agreement, Mango executed an exclusive 
distribution agreement of 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 leases six stores in Israel: in Tel Aviv (Azrieli shopping
center), Kfar-Saba, the Kraiot (Kyrion shopping center), Haifa (Grand Canyon    
shopping center), Petah-Tikva (The Grand Canyon), Herzliya (the Arena) and an   
additional three outlet stores in Haifa, Natanya and Beer-Sheva.                

The key elements of Mango's strategy are to:                          

    -    Increase sales to existing and new customers by adjusting our pricing
         strategy and market behavior. Mango believes its customer service and
   reliability as a franchisee of a leading international brand to
provide it with a competitive advantage.                    

    -    Localization and enhancing the Mango brand in Israel by improving its
marketing and branding strategy.                            

    -    Open new stores in strategic locations across Israel with emphasis on
        opening smaller shops of 250-300 square meters rather than stores of
         larger square meters, which are currently in operation, as well as by
reducing the size of the stores currently in operation.     

   -    Reduce the percentage of outlet stores out of the total Mango stores
in Israel, and relocate the outlet stores to the suburbs.   

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.                                                      

  Since its establishment in early 2000, Elscint Bio-Medical Ltd. ("EBM"),
our indirect wholly owned subsidiary, has focused on investments in early stage 
biotechnology companies. During 2001 and 2002, EBM expanded its investment in   
Gamida, an Israeli company that engages 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. Cord blood stem cells have the ability 
to treat the same diseases as bone marrow with significantly less rejection. In 
addition, stem cells could become the vehicle of choice for gene therapy and,   
ultimately, be used for tissue regeneration.                                    

  Elscint is a party to an agreement pursuant to which mainly the existing
shareholders of Gamida invested during July 2005 an aggregate amount of $4      
million (out of which our share was $1.36 million) in consideration for the     
issuance of Gamida's securities which have the same rights as the securities    
issued during Gamida's last equity financing round.                             

    As of December 31, 2005, EBM holds approximately 33.46% of the outstanding
shares of Gamida (approximately 30.3% on a fully-diluted basis. EBM has the     
right to appoint one quarter of the members of Gamida's board of directors. The 
aggregate investment made by EBM in Gemida since Gemida's establishment is      
approximately $9.2 million (out of which approximately $1.6 million was invested
in 2005).                                                                       

In May 2003, Teva Pharmaceuticals Ltd. ("Teva") invested $3 million in
Gamida in exchange for approximately 9% (on a fully-diluted basis) of Gamida's  
outstanding share capital.                                                      

  On February 12, 2006, Gamida Cell Holding Ltd. ("Holding"), Gamida, Teva
and Holding signed a founders                                                   

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agreement. The sole purpose of Holding shall be                                 
commercialization of the products and obtaining all required registrations and  
marketing approvals.                                                            

 Teva shall make an equity investment in Holding of up to $25 million in
consideration for up to 50% of Holding shares. The funding shall be payable as  
follows: as of the closing date, Teva will sign an irrevocable commitment for   
payment of a total amount of $10 million payable in installments. The additional
funding totaling $15 million shall be paid quarterly based on the budget of     
Holding. Teva shall be entitled to accelerate the funding payments schedule.    

   In the framework of the agreement Gamida and Holding shall sign a license
agreement according to which Gamida shall grant Holding a royalty free,         
worldwide license to exploit the products and Gamida's IP necessary for         
developing, manufacturing sale and distribution of the product and a royalty    
free, illimitable, worldwide exclusive license to manufacture, develop, market, 
offer for sale, distribute and sell the products and the right to sublicense.   
The license agreement is subject to the approvals required from Office of the   
Chief Scientist. Certain cancellation arrangements were determined between      
Gamida and Teva.                                                                

  EBM was bound in the past by agreements with a company controlled by its
former Chief Executive Officer ("CEO") entitling him to shares representing 2%  
of EBM's issued and paid-up capital, in consideration for their nominal value.  
The agreement also provided that EBM would invest 92% and the CEO's company     
would invest 8% in venture capital investments. The CEO's company's investment  
would be financed by a dollar-linked non-recourse loan bearing LIBOR+1% interest
from EBM. In the event of cancellation of this agreement (or another agreement  
between the parties for the provision of consulting services), EBM would be     
entitled, under certain conditions, to acquire all or any of the CEO's company's
holdings in the venture capital investments and in EBM at cost or at market     
value, as relevant (depending on the purchase date).                            

In November 2002, the employment agreement between EBM and its CEO was
terminated. Pursuant to the termination agreement, EBM transferred to itself the
CEO's rights in EBM and its portfolio investee companies, in consideration for  
the repayment of the loans provided by EBM to the CEO.                          

   A dispute arose between the parties, with the CEO contending that EBM had
lost its right to acquire his holdings, claiming the deadline according to the  
agreement for giving notice to acquire had expired. EBM's management disputes   
this contention and is acting to realize its rights under the agreement. The    
parties have yet to sign a full and final agreement for the waiver and/or       
settlement of their mutual claims. EBM's management estimates that in any event,
it will not incur significant costs from the termination of the agreements.     

   Concurrently with the termination of the employment agreement of the CEO,
EBM's management postponed for the foreseeable future further investment        
opportunities in biotechnology related companies, other than Gamida, pending its
re-assessment of the market situation.                                          

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 the e-commerce applications,          
personalization and interactive advertising. In addition, Olive develops and    
markets digital archive services for newspapers and libraries. In January 2000, 
the Dafnit fund invested $1.2 million in Olive in consideration for an 8.5%     
interest in Olive (on a fully diluted basis), in March 2004, the Sequoia fund   
invested $6 million in Olive in exchange for approximately 26% interest in Olive
(on a fully-diluted basis) and in August 2005, the Sequoia and Pitango funds    
invested $9 million in Olive in exchange for 5% and 15% interest in Olive (on a 
fully-diluted basis), respectively. Following the above issuances and as of May 
31, 2006, our interest in Olive is 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 42% of the outstanding shares of Easyrun 
and the right to appoint 40% of the directors of Easyrun. We also hold other    
convertible instruments of Easyrun.                                             

   Within the framework of the rights offering executed by Easyrun in August
2004, we invested $0.4 million (out of a $0.65 million total funding) calculated
at $0.13 per share. In consideration for our investment, we were also granted   
warrants exercisable into shares, at $0.13 per share, up to a total amount of   
$0.8 million. In addition, we converted a $0.3 million loan into shares of      
Easyrun. Assuming all loans are converted and warrants are exercised, our       
interest in Easyrun would be increased to approximately 53% on a fully diluted  
basis.                                                                          

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VCON Telecommunications Ltd.                                          

  VCON Telecommunications Ltd. ("Vcon"), an Israeli company is a developer
and manufacturer of software videoconferencing systems for ISDN and Internet    
Protocol networks. Vcon offers comprehensive meeting solutions for desk top,    
portable and group conferencing over ISDN, Transmission Control Protocol or     
TCP/IP, ATM, Satellite, xDSL and other carriers. Vcon is publicly traded on the 
Paris Stock Exchange (Nouveau Marche). In August 2005, Vcon reported that       
following the failure in its previously announced fund raising negotiations, it 
has determined that it can no longer independently pursue its current mode of   
operations, and has entered into an agreement for the sale of its business,     
activities and the majority of its assets, to Emblaze group in consideration of 
$1.6 million. Emblaze has also agreed to establish a limited line of credit in  
an amount, in NIS, equal to $250,000. Following this transaction, Vcon only     
engages, under the given circumstances, in maximizing the payments and          
satisfaction of its debts to its creditors and in its dissolution. Vcon         
estimates that none of the consideration from the sale will be allocated to its 
shareholders, accordingly, we recorded a provision for loss in our investment in
Vcon amounting to NIS 13.9 million ($3 million), which constitutes the entire   
balance of our investment in Vcon.                                              

REVENUES CLASSIFIED BY BUSINESS SEGMENTS AND BY GEOGRAPHICAL MARKETS            

     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):                                                                           

                                                                [Download Table]

                                                           Convenience
                                     Fiscal Year           Translation
                                  Ended December 31,         in U.S.  
                             ---------------------------     Dollars  
                               2005      2004      2003      For 2005 
                             -------   -------   -------   -----------
                                                                      
(in thousands of NIS)                                                 
Western Europe               304,731   203,615   181,668      66,203  
Eastern and Central Europe   359,420   414,457   346,200      78,084  
Israel                        92,226    71,678    65,235      20,036  
Others                        60,378    46,131     1,782      13,117  
Total Revenues               816,755   735,881   594,885     177,440  

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

                                                                [Download Table]

                                                                   Convenience
                                             Fiscal Year           Translation
                                          Ended December 31,         in U.S.  
                                     ---------------------------     Dollars  
                                       2005      2004      2003      For 2005 
                                     -------   -------   -------   -----------
                                                                              
Shopping and Entertainment centers   366,237   443,814   347,056      79,565  
Hotels                               270,057   218,365   189,205      58,670  
Image Guided Treatment                75,713    57,052    20,412      16,449  
Lease of an Asset                     71,000    15,425    13,495      15,425  
Other Activities                      33,748     3,412    24,717       7,331  
Total Revenues                       816,755   735,881   594,885     177,440  

SEASONALITY                                                                     

SHOPPING AND ENTERTAINMENT CENTERS                                    

  Each shopping and entertainment center may experience seasonal shifts in
retail activity. Generally speaking, during peak holiday seasons (such as       
Christmas, Easter, Passover, the Jewish New Year and other national holidays    
generally in the third and fourth quarter), there is generally an increase in   
patron traffic, both for the purchase of holiday gifts and for utilizing the    
entertainment facilities offered by the center. During the period immediately   
following such periods, there is generally a decrease in the number of patrons  
visiting the centers and a corresponding slow down in retail activity. However, 
this slow down may be offset by the fact that the indoor facilities offer an    
air-conditioned environment for shoppers and patrons, which is of particular    
significance during the warm summer months in Israel (April/May to              
October/November), particularly in July and August when schools are in recess   
and it is customary in Israel to take summer vacations.                         

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                                                          

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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. Similarly, in England, differences in the weather   
and certain other factors 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.                                                                     

   For our South African hotel, generally the holiday seasons (Christmas and
Easter) show slightly stronger results, although the depressed economy and the  
political uncertainty of the region have resulted in reduced occupancy rates to 
the point that seasonal comparisons are largely irrelevant.                     

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.                

PATENTS AND PROPRIETARY RIGHTS; LICENSES                                        

Our parent Europe-Israel was registered by mistake as the owner of a  
European Community Trademark "Plaza Centers+figures" in classes 35, 36, 37 and  
42. Europe-Israel has signed an agreement for the assignment of such trademark  
to Park Plaza. As of the date of this annual report, the assignment agreement   
has not yet been registered with the European patent and trademark office.      

Within the framework of 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 Texsonics Ltd.. As of May 31,  
2006, InSightec has submitted 72 additional patent applications, out of which 21
have already been approved (19 in the United States and the other two in        
Europe), with another 40 that remain pending and in process.                    

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

COMPETITION                                                                     

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                      

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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, Lativa, 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 in the pre-development stage (for acquisition of suitable sites),  
in the development stage (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 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.            

 Our Arena shopping and entertainmet center in Herzliya, Israel competes
directly with a shopping center located in Herzliya and another center located  
in northern Tel-Aviv, and is approximately 8 kilometers from the site. All these
centers compete vigorously for tenants and customers. We are attempting to      
establish a competitive edge, based on the unique location of the Marina,       
overlooking the Mediterranean Sea and the strong emphasis on the entertainment  
facilities offered to its patrons.                                              

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 New     
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 hotel we are planning to construct 
in Budapest, Hungary will compete directly with the Kempinski, Marriott, Hilton,
Inter-Continental and Hyatt hotels. The Bucuresti Hotel in Bucharest competes   
with the Hilton situated directly across the street, the Intercontinental, and  
the Marriott Grand Palace hotel. We believe that the average room rate in our   
hotels is competitive. In addition, we compete with other companies in the hotel
industry for opportunities to purchase or build new hotels.                     

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           

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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.                                   

     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. Philips Medical has also announced plans to introduce a 
MR-guided FUS product based on collaboration it has with the University of      
Bordeaux, France.                                                               

The French (EDAP) and U.S. (Focus Surgery) 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.     

GOVERNMENTAL REGULATION                                                         

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.                                                  

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  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. In 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. In 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.        

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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 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     
receive 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 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.                                               

    With regard to our hotel in Hungary which is currently under construction,
the hotel building (the Ballet Institute Building) has a historical landmark    
status, under the protection of the Hungarian Historical Building Office (which 
has authority for the administration and preservation of the building). This    
status mandates that the planning consents and requisite permits for the        
proposed renovation of the Ballet Institute Building and its conversion into a  
hotel must be applied for and obtained from the Historical Building Office. In  
order to obtain such consents and permits, it is necessary to ensure that the   
renovation plans provide for the restoration of the building and the            
preservation of its historical status. In addition, our hotel in Romania which  
is being renovated required the receipt of building permits under local         
applicable laws, in order to enable the re-opening of the hotel following       
renovation.                                                                     

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 existing 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 of
safety 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 regulations 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: (i)    
general certification of a company and (ii) certification for a specific        
product. Instead of choosing to comply with directive 93/42/EEC InSightec       
decided to comply with the then effective International Standard ISO 9001       
(European Standard EN 29001) entitled "Model for Quality Assurance in Design,   
Development, Production, Installation and Servicing" and its extension to       
medical products EN 46001 which 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.        

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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.                                                         

C.   ORGANIZATIONAL STRUCTURE                                                   

EMI is a subsidiary of Europe-Israel (M.M.S.) Ltd. (approximately 48% 
shareholder). Europe Israel is wholly owned by Control Centers Ltd., an Israeli 
privately held company, 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, 2005 are as follows:    

                                                        [Enlarge/Download Table]

                                                                                 EMI'S DIRECT/  
                                                                              INDIRECT OWNERSHIP
                                                                                  PERCENTAGE    
                                                                COUNTRY OF    ------------------
NAME OF COMPANY                           ABBREVIATED NAME     ORGANIZATION     EQUITY   VOTING 
---------------                         -------------------  ---------------    ------   ------ 
                                                                                                
Elscint Ltd.                            Elscint              Israel               100%     100% 
BEA Hotels NV                           BEA                  The Netherlands      100%     100% 
S.L.S. Sails Ltd.                       SLS                  Israel               100%     100% 
Elbit Ultrasound (Netherlands) BV       EUBV                 The Netherlands      100%     100% 
InSightec - Image Guided Treatment Ltd. InSightec            Israel              52.2%    69.4% 
Plaza Centers (Europe) BV               PC or Plaza Centers  The Netherlands      100%     100% 
Mango Israel Clothing and Footwear Ltd. Mango                Israel               100%     100% 

(*)  on a fully diluted basis.                                                  

D.   PROPERTY, PLANTS AND EQUIPMENT                                             

EMI leases approximately 8,607 square feet in Tel Aviv, Israel for    
management and administration purposes, of which approximately 3,604 square feet
are leased from Control Centers. The lease agreement with Control Centers       
expired on December 31, 2005, but EMI continues to lease the office space on the
same terms. The other lease expires on February 28, 2007. The aggregate rental  
fees paid by EMI in 2005 with respect to such lease were approximately $125,720 
out of which approximately $56,120 were paid to Control Centers. The leased     
property is adequate for EMI's needs in the foreseeable future.                 

     Elscint leases approximately 4,929 square feet of office space in Tel Aviv,
Israel for its management and administration activities of which approximately  
4,218 square feet are leased from Control Centers. The lease agreements expired 
in July-August 2005, however, Elscint continues to lease the office space on the
same terms. The aggregate rental fees paid by Elscint in 2005 with respect to   
such lease were approximately $100,000 out of which approximately $65,000 were  
paid to Control Centers. The leased property is adequate for Elscint'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 52,000 square feet in Tirat Hacarmel and Or-Yehuda, with an option
to lease another 13,520 square feet. Total annual rental expenses under these   
leases are $700,000. The leased property is adequate for InSightec's needs in   
the foreseeable future.                                                         

    Mango leases from May 2005 approximately 2,700 square feet of office space
in Tel Aviv, Israel, from Europe-Israel. The aggregate rental fees paid to      
Europe-Israel in 2005 were approximately $44,000 (approximately NIS 196,000).   

ITEM 4A. UNRESOLVED STAFF COMMENTS.                                             

Not applicable.                                                       

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                           

OVERVIEW                                                                        

Our revenues from the sale of real estate assets are recognized upon  
consummation of the sale of real estate and/or the investments (see also below  
revenue recognition). Our revenues from 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                         

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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 thereform will be recognized while consideration is       
allocated by and between the various items of the agreement.                    

   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. For convenience purposes, financial data 2005 presented   
herein for the fiscal year ended December 31, 2005, have been translated into   
dollars using the representative exchange rate on December 31, 2005 of NIS 4.603
= $1.00.                                                                        

CRITICAL ACCOUNTING POLICIES AND ESTIMATES                                      

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,
allowance for doubtful debts, determination of subsidiaries' functional         
currency, revenue recognition, 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.                                       

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 and the accounting for stock - based compensation, in accordance with   
APB 25 described below.                                                         

   IMPAIRMENT AND DEPRECIATION OF REAL ESTATE PROPERTIES, DEVELOPMENT ASSETS

   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                

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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. 10C. and 19L. 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 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 (50 years, in respect of shopping and entertainment centers and 67 or  
95 years, as the case may be, in respect of hotels), 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                                    

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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.(1) c. (3) 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 AND ALLOWANCE FOR DOUBTFUL DEBTS

    A. 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. and 24A, B and D to our Consolidated Financial
Statements.                                                                     

  B. We examine, on an ongoing basis, the volume of credit extended to our
customers in the ordinary course of business (including long term loans to third
parties, in line with and regarding our business) and accordingly, record a     
provision for doubtful debts based on those factors affecting credit risks,     
based upon our best judgment. We periodically evaluate the quality and value of 
loans granted by us to various third parties in the ordinary course of business,
taking into consideration the                                                   

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security that was provided, the term of the loans and our past experience with  
these third parties. If our estimate of collectibility differs from the cash    
received, the timing and amount of our reported results of operations could be  
adversely affected.                                                             

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. See also "Item 11.           
Quantitative and Qualitative Disclosure About Market Risks - Exchange Rate      
Exposure" and "Exposure to Net Investment Value of Foreign Entity"" below.      

     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,
several countries, among them Hungary, Poland and the Czech Republic (countries 
in which the majority of our operations in the field of shopping and            
entertainment centers is concentrated), joined the European Union on May 1,     
2004. The joining countries undertook to manage an economic policy which        
conforms to certain monetary and regulatory targets, aiming at the implementing 
required conditions for the adoption of the Euro as the country's legal         
currency. Prior to their joining, those countries took significant actions      
pertaining thereto, such as: altering their monetary and fiscal policies,       
including full liberalization of their currency regimes and lifting of foreign  
currency controls (such as liberty to transact, transfer and execute payment in 
foreign currency, allowing free trading in the local currency abroad, lifting of
the restrictions on transferring foreign currency abroad, allowing free         
unlimited trading in foreign securities, reporting, etc.). As a result, our     
subsidiaries, which are incorporated and operate in Hungary, Poland and the     
Czech Republic (the "Companies") deemed it necessary to reconsider their        
settlement currency with lessees ("Settlement Currency"), the nature and scope  
of protection of the value of their financial assets and liabilities, their     
currency risk management policy, etc. In light of the foregoing and concurrently
therewith, the Companies reconsidered their operational and measurement         
currency. According to the nature of the Companies' operations and the changes  
in the economic environment in which they operate, and in accordance with       
Israeli and U.S. Standards, we are of the opinion that as and from April 1,     
2004, the Euro, rather than the local currency, more adequately reflects the    
business condition and the results of operations (transactions) of the          
Companies, affecting the management policy and decision-making processes as well
as the transactions (revenues and cost of acquisition/construction of assets),  
the scope and prices thereof, the currency risk policy and the financing        
operations thereof. Accordingly, the Euro serves as the functional currency of  
the Companies starting from April 1, 2004.                                      

    For information on currencies involved in our global operations, see "Item
11. Quantitative and Qualitative Disclosure About Market Risks - Table I -      
Foreign Currency Risks" below.                                                  

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 SAB 101, as amended by SAB 104 when (i)    
persuasive evidence of an arrangement exists, (ii) delivery has occurred or     
services has been rendered, (iii) the price is fixed or determinable and (iv)   
collectibility is reasonably assured. 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.              

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For these arrangements, we implement the guidance in EITF No. 00-21   
"Revenue Arrangements with Multiple Deliverables". The principles and guidance  
outlined in EITF No. 00-21 provide a framework to (a) determine whether an      
arrangement involving multiple deliverables contains more than one unit of      
accounting, and (b) determine how the arrangement consideration should be       
measured and allocated to the separate units of accounting in the arrangement.  
Each of these deliverables in the arrangement represents individual units of    
accounting if the delivered system has (i) value to the customer on a           
stand-alone basis; and (ii) objective and reliable evidence of fair value exists
for the installation and training. 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 recognize 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, based on the criteria in EITF 00-21, 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.                                                                       

  In the past InSightec has entered into sales arrangements with customers
where payment for InSightec's product was contingent upon its receipt of FDA    
approval to market the ExAblate 2000, or upon its provision of certain hardware 
and software upgrades. Accordingly, InSightec did not recognize revenue from    
such sales until the applicable contingency was fulfilled.                      

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. To date, InSightec's warranty reserve has
been minimal and InSightec's warranty costs have not exceeded this reserve.     

Revenue recognition from sales of real estate assets and investments: 

   The Company recognizes gain on sales of real estate assets and investment
properties when a sale has been consummated, the buyer's initial and continuing 
investment is adequate to demonstrate commitment to pay, any receivable obtained
is not subject to future subordination and the usual risks and rewards of       
ownership have been transferred.                                                

   As described in Note 9B. (3) to our consolidated financial statements, we
have entered into several sale agreements with Klepierre and Dawny Day for the  
sale of our shopping and entertainment centers portfolio. 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 for limited period
or in a limited amount, profit is recognized when there is reasonable assurance 
that total estimated future rent receipts will cover operating expenses and debt
service including payments due 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 safety factor, unless the amount so computed is less
than the rents to be received from signed leases. For the Company, these        
conditions are usually fulfilled at the time of sale.                           

     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.                

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,  
2005 we recorded a valuation allowance for substantially all of our deferred tax
assets (net, after provisions) primarily consisting of certain net              

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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       
jurisdiction 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. As to tax issues affecting our U.S. subsidiary 
- see Note 16B.(2) to our consolidated financial statements.                    

  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. Certain foreign group companies 
have received final tax assessments for the years through 1999, while others    
have not been assessed since their incorporation. See, in addition, Note 17C.(5)
to our consolidated financial statements. 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.            

Our finance costs capitalization method 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.                                                           

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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 over loan periods. 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; (e) frequent changes, in the ordinary 
course of business, in the terms of leases (including (i) increase or decrease  
of rental fees for the whole or a part of the lease period; (ii) alteration of  
the fee base from a fixed sum to variable, and vice versa; (iii) shortage of    
lease period; and the like). These changes are usually carried out in the       
ordinary course of business, in accordance with changes in circumstances,       
(mainly as a result of (i) poor collectibility in respect of specific tenant;   
(ii) demand of a potential purchaser, in as much as same may be implemented; and
others); and (f) our lease activities that are subject to embedded derivatives  
are being carried out mainly in Hungary and Poland, countries having no past    
experience in quotation of complicated derivative financial instruments and in a
functional currency of which there is little experience in derivative           
operations.                                                                     

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                                                     

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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.                                    

STOCK-BASED COMPENSATION                                              

We calculate this amount using the Black-Scholes method of valuing the
option to estimate the fair value of the options grant. This method requires    
that we make several estimates, including the volatility of our stock price, and
the expected life of the option. In making these estimates, we have used        
historical data as well as management judgment to arrive at the data inputs.    

We expect to comply with FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment," ("Statement 123R"), beginning in the first quarter of    
2006.                                                                           

  In August 2005, the Israel Accounting Standards Board ("IASB") published
Standard - No. 24 - "Share-Based Payment" ("Standard No. 24"). The objective of 
Standard No. 24 is to specify the principles of financial reporting by an entity
where it enters into a share-based payment transaction. In particular, it       
requires an entity to reflect in its profit or loss and financial position, the 
effects of share-based payment transactions, including expenses associated with 
transactions in which stock options are granted to employees. For equity-settled
share-based payment transactions, we should measure the goods or services       
received, and the corresponding increase in equity, directly, at the fair value 
of the goods or services received, unless that fair value cannot reliably be    
estimated. If so, we should measure their value, and corresponding increase in  
equity, indirectly, by reference to the fair value of the equity instruments    
granted, by measuring their fair value at the measurement date, based on market 
prices if available. If market prices are not available, fair value of the      
equity instruments granted should be 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 should be measured
directly by reference to the fair value of the equity instrument granted, at the
date of grant.                                                                  

As for the impact of this standard on our 2005 consolidated financial 
statements, on our reported results for the first quarter of 2006 and on the    
2006 consolidated financial statements, see Note 2X. (ii) to our consolidated   
financial statements included in Item 18 below.                                 

RECENTLY ISSUED ACCOUNTING STANDARDS                                            

    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 X. to our consolidated financial statements.                         

A.   OPERATING RESULTS                                                          

PRESENTATION METHOD OF STATEMENT OF OPERATIONS AND THE CHANGE THEREOF           

     Significant recent global changes, particularly in the real estate business
in which we operate, enable us to utilize our relative advantage in such field  
of operation. Such changes include, among others, a decrease in commercial      
assets' long-term yield rates; low short term interest rates, geo-political     
evolutions including rapid financial progress in developing markets and         
transformation thereof to much more readily accessible geographical targets.    
Concurrently with such changes and consequently thereto, a significant increase 
was noted in the quest for real assets, both by private, as well as by          
institutional investors, pension funds, REIT funds, and others. The above       
mentioned global changes together with the completion of the July 2005          
transaction between PC and Klepierre, (See "Item 10. Additional Information -   
Material Contracts - Shopping and Entertainment Centers" below), led the        
management to reexamine our nature of activity while attempting to strategically
alter its business. The core of such change is expressed in evolving the major  
part of our business activities from the entrepreneurship, development and      
operation of various commercial real estate assets in the medium to long term,  
into the entrepreneurship and development of such assets supported by short term
management and operation activities with the principal objective of founding and
stabilizing the assets for their sale, as closely as possible to completion of  
construction, and/or into the construction of assets under pre-sale development 
agreements executed with third parties (such as investment or management        
companies on the basis of turnkey construction agreements). This new business   
model is intended to reap the advantages of our strengths and expertise         

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in the entrepreneurship and development of projects, rather than investing      
precious financial and manpower resources for the operation of its assets for   
the long term. The reexamination resulted in redefinition of the our operational
and business model so that sales of its operational assets are included therein,
whereas during previous reporting periods such sales and the results thereof    
were excluded from our operational results.                                     

Following the consummation of the various "exit" transactions which   
commenced during 2004 and continued in 2005, and as a result of the change to   
our business model as specified above, our management believe that the          
historical presentation format of our statement of operations ("Multiple - step 
form") is no longer a meaningful measure and presentation of our business       
activities, nor does it optimally reflect same. Our management believes that all
costs and expenses (including selling and marketing, general and administrative 
as well as finance costs) should be considered as continuously contributing to  
obtaining overall income and profits, and that any attempt to classify only part
of the expenses directly to the income revenues, may be construed as artificial.
Management also believes that splitting such operational costs, to separate     
items such as "cost of sale", "selling and marketing costs", and "general and   
administrative expenses", is not meaningful to us, as we are a diversified      
company (containing a wide range of different activities), but rather an        
alternative classification should be applied which recognizes two types of      
costs: (i) those directly related to the sales; 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.                                                                 

Accordingly, we have adopted a new method for the presentation of our 
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 represented in one group ("Single - Step Form"), as opposed to the previous
presentation, used through the previous reporting period ("Multiple - Step      
Form"). Accordingly, expense items were classified - as part of such change - by
differentiating those costs directly relating to each income, and those which   
serve the business in general.                                                  

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. Comparative figures for 
the previous accounting years have been reclassified accordingly.               

  The following table presents for the periods indicated the statements of
operation of EMI for the years period the last of which ended December 31, 2005:

                                                        [Enlarge/Download Table]

                                                       2005                                    
                                                     Reported                                  
                                                   Convenience    2005       2004       2003   
                                                   Translation  Reported   Reported   Adjusted 
                                                   -----------  --------   --------   -------- 
                                                      $'000            (In Thousand NIS)       
                                                                                               
REVENUES                                                                                       
Sale of real estate assets and investments, net       61,191    281,661     131,921         -- 
Commercial centers operations                         31,057    142,957     311,893    347,056 
Hotels operations and management                      58,670    270,057     218,365    189,205 
Sale of medical systems                               16,449     75,713      44,049         -- 
Realization of investments                               425      1,958      16,415     45,129 
Other operational income                               9,648     44,409      13,238     13,495 
                                                     -------    -------     -------   -------- 
                                                     177,440    816,755     735,881    594,885 
                                                     -------    -------     -------   -------- 
COSTS AND EXPENSES                                                                             
Commercial centers operations                         34,248    157,640     271,392    257,913 
Hotels operations and management                      56,331    259,293     207,152    188,672 
Cost and expenses of medical systems operation        10,771     49,577      26,039      8,720 
Other operational expenses                            10,166     46,793       3,655      3,510 
Research and development expenses, net                12,796     58,899      38,158     43,719 
General and administrative expenses                    8,025     36,939      43,627     42,144 
Share in losses of associated companies, net           2,613     12,028      15,968     20,951 
Financial expenses, net                               26,574    122,321      53,569    211,821 
Other expenses, net                                   12,406     57,106      51,428     10,477 
                                                     -------    -------     -------   -------- 
                                                     173,930    800,596     710,988    787,927 
                                                     -------    -------     -------   -------- 
PROFIT (LOSS) BEFORE INCOME TAXES                      3,511     16,159      24,893   (193,042)
Income taxes (tax benefits)                            1,694      7,798      15,804    (20,217)
                                                     -------    -------     -------   -------- 
PROFIT (LOSS) AFTER INCOME TAXES                       1,816      8,361       9,089   (172,825)
Minority-interest in results of subsidiaries, Net     15,922     73,287      27,448     48,671 
PROFIT (LOSS) FROM CONTINUING OPERATIONS              17,738     81,648      36,537   (124,154)

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                                                        [Enlarge/Download Table]
                                                                                     
Profit from discontinued operations, net         1,285     5,917     6,810    12,073 
Cumulative effect of accounting change at the                                        
   beginning of the year                          (135)     (622)       --        -- 
                                               -------   -------   -------  -------- 
NET INCOME (LOSS)                               18,888    86,943    43,347  (112,081)
                                               =======   =======   =======  ======== 

FISCAL 2005 COMPARED TO FISCAL 2004                                             

  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 2005 were NIS 816.8 million ($177.4   
million) compared to NIS 735.9 million for 2004, an increase of NIS 80.9        
million, or 11%.                                                                

 Revenues from sale of real estate assets and investments, net, for 2005
were NIS 281.7 million ($61.2 million) compared to NIS 131.9 million in 2004.   

Revenues from sale of real estate assets and investments in 2005 were 
derived from (i) sale of four Polish shopping 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 shopping and  
entertainment centers to Klepierre in July 2004, which contributed net revenues 
of NIS 53.4 million ($11.6 million); (iii) sale of four Hungarian shopping and  
entertainment centers to Dawney Day in April 2005, which contributed net        
revenues of NIS 3.5 million ($0.8 million); and (iv) sale of our interest (30%) 
in Shaw in December 2005, which contributed net revenues of NIS 58.4 million    
($12.7 million).                                                                

  Revenues from sale of real estate assets and investments in 2004 derived
from the sale of twelve Hungarian shopping and entertainment centers to         
Klepierre in July 2004.                                                         

For further elaboration of these transactions see "Item 10. Additional
Information - Material Contracts - Shopping and Entertainment Centers" below.   

  Revenues from shopping and entertainment centers operations in 2005 were
NIS 143.0 million ($31 million) compared to NIS 311.9 million in 2004, a        
decrease of NIS 168.9 million or 54%. Such decrease resulted mainly from (i) the
sale of the activities of 12 shopping centers in Hungary, which were sold to    
Klepierre Group at the beginning of the third quarter of 2004 and which did not 
contribute any revenues in 2005 in comparison with NIS115.5 million in the first
half of 2004; (ii) the sale of the activities of four operational centers in    
Hungary which were sold to Dawny Day at the beginning of the second quarter of  
2005, which contributed revenues of NIS 11.5 million ($2.5 million) in first    
quarter 2005 compared to NIS 46 million in 2004; and (iii) the sale of the      
activities of four operational centers in Poland which were sold to Klepierre at
the beginning of the third quarter of 2005 and which contributed revenues of NIS
40.0 million ($ 8.7 million) in the first half of 2005 compared to NIS 60.0     
million in 2004.                                                                

   Revenues from our hotel operations and management for 2005 were NIS 270.1
million ($58.7 million) as compared to NIS 218.4 million for 2004, an increase  
of NIS 51.7 million or 23.7%. The increase in revenues in the hotel division    
resulted primarily from the commencement of operations of the Riverbank Park    
Plaza Hotel in April 2005, which contributed additional revenues of NIS 39.1    
($8.5 million) in 2005; from an increase in revenues from the operations of     
Victoria London hotel mainly attributed to higher occupancy rate and higher     
average room rate; and from an increase in revenue from the Centerville         
apartments hotel in Bucharest mainly attributed to renovation and commencement  
of operations of an additional 60 apartments during 2005.                       

   Revenues from InSightec's sale of medical systems in fiscal 2005 were NIS
75.7 million ($16.4 million) as compared to NIS 44.0 million in 2004. The sales 
in fiscal 2005 represent sales of 15 "ExAblate 2000" Systems as compared to 10  
systems in 2004.                                                                

  Revenues from realization of investments in 2005 were NIS 2.0 million ($
0.4 million) which were attributed to additional proceeds received from the sale
of our interest in Algotech in November 2003 as compared to NIS 16.4 million in 
2004 which were attributed to gain deriving from decrease in shareholding of our
interest in InSightec amounting to NIS 13.0 million and certain additional      
proceeds received from the sale of Algotech amounting to NIS 3.4 million.       

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    Revenues from other operational income in 2005 were NIS 44.4 million ($9.6
million), out of which NIS 31.8 million ($6.9 million) being revenues from the  
operation of Mango which was acquired in May 2005 and NIS 12.7 million ($2.7    
million) representing lease of assets, as compared to NIS 13.2 million in 2004, 
all of which deriving from lease of assets.                                     

Profits before Income Taxes                                           

SET FORTH IS AN ANALYSIS OF OUR PROFITS BEFORE INCOME TAXES AND THE   
ANALYSIS OF THE DECREASE IN OUR PROFITS BEFORE INCOME TAXES FROM NIS 24.9       
MILLION IN 2004 TO NIS 16.2 MILLION ($3.5 MILLION) IN 2005:                     

 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.                              

    Costs and expenses from shopping and entertainment centers operations less
revenues from shopping and entertainment centers in 2005 was NIS 14.7 million ($
3.2 million) compared to revenues from shopping and entertainment centers       
operations less costs and expenses related to such revenues in 2004 of NIS 40.5 
million. This decrease was attributable mainly to a decrease in the revenues of 
the shopping and entertainment centers as a result of the project sales         
described above. The decrease in revenues was not followed by a matching        
decrease in other operational expenses related to the shopping and entertainment
centers operations (i.e., initiation, selling & marketing as well as general and
administrative expenses).                                                       

Revenues from hotel operations less costs and expenses related to such
revenues in 2005 was NIS 10.7million ($ 2.3 million) compared to NIS 11.2       
million in 2004. This decrease is attributable mainly to the fact that the      
Riverbank Hotel which commenced operation in April 2005 was not operating on a  
full-scale basis while its fixed expenses (e.g. property tax, insurance,        
depreciation, etc.) corresponded to full-scale operations of such hotel         
resulting in losses of approximately NIS 12 million ($2.6 million) from this    
hotel which are typical to hotel in its preliminary stages of operation. Such   
losses were partially offset by an increase in profits of the Centerville       
apartments hotel in Bucharest and the Victoria London Hotel.                    

  Revenues from sale of medical systems less costs and expenses related to
such revenues in 2005 was NIS 26.1millions ($ 5.7 million) compared to NIS 18.0 
million in 2004. This increase is attributable mainly to a growth in sales, as  
described in preceding paragraphs, offset by increase in selling and marketing  
expenses and general and administrative expenses attributable to sale of medical
systems from NIS 16.2 million in 2004 to NIS 30.2 million ($ 6.6 million) in    
2005. This increase in selling and marketing expenses was attributable to       
InSightec's extensive efforts and resources devoted to expand its scope of sales
and the increase in general and administrative expenses attributable to an      
increase in InSightec's headquarters personnel in order to expand InSightec's   
activities.                                                                     

    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 income less revenues from other
operational income in 2005 was NIS 2.4 million ($ 0.5 million) compared to      
revenues from other operational income less costs and expenses related to such  
revenues in 2004 of NIS 9.6 million. which include the following: (i) revenues  
of Mango less costs and expenses of Mango of NIS 4.4 million ($1.0 million);    
(ii) project initiation expenses of NIS 7.8 million ($1.7 million) mainly       
relating EMI's tender offer to participate in Israel's Channel 2 broadcasting;  
and (iii) revenues from lease of assets less costs and expenses of related to   
such revenues was NIS 9.8 million ($2.1 million). Revenues from other           
operational income in 2004 less costs and expenses related to such revenues     
resulted from lease of assets and amount of NIS 10.0 million.                   

 Research and development expenses, net in 2005 totaled NIS 58.9 million
($12.8 million), after deducting NIS 3.9 million ($0.8 million) granted by the  
Israeli Office of the Chief Scientist ("OCS"), compared to NIS 38.2 million in  
2004, after deducting NIS 7.7 million granted by the OCS. All research and      
development expenses derived from InSightec's operations. InSightec expanded its
scope of research and development in 2005 to new applications of the ExAblate   
2000 systems as well as costs related to the developing of new systems.         

   General and administrative expenses decreased in 2005 to NIS 36.9 million
($8 million) from NIS 43.6 million in the previous year. This decrease is       
attributed mainly to a decrease in legal and other professional fees including, 
inter alia, a one-time write off of a provision previously recorded for such    
expenses as well as a decrease in headquarters salary expenses. General and     
administrative expenses include corporate executive, administrative, legal and  
accounting activities, rental expenses and professional fees. General and       
administrative expenses related directly to EMI's 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 12.0 million
($2.6 million) in 2005, compared to NIS 16.0 million in 2004. Such losses are   
attributable mainly to EMI's share in losses resulted from the operations of our
venture capital investments: Gamida, Olive and Easyrun, partially offset by net 
income deriving from Ercorner (the company holding the Dream Island project).   

 Finance expenses, net increased to NIS 122.3 million ($26.6 million) in
2005 from NIS 53.6 million in 2004. Such increase resulted from a combination of
the following factors:                                                          

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     -    In 2005, EMI had an exchange rate differences loss of NIS 20.2 million
          ($4.4 million) as compared to an exchange rate differences gain of NIS
87.8 million in 2004 which was attributable to:             

         (i)  In 2004, our shopping and entertainment centers segment recorded
              an exchange rate differences gain of NIS 76.8 million, generated
          mainly by the significant re-valuation (5%) of the Hungarian
             Forint in Hungary (which until April 1, 2004 was the functional
             currency of the operations in that country), in relation to the
             Euro, which is the currency used in financing these activities.
            This compares to PC's exchange rate differences losses in 2005
           which amounted to NIS 2.1 million, since the Euro is both the
              functional currency of PC's subsidiaries and the currency of its
           monetary net assets. In addition, in 2005, we had an exchange
             rate differences loss of NIS 12.6 million which resulted mainly
             from the Arena shopping and entertainment center in Israel as a
            result of an evaluation of the US dollar against the NIS which
constitute Arena's functional currency;           

   (ii) Our hotel segment (mainly its Romanian subsidiary) accrued
               exchange rate differences loss amounting to NIS 6.0 million ($1.3
            million) in 2005 compared to exchange rate differences gain of
             NIS 17.4 million in 2004, attributed to the fluctuations of the
        US dollar against the Romanian Lei, being the subsidiary's
functional currency;                              

       (iii) In 2005, we recorded an exchange rate differences loss of NIS
              10.3 million ($ 2.2 million), which is attributable to corporate
               loans provided to us in foreign currencies (mainly the US dollar)
            against the NIS. This compares to an exchange rate differences
gain of NIS 13.0 million in 2004; and             

        (iv) An increase in our exchange rate differences gain from cash and
        bank deposits to NIS 10.8 million in 2005 ($ 2.3 million),
               compared to an exchange rate differences loss of NIS 19.4 million
in 2004.                                          

 -    In fiscal 2005, we incurred interest expenses and a gain/loss from
         forward transactions of NIS 102.1 million ($22.2 million) as compared
          to NIS 141.4 million in 2004, which was attributable to the following:

      (i)  In 2005, we recorded a gain from a forward transaction of NIS
      14.7 million ($3.2 million) compared to a loss from such
   transaction of NIS 14.9 million in 2004; Such forward
               transactions were designed in order to hedge payments or proceeds
            that should have been paid or received in other currencies and
   which for accounting purposes do not constitute hedge
            transactions and therefore, their results were recorded in the
statement of operations;                          

         (ii) In 2005, our shopping and entertainment centers segment recorded
               interest expenses of NIS 27.3 million ($5.9 million), compared to
               NIS 66.4 million in 2004 mainly due to a decrease in the scope of
        loans following the sale of the shopping and entertainment
centers;                                          

   (iii) Our hotels segment recorded interest expenses of NIS 52.7
            million ($ 11.5 million) compared to NIS 35.7 million in 2004,
           mainly due to the commencement of operations of the Riverbank
Park Plaza hotel; and                             

          (iv) Interest expenses in respect of our corporate loans less interest
         income on our deposits increased to NIS 35.5 million ($ 7.7
             million) compared to NIS 24.4 million in 2004. This increase is
          mainly attributable to an increase in our scope of loans and
      an increase in the basic LIBOR rates for all currencies.

Other expenses, net, in 2005 totaled NIS 57.1 million ($12.4 million) 
compared to NIS 51.4 million in 2004. This was the result of:                   

               (i)  In 2004 we recorded a gain of NIS 12.4 million deriving from
              realization of investment-type monetary balances (i.e.
               foreign currency exchange rates results with respect to
          shareholder loans provided to our investee company
          previously recorded directly as cumulative foreign
           currency translation adjustments within shareholder
            equity and which, as a result of a repayment of such
              shareholder loans, were realized into the statement of
                operations). In 2005 EMI did not record such a gain; and

          (ii) A provision for loss resulting from expected decline in
           EMI's holdings in Elscint due to the probability of
                  realization of Elscint' shares held by employees under the
               Elscint Incentive Plan, which was recorded prior to the
           consummation of the merger between EMI and Elscint,
                   partially offset by a decrease in loss from disposition and
                  impairment of assets and investments which in 2004 totaled
                 NIS 64.8 million compared to NIS 46.4 million recorded in
                    2005 ($10 million). The assets and investments impairment in
                  2005 included mainly impairment of our hotels and shopping
                  and entertainment centers and impairment of our investment
               in Vcon, which is one of our venture capital investment
companies.                              

   As a result of the foregoing factors, profit before income tax totaled in
2005 NIS 16.2 million ($3.5 million), compared to NIS 24.9 million in 2004.     

Certain additional factors affecting our net profit for 2005 and 2004 
included the following:                                                         

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   (a)  income taxes in 2005 totaled NIS 7.8 million ($1.7 million) compared
to NIS 15.8 million in 2004;                                

  (b)  minority interest in results of subsidiaries, net, totaled NIS 73.3
        million ($15.9 million) compared to NIS 27.4 million in 2004, mainly
          resulting from an increase in EMI's share in Elscint's and InSightec's
losses;                                                     

  The above resulted in profit from continuing operation totaling NIS 81.6
million ($17.7 million) in 2005, compared to NIS 36.5 million in 2004.          

 (c)  profit from discontinuing operations, net, totaled NIS 5.9 million
     ($1.3 million) in 2005, compared to NIS 6.8 million in 2004; this
        profit resulted mainly from the collection of receivables previously
       written off and to exchange rate differences income attributable to
monetary assets pertaining to discontinuing operations;     

   (d)  cumulative effect from the application of a new accounting standard,
resulted in loss of NIS 0.6 million ($0.1 million) in 2005; 

 The above resulted in net profit of NIS 86.9 million ($18.9 million) in
2005, compared to NIS 43.3 million for fiscal 2004.                             

FISCAL 2004 COMPARED TO FISCAL 2003                                             

Revenues                                                              

     Total consolidated revenues for fiscal 2004 were NIS 735.9 million compared
to NIS 594.9 million for 2003, an increase of NIS 141 million, or 23.7%.        

   Revenues from sale of real estate assets and investments, net, for fiscal
2004 were NIS 131.9 million. There were no such transactions in 2003.           

  Revenues from sale of real estate assets and investments in 2004 derived
from the sale of twelve Hungarian shopping and entertainment centers to         
Klepierre in July 2004.                                                         

     Revenues from shopping and entertainment centers operations for fiscal 2004
were NIS 311.9 million compared to NIS 347.1 million in 2003, a decrease of NIS 
35.2 million or 10%. This decrease resulted from the exclusion of the activities
of 12 shopping centers in Hungary, which were sold to Klepierre at the beginning
of the third quarter of 2004, which contributed revenues of NIS 115.5 in the    
second half of 2004 compared to NIS 219.0 million in 2003. This decrease was    
offset by: (i) an increase in revenues from Arena in the amount of NIS 35       
million; Arena commenced partial operations in mid June 2003 while during fiscal
2004 attaining almost full scale operations; (ii) an increase revenues in the   
amount of NIS 7 million deriving from the opening of an additional shopping     
center in Hungary during 2004; (iii) an increase revenues in the amount of NIS  
15 million received by the center's management company (in which EMI then held  
50%) during the second half of 2004, from the 12 centers sold to Klepierre; and 
(iv) an increase revenues in the amount of NIS 13 million resulting from        
currency fluctuations in Hungary and Poland during the fiscal year 2003.        

Revenues from hotel operations and management for 2004 were NIS 218.4 
million as compared to NIS 189.2 million for fiscal 2003, an increase of NIS    
29.2 million or 15%. The increase in revenues resulted from: (i) commencement of
operations of the Aquotopia attraction within the Astrid Park Plaza facilities  
in 2004; (ii) higher occupancy rates in Victoria London and the Sherlock Holmes 
hotels; and (iii) renovations and operations of additional apartments in our    
Centerville apartment hotel in Bucharest during fiscal 2004 and higher occupancy
and rental rates from this hotel.                                               

Revenues from InSightec's sale of medical systems in 2004 were NIS 44 
Million. InSightec commenced sales during the first quarter of 2004. The sales  
represent sales of 10 "ExAblate 2000" Systems.                                  

 Revenues from realization of investments in 2004 were NIS 16.4 million,
compared to NIS 45.1 million in 2003. This decrease was attributable to a       
decrease in our shareholding in InSightec amounting to NIS 13.0 million in 2004 
and NIS 20.4 in 2003, as well as additional proceeds received from the sale of  
our interest in Algotech totaling NIS 3.4 million in 2004 compared to gain      
derived from the consummation of this sale of NIS 24.7 million in 2003.         

   Other operational income consists of revenues deriving from hotel leasing
in 2004 of NIS 13.2 million as compared to NIS 13.5 million for 2003.           

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Profits before Income Taxes                                           

    SET FORTH IS AN ANALYSIS OF THE PROFITS BEFORE INCOME TAX: Profit from the
sale of real estate assets and investments is presented in net, after cost of   
assets or investments sold; therefore, the profits from such sales are equal to 
the revenues derived therefrom.                                                 

    Revenues from shopping and entertainment centers operations less costs and
expenses related to such revenues in 2004 was NIS 40.5 million compared to NIS  
89.1 million in 2003. This decrease was mainly due to the sale of the activities
of 12 shopping centers in Hungary, which were sold to Klepierre at the beginning
of the third quarter of 2004.                                                   

Revenues from hotel operations less costs and expenses related to such
revenues in 2004 was NIS 11.2 million compared to NIS 0.5 million in 2003. This 
increase resulted from increase in revenues of the hotel segment and improved   
efficiency in our costs of revenues of this segment.                            

  Revenues from sale of medical systems less costs and expenses related to
such revenues in 2004 was NIS 18.0 million compared to costs and expenses of    
medical systems less revenues from sale of medical systems of NIS 8.7 million in
2003. This increase was attributed to an increase in revenues from the sales of 
such systems. The costs and expenses related to medical systems operations in   
fiscal 2003, consists mainly of general and administrative expenses recorded in 
accordance with the Single - Step Form described above.                         

    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.                                                     

Revenues from sale of other operational income less costs and expenses
related to such revenues in 2004 resulted from the lease of assets.             

 Research and development expenses, net in 2004 totaled NIS 38.2 million
after deducting NIS 7.7 million granted by the OCS, compared to NIS 43.7 million
in fiscal 2003, after deducting NIS 7.5 million granted by OCS. All research and
development expenses derived from InSightec's operations.                       

    General and administrative expenses, increased in 2004 to NIS 43.8 million
from NIS 42.1 million in the corresponding period of the previous year.         

   Share in losses of associated companies, net, totaled NIS 16.0 million in
2004, compared to NIS 21.0 million in 2003 mainly resulted from the operations  
of our venture capital investments: Gamida, Olive and Easyrun, partially offset 
by net income deriving from Ercorner (the company that owns the Dream Island    
project). Due to the fact that from the fourth quarter of 2003, the investment  
in Vcon is stated on a cost basis, the Company has not recorded any equity      
income or loss regarding Vcon since that date.                                  

  Financing expenses, net in 2004, totaled NIS 53.6 million as compared to
NIS 211.8 million in 2003, a decrease of NIS 158 million. Such decrease resulted
from a combination of the following factors:                                    

         In 2004, EMI had exchange rate differences gain of NIS 87.8
        million compared to exchange rate differences loss of 67.1
           million in 2003, which was attributable mainly to an exchange
          rate differences gain of NIS 76.7 million recorded by our an
              shopping and entertainment segment in 2004, which were generated
            mainly by the significant re-valuation of the Hungarian Forint
           (which until April 1, 2004 was the functional currency of the
            operations in that country), in relation to the Euro, which is
               the currency used in financing these activities. This compared to
              exchange rate differences expense losses of NIS 100.9 million in
              2003 which were incurred due to substantial currency devaluation
            (net of inflation) in Hungary and Poland, partially offset by:

        (i)  EMI's hotel segment (mainly its Romanian subsidiary) accrued an
        exchange rate differences gain of NIS 17.5 million in 2004
            compared to accrued exchange rate differences gain of NIS 27.1
              million in 2003, attributed to the fluctuations of the US dollar
            (being the Romanian's subsidiary net monetary assets currency)
against the Romanian Lei; and                     

   (ii) Exchange rate differences loss in 2004 attributable to our
         corporate loans and deposits totaled NIS 6.4 million, which
        resulted mainly from fluctuations in the exchange rates of
        currencies financing the operations of the Company (mainly
            exchange rate of the US dollar against the NIS). This compares
    with an exchange rate gain of NIS 8.6 million in 2003.

-    In 2004, we incurred interest expenses of NIS 141.4 million as   
        compared to NIS_144.7 million in fiscal 2003, which was attributable
        mainly to the decrease in interest expenses in 2004 accrued on Plaza
       Center's bank loans, totaling NIS 55.0 million compared to NIS 81.5
       million in 2003, which was primarily a result of a reduction in the
         amount of outstanding loans due to the exclusion of the activities of
         12 shopping centers in Hungary that were sold to Klepierre during the
third quarter of 2004. This was partially offset by:        

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         (i)  Increase in interest expenses of our hotels segment amounting to
            NIS 35.7 million in 2004 compared to NIS 27.7 million in 2003,
             mainly due to an increase in the scope of loans of this segment
as a result of new refinance loans; and           

          (ii) Increase of Arena's accrued interest expenses of NIS 11.4 million
            in 2004 compared to NIS 6.4 million in 2003, mainly due to the
              fact that Arena commenced operation in mid June 2003 and did not
            accrue interest expenses in its statement of operations in the
first half of 2003; and                           

       (iii) Decrease in our interest income from bank deposits to NIS 4.6
             million in 2004 compared to NIS 11.2 million in 2003 mainly due
  to a decrease in the amount of deposits held by EMI.

    Other expenses, net, in 2004 totaled NIS 51.4 million compared to NIS 10.5
million in 2003. This was as a result of: (i) gain of NIS 12.4 million recorded 
in 2004 from realization of investment type monetary balance in investees (i.e. 
foreign currency exchange rates results with respect to shareholder loans       
provided to our investee company previously recorded directly as cumulative     
foreign currency translation adjustments within shareholder equity and which, as
a result of a repayment of such shareholder loans, were realized into the       
statement of operations), compared to a gain of NIS 32.3 million in 2003        
resulting from such realization; and (ii) an increase from disposition and      
impairment of assets and investments in 2004 totaling NIS 64.8 million, compared
to NIS 38.0 million recorded in 2003.                                           

   As a result of the foregoing factors, profit before income tax totaled in
2004 NIS 24.9 million compared to loss before income tax NIS 193.0 million in   
2003.                                                                           

Additional factors affecting EMI's net profit for 2004 and 2003 are as
follows:                                                                        

      (a)  income taxes in 2004 totaled NIS 15.8 million compared to tax
benefit of NIS 20.2 million in 2003;              

       (b)  minority interest in results of subsidiaries, net, totaled NIS
       27.4 million compared to NIS 48.7 million in 2003, mainly
     resulting from increase in EMI's share in Elscint's and
InSightec's losses;                               

       The above results in profit from continuing operations totaling NIS
         36.5 million in 2004, compared to loss therefrom of NIS 124.2 million
for 2003.                                                   

          (c)  profit from discontinuing operation, net, totaled NIS 6.8 million
        in 2004, compared to NIS 12.1 million in 2003; this profit
           resulted mainly from the collection of receivables previously
     written off and to exchange rate differences for income
     attributed to monetary assets pertaining to discounting
operations;                                       

  The above results in net profit of NIS 43.3 million in 2004, compared to
loss NIS 112.1 million for 2003.                                                

B.   LIQUIDITY AND CAPITAL RESOURCES                                            

GENERAL                                                                         

   Our capital resources include the following: (a) lines of credit obtained
from Israeli banks; (b) proceeds from sales of assets; (c) financing margins    
resulting from the refinancing of loans extended to the subsidiaries building   
the centers; (d) private issuance of non-convertible debentures and shares; and 
(e) available cash and cash equivalents. Such resources are used for one or more
of the following purposes:                                                      

        (i)  equity investments in our centers and hotels constructed by our
               wholly owned and jointly controlled subsidiaries (special purpose
          entities that are formed for the construction of the various
              centers and hotels ("Projects Companies")). We generally finance
               approximately 25%-30% of such projects through equity investments
               in the Project Companies, while the remaining 70%-75% is financed
            through a credit facility secured by a mortgage of the project
          constructed by the respective Project Company, registered in
             favor of the financial institution that provide such financing.
           The equity investments in the Project Companies are typically
               provided by us through shareholder loans that are subordinated to
the credit facilities as therein provided;        

(ii) additional investments in InSightec if necessary;      

        (iii) additional investment in our investees (mainly venture capital
investments); and                                 

(iv) other investments such as project initiation.          

InSightec's capital resources are obtained primarily from additional  
investments in equity or in convertible notes by its shareholders and from its  
revenues from sale of medical systems. Such amounts are used for research and   
development activities aimed at obtaining FDA approvals for further treatments  
and other general corporate expenses such as cost of revenues, marketing and    
selling and general and administrative expenses.                                

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LIQUIDITY                                                                       

     The followings items elaborate on the major transactions and events carried
out by EMI in 2005 and onwards, which resulted in material changes in EMI's     
liquidity:                                                                      

     Sources of Cash from Major Transactions and Events - 2005 and 2006 to Date:

       -    On July 29, 2005, PC sold four operational shopping centers in
        Poland, to Klepierre for a net cash consideration of E73.8
               million ($88.7 million). The net cash consideration reflected the
             sold centers' asset value as at the closing, after deduction of
            bank loans and other working capital items of the sold centers
      (the "first stage"). In accordance with the terms of the
          agreement, an adjustment of the purchase price was set to be
            conducted on the basis of the gross rentals as of December 31,
              2005 (in respect of one shopping center - as of a date up to May
               31, 2006), and a net asset value adjustments based on the audited
              financial statements of the Sold Centers. As of the date of this
          annual report such adjustments have not yet been made and we
          believe that following such adjustments EMI will generate an
additional net cash consideration of E15 million. 

          -    In April 2005, PC sold four shopping and entertainment centers in
            certain peripheral cities in Hungary to Dawny Day Europe for a
              net consideration of E17.2 million ($20.3 million). The net cash
              consideration reflects the asset value of the sold centers after
            deduction of bank loans and other working capital items of the
              sold centers. We undertook within the framework of the agreement
             to guarantee achieving of certain operational targets of one of
          the sold centers, for a period of 3 years until December 31,
2007, which is estimated to total E1.3 million.   

          -    On December 19, 2005, Elscint has sold its entire 30% interest in
        the company owning the Shaw Hotel for net consideration of
E5.5 million ($6.5 million)                       

   -    Within the framework of an agreement signed between PC and
    Klepierre in July 2004 for the sale of 12 shopping and
              entertainment centers in Hungary, PC has provided Klepierre with
              a bank guaranty in order to secure certain revenues achievements
           of the sold centers. In the framework of the agreement signed
        between PC and Klepierre in July 2005, as described above,
             Klepierre released the guaranty unexercised, and PC received an
            additional cash consideration from Klepierre which amounted to
              E7.6 million ($9.0 million). In addition, in accordance with the
             agreement signed with Klepierre in July 2004, PC deposited E6.8
            million ($8.2 million) in an escrow account in order to secure
           certain tax conditions set forth in the sale agreement, which
have been released to us in March 2005.           

    -    In 2005, we continued our investments in those shopping and
             entertainment centers and hotels, which are under construction,
            through grants to our project companies totaling approximately
E24 million ($28 million).                        

       -    On March 2, 2006, through our jointly controlled subsidiaries,
     which hold three hotels in the United Kingdom ("Holding
               Companies"), we executed a refinance loan agreement together with
              Park Plaza. The Holding Companies and Park Plaza are jointly and
             severally borrowers under the agreement, while our share in the
         loan amounted to L97.5 million ($168 million) ("Refinancing
              Loan"). The Refinancing Loan bears annual interest of Libor + 3%
               and is repayable over a five-year period with an option to extend
         such term to seven years, subject to fulfillment of certain
condition as stipulated in the Refinancing Loan.  

        In the event of cash distributions deriving from the sale,
              disposal or refinancing of the hotels which were financed by the
        refinancing loan funds ("Transactions"), the Borrowers are
               required to pay to the financing bank an amount equivalent to 15%
         of the difference between the market value of the hotels as
            determined in such Transactions and the value of the hotels as
           set and agreed upon for the purposes of the Refinancing Loan.

             The Refinancing Loan proceeds were first used for the repayment
               of outstanding loans previously granted to the Holding Companies,
        in which our share amounted to L60 million ($104 million).

             The Holding Companies have transferred to us the surplus of the
           credit-received totaling L30.6 million ($52.7 million) out of
               which, L16.7 million ($28.7 million) was used to repay bank loans
            that financed our equity investments in the Holding Companies.

-    In February, March and June 2006, we issued unsecured  
       non-convertible debentures totaling NIS 527 million ($114
          million) to Israeli investors. The debentures consist of two
             series: Series A Debentures, in a principal amount of NIS 468.0
          million ($101.7 million), bear annual interest of 6% and are
             linked (principal and interest) to the increases in the Israeli
         CPI. Series B Debentures, in a principal amount of NIS 59.0
               million ($12.6 million), bear annual interest of LIBOR plus 2.65%
and are linked (principal and interest) to the US 

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              dollar. The principal amount of Series A and Series B Debentures
            are repayable in equal 10 semi-annual installments, commencing
            August 2009. The Series A and Series B debentures also provide
            that the debentures will be prepaid by us at the option of the
            trustee or the holders of the debentures if our securities are
             de-listed from trade on both the Tel Aviv Stock Exchange and on
              Nasdaq Global Market. We have undertaken to use our best efforts
           to register the two series of debentures for trade on the Tel
            Aviv Stock Exchange not later than August 30, 2006. So long as
               the debentures are not registered for trade on the Tel Aviv Stock
             Exchange, we have undertaken: (i) to pay an additional interest
               at a rate of 0.3% per annum; (ii) not to make any distribution as
            defined in the Israeli Companies Law to our shareholders which
            does not comply with the profit and solvency tests provided in
              section 302(a) of the Companies Law, unless such distribution is
          approved at the general meeting of holders of each series of
             debentures by an unanimous vote of all holders participating in
            the vote; (iii) to pre-pay the debentures at the option of the
             trustee or the holders of the debentures upon the occurrence of
              any of the following events: (a) the rating of the debentures in
            Israel decrease in Baa2 (the equivalent rating of BBB); or (b)
              the holding of Europe-Israel in us drops below 25% of our issued
         share capital. Such undertaking will be terminated upon the
            registration for trade of the debentures on the Tel Aviv Stock
Exchange.                                         

     -    On May 17, 2006, Elscint sold through a private transaction,
            524,187 dormant shares of EMI in consideration for NIS 115 per
          share, generating net cash consideration of NIS 60.2 million
($13.1 million).                                  

     -    On June 11, 2006, EMI issued to Israeli investors additional
              series A unsecured non-convertible debentures, in an approximate
          aggregate amount of NIS 68 million ($14.7 million).The newly
               issued series A debentures have same terms as those governing the
        previously issued series A debentures, as described above.

               Use of Cash from Major Transactions and Events - 2005 and 2006 to
Date:                                             

         -    On March 17, 2005, we distributed to our shareholders a dividend
 in the amount of NIS 153.9 million ($34.5 million).

         -    On January 17, 2006, the Company distributed to its shareholders
            a dividend in the amount of NIS 130.0 million ($28.2 million).

    The following table sets forth the components of our cash flows statements
for the periods indicated:                                                      

                                                        [Enlarge/Download Table]

                                                     YEAR ENDED DECEMBER 31,            
                                         -----------------------------------------------
                                             2005                                       
                                         Convenience      2005        2004        2003  
                                         Translation      NIS         NIS         NIS   
                                         -----------   ---------   ---------   ---------
                                             US $      Thousands   Thousands   Thousands
                                                                                        
Net cash used in operating activities ..   (21,531)     (99,108)    (21,562)     (8,333)

Net cash provided by investing                                                          
   activities ..........................     1,194        5,496     128,481     131,443 

Net cash provided by (used in)                                                          
   financing activities ................    52,950      243,727      75,872    (174,995)

Net effect on cash due to changes in                                                    
   currency exchange rates .............    (1,416)      (6,516)       (522)      3,959 

Increase (decrease) in cash and cash                                                    
   equivalents .........................    31,197      143,599     182,269     (47,926)

Cash flow from operating activities                                   

    Net cash used in operating activities for fiscal 2005 was NIS 99.1 million
($21.6 million), as compared to NIS 21.5 million for fiscal 2004. This increase 
in net cash used in operating activities, in the amount of NIS 77.5 was mainly  
due to the following:                                                           

   a decrease of NIS 116.0 million ($25.0 million) in PC's net cash provided
by its operating activities, which resulted mainly from (i) the sale of the     
activities of 12 shopping centers in Hungary, which were sold to Klepierre at   
the beginning of the third quarter of 2004; (ii) the sale of the activities of  
four operational centers in Hungary which were sold to Dawny Day at the         
beginning of the second quarter of 2005; and (iii) the sale of the activities of
four operational centers in Poland which were sold to Klepierre at the beginning
of the third quarter of 2005.                                                   

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This was offset by:                                                   

         (i)  Cash flow in respect of gain from derivative financial
               transactions of NIS 14.7 million ($3.1 million) in 2005
                   compared to loss from such transactions of NIS 13.5 million
                 in 2004. Consequently, the total change in cash flow from
                 our operating activities deriving from these transactions
amounted to NIS 28.2 million.           

            (ii) A decrease in the amount of NIS 15 million in InSightec's
                    net cash used for its operating activities as a result of an
                increase in revenues generated from the sales of medical
systems.                                

Cash flow from investing activities                                   

 Cash flow from investment activities decreased to NIS 5.5 million ($1.1
million) in 2005 from NIS 128.5 million in 2004. This decrease was mainly       
attributable to the following:                                                  

         -    an increase in the purchase of fixed assets to NIS 435.8 million
             in 2005 from NIS 373.5 million in 2004 mainly in respect of the
              construction of our shopping and entertainment centers in Poland
          and the Czech Republic and the construction of the Riverbank
hotel in London.                                  

        -    an increase in our investments in subsidiaries which were first
           acquired and consolidated in 2005 to NIS 117.7 million ($25.6
          million) from NIS 35.5 million. Such investments in 2005 are
            attributed mainly to (a) the purchase of the remaining 50% not
               owned by EMI in Sadyba; (b) the purchase of the entire equity and
          voting right in Kerepesi; and (c) the purchase of the entire
             equity and voting rights of Mango. This was partially offset by
             an increase in the proceeds from sale of real estate assets and
              investments to NIS 524.5 million ($113.9 million) in fiscal 2005
compared to NIS 412.0 million in 2004.            

     -    A decrease in the proceeds from the sale of fixed assets and
             investments to NIS 7.8 million ($ 1.7 million) in 2005 from NIS
               59.3 million in 2004; and (iv) a decrease in realization of short
           and long term deposits to NIS 37.5 ($ 8.1 million) million in
2005 from NIS 60.0 million in 2004.               

Cash flow from finance activities                                     

   Cash flow from financing activities increased to NIS 243.7 million ($53.0
million) in fiscal 2005 from NIS 75.9 million in 2004. Such increase was        
attributable to (i) receipt of long term bank loans - net of repayment of such  
loan - of NIS 365.7 million ($79.5 million) compared to NIS 218.4 million in    
2004. The proceeds from these new bank loans were used mainly for the           
construction and/or purchase of our shopping and entertainment centers and      
hotels; (ii) a dividend payment in fiscal 2005 of NIS 153.9 million ($33.4      
million) with no such distribution in 2004 although in fiscal 2004 EMI had      
acquired its shares in a total amount NIS 138.9 million with no similar purchase
in 2005; and (iii) the issuance of convertible debentures by InSightec of NIS   
60.2 million in 2004 with no such issuance in 2005.                             

Major balance sheet changes                                           

  Major balance sheet items as a percentage of total assets as at December
31, 2005 and 2004 were as follows:                                              

                                                                [Download Table]

                                            DECEMBER 31,
                                            ------------
                                             2005   2004
                                             ----   ----
                                                        
Current assets...........................     23%    16%
Current liabilities......................     18%    18%
Long-term Investments and fixed assets...     76%    82%
Long-term liabilities....................     50%    54%
Minority Interest........................    0.3%    10%
Shareholders' equity.....................     28%    18%

     Hotels, shopping and entertainment centers and other fixed assets decreased
by NIS 0.8 billion, to NIS 2.7 billion ($0.6 billion) at December 31, 2005 from 
NIS 3.5 billion at December 31, 2004. This decrease derived primarily from: (i) 
the sale of the centers to Klepierre; (ii) the sale of the centers to Dawny Day;
and (iii) the sale of the Shaw hotel. This decrease was partially offset by the 
continuing investments in the shopping and entertainment centers and hotels     
under construction in Europe.                                                   

Short-term credits and long term debt decreased to NIS 2,363 million  
($513.3 million) at December 31, 2005 from NIS 2,956 million at December 31,    
2004. The decrease in borrowings resulted primarily from repayment of long term 
loans which used to finance the centers and the hotels that were sold during    
2005, and the decrease wasoffset somewhat by loans obtained for the financing of
new centers and hotels.                                                         

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  Based on management's internal forecasts and assumptions relating to our
operations, that our existing cash and funds generated from operations, together
with the proceeds from the sale of assets and together with our existing        
financing agreements, will be sufficient to meet our working capital and capital
expenditure requirements for the completion of those projects whose construction
has already commenced. In the event that our plans change, our assumptions      
change or prove to be inaccurate, business conditions change, or if other       
capital resources and projected cash flow otherwise prove to be insufficient to 
fund our operations (due to unanticipated expenses or other unforeseen events), 
we may be required to reduce our operating expenses or use more of our cash     
reserves to fund operating expenses. In addition, we may need to seek additional
financing sooner than currently anticipated. We have no current arrangements    
with respect to sources of additional financing and there can be no assurance   
that we will be able to obtain additional financing on terms acceptable to us,  
if at all.                                                                      

Concentration of Credit Risk                                          

  Cash and amounts on deposit in Israel and abroad are deposited in banks.
For information on composition of the short and long-term investment portfolio, 
see Notes 4 and 8 to our consolidated financial statements included in Item 18. 
Such investments are exposed to market-price fluctuation, with the group        
affected by fluctuation of the Israeli capital market, over which the group has 
no control. Such changes may have an impact on the value of these investments   
upon realization.                                                               

EMI and most of its investee companies (the "Group Companies") are not
materially exposed to credit risks stemming from dependence on a given customer.
The Group Companies examine, on an ongoing basis, the amount of credit extended 
to their customers and, accordingly, record a provision for doubtful accounts   
based on those factors affecting credit risks of certain customers in the       
opinion of these companies' management.                                         

As for sale transactions with Klepierre, see "Item 10. Additional     
Information - C. Material Contracts - Shopping and Entertainment Centers" below.

   In 2003, the Israeli Bank Controller instituted new regulations governing
lending by Israeli banks to groups of affiliated borrowers. Under these         
regulations, the banks are limited in their maximum exposure to groups of       
affiliated companies under a combined lending ceiling based on objective and    
subjective guidelines. As a result, our borrowing capacity may be limited under 
certain circumstances even if we have unused lines of credit, due to borrowing  
by companies affiliated with shareholders that are defined by the Controller of 
the Banks as controlling shareholders of EMI. In anticipation of such           
developments, we are developing credit facilities that will not be affected by  
the new regulations.                                                            

DERIVATIVE INSTRUMENTS                                                          

    For information on financial instruments used, profile of debt, currencies
and interest rate structure, see "Item 11. Quantitative and Qualitative         
Disclosure About Market Risks" below.                                           

OTHER LOANS                                                                     

A. We have entered into or assumed liability for various financing agreements,  
either directly or indirectly through our subsidiaries, to provide capital for  
the purchase, construction, and renovation and operation of shopping and        
entertainment centers and hotels as well as for various investments in our other
segments of operations. In our opinion, our working capital is sufficient for   
our current requirements; however, our subsidiaries will continue to borrow     
funds from time to time to finance their various projects. Set forth below is   
certain material information with respect to loans extended to EMI, its         
subsidiaries and its jointly controlled companies as of December 31, 2005. The  
loans granted to our jointly controlled companies are presented in the table at 
their full value:                                                               

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                                                        [Enlarge/Download Table]


                          AMOUNT OF LOAN AND                                                                            
                        AMOUNT OUTSTANDING AS                                                PRINCIPAL SECURITIES AND   
  BORROWER AND LENDER    OF DECEMBER 31, 2005   INTEREST ON LOAN       PAYMENT TERMS                COVENANTS           
  -------------------  -----------------------  ----------------  ----------------------  ------------------------------
                                                                                                                        
Borrower:              Loan: $58 million        Libor + 3.35%     Loan for 10 years to    Principal Securities:         
EMI                                                               be repaid by 2013, in   First ranking pledge on the   
                       Amount outstanding:                        18 equal semi-annual    entire shares of PC and on    
Lender:                $50.7 million.                             installments,           615,500 shares of Elscint     
Bank Hapoalim B.M.     ($21 million + EURO 29                     commencing on June 30,  (approximately 3.5% of        
                       million)                                   2004.                   Elscint's share capital).     

                       Available amount: 0                        Interest payment will   PC's guarantee.               
                                                                  occur twice a year                                    
                                                                  commencing on December  Principal Financial Covenants:
                                                                  31, 2003                Adjusted Shareholder's Equity 
                                                                                          shall represent at least 20%  
                                                                                          of the Adjusted Balance Sheet 
                                                                                          Value.                        

                                                                                          Net Operating Profit (before  
                                                                                          deductions for depreciation   
                                                                                          and amortization relating to  
                                                                                          net operating profit) shall   
                                                                                          be at each June 30 of every   
                                                                                          year no less than NIS 120     
                                                                                          million.                      

                                                                                          In the event of (i) the net   
                                                                                          loan amount is $30 million;   
                                                                                          (ii) the total amount         
                                                                                          outstanding under the Europe  
                                                                                          Israel loan agreement is less 
                                                                                          than $30 million; and (iii)   
                                                                                          there has been no event of    
                                                                                          default under the loan        
                                                                                          agreement, the above          
                                                                                          financial covenants shall not 
                                                                                          apply.                        

                                                                                          For a waiver provided by      
                                                                                          lender with regard to the     
                                                                                          financial covenants and other 
                                                                                          issues, see "other            
                                                                                          information".                 

Borrower:              Loan: $25 million        Libor + 3.35%     Loan for 10 years to    See above.                    
Elbit Ultrasound                                                  be repaid by 2013, in                                 
(Netherlands) B.V.     Amount outstanding:                        18 equal semi-annual                                  
(our subsidiary)       EURO 15.2 million ($18                     installments,                                         
                       million)                                   commencing on June 30,                                
                                                                  2004                                                  
Lender:                Available amount: 0                                                                              
Bank Hapoalim B.M.                                                Interest will be paid                                 
                                                                  twice a year                                          
                                                                  commencing on December                                
                                                                  31, 2003                                              

Borrower:              Short term credit        Libor + 3.35%     Renewal every three                                   
EMI                    facility $10 million                       months.                                               

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                           AMOUNT OF LOAN AND                                                                           
                         AMOUNT OUTSTANDING AS                                                PRINCIPAL SECURITIES AND  
  BORROWER AND LENDER     OF DECEMBER 31, 2005   INTEREST ON LOAN       PAYMENT TERMS                COVENANTS          
----------------------  -----------------------  ----------------  ----------------------  -----------------------------
                                                                                                                        
Lender:                 Amount outstanding:                                                                             
Bank Hapoalim B.M.      $10 million                                                                                     

                        Available amount: 0                                                                             

Borrower:               Amount outstanding       Libor + 2.5% /    Renewal every 6         Principal Securities:        
InSightec Ltd           NIS equivalent of $5.1   or Prime + 1.1%   months subject to       EMI's guarantee for up to $5 
                        million                                    EMI's guarantee.        million.                     
Lender:                                                                                                                 
Bank Hapoalim B.M.                                                                         Liens on InSightec's MRI     
                                                                                           system and ExAblate 2000     
                                                                                           system installed at Sheba    
                                                                                           Medical Center.              

Borrower:               Credit line of $19.1     Libor + 3.35%     Renewal every 3         Principal Securities:        
EMI                     million                                    months.                 First ranking pledge of cash 
                                                                                           deposit and securities in an 
Bank Leumi Le-Israel    Amount outstanding:                                                aggregate amount of $3       
Ltd.                    $19.1 million                                                      million.                     

                        Available amount: 0                                                Negative pledge over         
                                                                                           Elscint's shares.            

Borrower:               Loan: $10 million        will be agreed    Credit will expire on   Principal Securities:        
InSightec Ltd                                    by the parties    June 30, 2006           First ranking pledge over the
                        Amount outstanding: 0    and will be                               entire assets of InSightec.  
Lender:                                          paid on a                                                              
Bank Leumi Le-Israel    Available Amount: $10    monthly basis.                            First ranking pledge and     
Ltd.                    million                                                            assignment on all rights in  
                                                                                           the ExAblate 2000 installed  
                                                                                           in the Shiba hospital.       

Borrower:               Loan: EURO 39.3          Euribor +         60% of the principal    Principal Securities:        
Movement Poland S.A     million                  margin ranging    to be repaid in 40      First ranking mortgage on the
                                                 from 1.5% to      quarterly payments.     shopping and entertainment   
Lender:                 Amount outstanding: 0    1.9% per annum.   40% of the principal    center.                      
Kredytbank S.A.                                                    to be repaid in one                                  
                        Available amount: EURO                     installment at final    First ranking pledge on      
Project:                39.3 million                               repayment date (no      shares of Borrower, on all of
Lublin Plaza                                                       later than March 31,    its accounts and on all      
                                                                   2017).                  present and future assets    

                                                                   The first repayment     Assignment of securities     
                                                                   date shall occur after  (insurance, lease, hedging   
                                                                   a nine-month period     agreement, management        
                                                                   commencing on the       agreements, project          
                                                                   completion date.        documents, accounts etc.) to 
                                                                   During the              lender.                      
                                                                   availability period                                  
                                                                   the interest will be    Cost Overruns Guarantee by PC
                                                                   paid on a monthly       and Sol-or Holding Management
                                                                   basis and thereafter    Ltd. (shareholders of        
                                                                   in quarterly            Borrower).                   
                                                                   installments.                                        
                                                                                           Corporate guarantees by PC   
                                                                                           and Sol-or which maybe       
                                                                                           revoked upon certain terms.  

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                               AMOUNT OF                                                                                        
                            LOAN AND AMOUNT                                                                                     
                           OUTSTANDING AS OF                                                                                    
  BORROWER AND LENDER      DECEMBER 31, 2005     INTEREST ON LOAN        PAYMENT TERMS        PRINCIPAL SECURITIES AND COVENANTS
----------------------  -----------------------  ----------------  -------------------------  ----------------------------------
                                                                                                                                
                                                                                              Principal Financial Covenants:    
                                                                                              Debt Service Cover Ratio is not   
                                                                                              less than 1.15.                   

                                                                                              The Loan to the Property's Value  
                                                                                              Ratio shall not be less than 80%. 
                                                                                              Such percentage decreases over the
                                                                                              years up to 50%.                  

                                                                                              Loan to Equity Contributions ratio
                                                                                              shall not be higher than 80:20.   

Borrower:               Loan: PLN equivalent of  Euribor + 1.4%    Either:                    Principal Securities:             
Movement Poland S.A     EURO 8.5 million         per annum.        on each interest payment   Second ranking mortgage on the    
                                                                   date by any VAT refund     center.                           
Lender:                 Amount outstanding: 0                      amount standing on that                                      
Kredytbank S.A                                                     day                        Assignment of VAT refunds.        
                                                                   or                                                           
Project:                Available amount: PLN                      one day after the date                                       
Lublin Plaza.           equivalent of EURO 8.5                     when relevant VAT refund   Pledge on bank accounts.          
                        million                                    is received from the tax                                     
                                                                   office                                                       

Borrower:               Loan: EURO 24.7 million  EURIBOR + margin  60% of the principal to    Principal Securities:             
Rybnik Plaza sp.z.o.o.                           ranging from      be repaid in 40 quarterly  First ranking mortgage on the     
                        Amount Outstanding: 0    1.45% to 1.95%    payments. 40% in one       property.                         
Lender:                                          per annum.        installment at final                                         
Kredytbank S.A.         Available amount: EURO                     repayment date (no later   Assignment of current and future  
                        24.7 million                               than Jun 30, 2017)         leases of relating insurance      
Project:                                                                                      agreements, of all rights under   
Rybnik Plaza                                                                                  the development contracts and the 
                                                                                              receivables under the performance 
                                                                                              bonds.                            

                                                                                              Pledge on shares of borrower and  
                                                                                              over the receivables under the    
                                                                                              project's accounts.               

                                                                                              PC's cost overruns guarantees.    

                                                                                              PC's corporate guarantee (until   
                                                                                              income level of 2.5 million EURO  
                                                                                              is reached).                      

                                                                                              Principal Financial Covenants:    
                                                                                              The Debt Service Cover Ratio shall
                                                                                              be no less than 1.15 during each  
                                                                                              quarter.                          

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                          AMOUNT OF LOAN AND                                                                                        
                         AMOUNT OUTSTANDING AS                                                                                      
  BORROWER AND LENDER      OF DECEMBER 31, 2005    INTEREST ON LOAN          PAYMENT TERMS        PRINCIPAL SECURITIES AND COVENANTS
----------------------  -----------------------  -------------------  --------------------------  ----------------------------------
                                                                                                                                    
                                                                                                  Loan to Asset's Value Ratio shall 
                                                                                                  not be less than 80%. Such        
                                                                                                  percentage decreases over the     
                                                                                                  years up to 50%.                  

                                                                                                  Loan to Equity Contributions      
                                                                                                  ratio shall not be higher than    
                                                                                                  80:20.                            

                                                                                                  Loan shall not exceed 80% of the  
                                                                                                  project budget.                   

Borrower:               Loan: The PLN            Euribor + 1.4% per   VAT amounts refunded by     Principal Securities:             
Rybnik Plaza sp.z.o.o.  equivalent of EURO       annum.               the tax office on the last  Second ranking mortgage on the    
                        6.2 million                                   day of a given interest     mall.                             
                                                                      period. Remaining           Registered pledge on the          
Lender:                 Amount Outstanding: 0                         outstanding facility will   borrower's assets                 
Kredytbank S.A.                                                       be repaid not later than    Assignment of VAT refunds         
                        Available amount: The                         nine months after the end                                     
Project:                PLN equivalent of                             of construction period,                                       
Rybnik Plaza            EURO 6.2 million                              however, no later than                                        
                                                                      September 30, 2007.                                           

Borrower:               Loan: EURO 27.4 million  Euribor + margin     55.5% of the principal to   Principal Securities:             
Bestes s.r.o                                     ranging from 1.4%    be repaid in 40 quarterly   First ranking mortgage on the     
                        Amount outstanding:      to 2%.               installments. 45.5% in one  mall.                             
Lender:                 EURO 16.8 million                             installment on final                                          
MKB Bank Rt. And                                                      repayment date (latest on   Assignment of leases in           
Investkredit            Available amount: EURO                        31.12.2015)                 mall, of the construction         
                        10.6 million                                                              agreements and the construction   
                                                                                                  warranties.                       

Project:                                                                                          Pledge over bank accounts, over   
Novo Plaza                                                                                        insurance, over all present and   
                                                                                                  future assets and on the          
                                                                                                  Borrower's shares and on          
                                                                                                  Entertainment Plaza's shares.     

                                                                                                  PC cost overrun guarantee         

                                                                                                  Principal Financial Covenants:    

                                                                                                  Debt Service Cover Ratio shall not
                                                                                                  be lower than 115%.               

                                                                                                  The Loan to Cost Ratio (i.e.      
                                                                                                  actual loan divided by budget of  
                                                                                                  construction) shall not be higher 
                                                                                                  than 75% during the term of the   
                                                                                                  construction.                     

                                                                                                  The Loan to the Property's Value  
                                                                                                  Ratio shall no be higher than 75%.

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                           AMOUNT OF LOAN AND                                                                                       
                           AMOUNT OUTSTANDING                                                                                       
  BORROWER AND LENDER   AS OF DECEMBER 31, 2005    INTEREST ON LOAN          PAYMENT TERMS        PRINCIPAL SECURITIES AND COVENANTS
----------------------  -----------------------  -------------------  --------------------------  ----------------------------------
                                                                                                                                    
Borrower:               Loan: EURO 7.5 million   Euribor + 1.75% per  Principal will be paid in   Principal Securities:             
Praha Plaza s.r.o                                annum.               48 quarterly payments of    First ranking mortgage on the     
                        Amount outstanding:                           EURO 117,200, beginning on  property.                         
Lender:                 EURO 6.9 million                              December 31st, 2004. The                                      
Erste Bank AG                                                         remaining amount will be    First ranking pre-emption right   
                        Available amount: 0                           paid in one installment on  regarding the property in favor of
Project:                                                              December 31st, 2016.        the lender.                       
Praha Plaza Commercial                                                                                                              
Complex                                                               Interest will be paid on    Pledge on shares of Borrower, on  
                                                                      the last day of each        accounts, on receivables from the 
                                                                      interest period (3 months)  lease agreements.                 
                                                                      commencing utilisation                                        
                                                                      date or on the last day of  Assignment of insurance.          
                                                                      its preceding interest                                        
                                                                      period.                     Principal Financial Covenants:    
                                                                                                  Maintenance of Debt Service Cover 
                                                                                                  Ratio of 1.15 or higher.          

                                                                                                  Undertaking to refill the debt    
                                                                                                  service reserve account in the    
                                                                                                  event it is reduced below a       
                                                                                                  certain minimum.                  

                                                                                                  Loan to the Property's Value Ratio
                                                                                                  shall not exceed 80%.             

Borrower:               Loan: EURO 3.5 million   Euribor + 1.85% per  Repayment in ten            Principal Securities:             
Tatabanya Plaza Kf.t.                            annum                increasing installments.    Pledge on quotes of Tatabanya     
                        Amount outstanding:                           Last repayment done on      Plaza.                            
Lender:                 EURO 1.4 million                              September 30, 2006.                                           
MKB Bank Rt.                                                                                      Suretyship of PC.                 
                        Available amount: 0                                                                                         
                                                                                                  Pledge over shares of Helios Plaza
                                                                                                  (our subsidiary).                 

Borrower:               Loan: EURO 10.5 million  Euribor + margin     Repayment in 40 increasing  Principal Securities:             
Tatabanya Plaza Kft                              ranging form 1.5%    installments. Final         PC guarantee (until mortgage is   
                        Amount outstanding:      to 1.8% (depending   repayment date is on July   registered).                      
Lender:                 EURO 5.9 million         on the registration  31 2015 where a bullet                                        
MKB Bank Rt.                                     of the first rank    payment of 43.5% of the     Mortgage on the project site      
                        Available amount: EURO   mortgagae and on     principal is due.           following the de-merger           
                        4.5 million              debt service cover                                                                 
                                                 ratio level). +                                  Charge over borrower's shares, on 
                                                 associated costs                                 bank accounts                     

                                                                                                  Assignment of insurance, of all   
                                                                                                  rental revenues of the project    

                                                                                                  Following the establishment of the

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                        AMOUNT OF LOAN AND AMOUNT                                                                               
                            OUTSTANDING AS OF                                                             PRINCIPAL             
  BORROWER AND LENDER       DECEMBER 31, 2005        INTEREST ON LOAN          PAYMENT TERMS       SECURITIES AND COVENANTS     
----------------------  -------------------------  -------------------  -----------------------  -------------------------------
                                                                                                                                
                                                                                                 security provider, PC shall    
                                                                                                 enter into a security deposit  
                                                                                                 agreement establishing a       
                                                                                                 security deposit on the shares 
                                                                                                 of the security provider.      

                                                                                                 Principal Financial Covenants: 
                                                                                                 Debt Service Cover Ratio shall 
                                                                                                 not be less than 1.15.         

Borrower:               Loan: EURO equivalent of   Euribor + 2% per     Repayment done in 8      Principal Securities:          
Szombathely 2002, Kft.  HUF 1 billion (EURO 3.9    annum.               equal installments       First ranking mortgage on land 
                        million)                                        (principal + interest).  in Lodz, Poland.               
Lender:                                                                 Final repayment date is                                 
MKB Bank Rt.            Amount outstanding: EURO                        15.07.2007.              Pledge on quotas of the        
                        3.4 million                                                              Borrower and on bank accounts. 

                        Available amount: 0                                                      Principal Financial Covenants: 
                                                                                                 Decrease in the business volume
                                                                                                 of more than 15% may result in 
                                                                                                 the decrease of the loan.      

Borrower:               Loan: EURO 2.8 million     Euribor + 1.35% per  Loan expires on          Principal Securities:          
Plaza House Kft. (our                              annum.               30.05.2011. Repayment    First ranking mortgage on all  
subsidiary)             Amount outstanding: EURO                        done through quarterly   assets of the borrower         
                        1.7 million                                     payments of EURO 64,920  including the building.        
Lender:                                                                                                                         
HVB Bank Hungary Rt.    Available amount: 0                                                      Assignment of claims, lease    
                                                                                                 agreements, insurance; pledge  
Project:                                                                                         on shares.                     
Plaza House                                                                                                                     
                                                                                                 PC guarantee for 0.5 million   
                                                                                                 EURO.                          

                                                                                                 Principal Financial Covenants: 
                                                                                                 Debt Service Cover Ratio       
                                                                                                 shall be at least 1.10.        

Borrower:               Loan: EURO 19 million      Euribor + 1.65% per  Each Borrower shall      Principal Securities:          
Kerepesi 2 and                                     annum.               repay the loan made to   First ranking mortgage on land.
Kerepesi 3' Kft. (our   Amount outstanding: EURO                        it in one lump sum on                                   
subsidiaries)           19 million                                      the 15th November 2006.  Negative pledge over the       
                                                                                                 borrowers' assets.             
Lender:                 Available amount: 0                                                                                     
MKB Bank Rt. And                                                                                 On demand guarantee of kerepesi
OTP Bank Rt                                                                                      4 and kerepesi 5 (our companies
                                                                                                 that own adjacent plots).      
Project:                                                                                                                        
Arena Plaza (Kerepesi)                                                                                                          

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                            AMOUNT OF LOAN AND                                                                                  
                          AMOUNT OUTSTANDING AS                                                              PRINCIPAL          
BORROWER AND LENDER        OF DECEMBER 31, 2005     INTEREST ON LOAN          PAYMENT TERMS           SECURITIES AND COVENANTS  
-------------------       ----------------------  -------------------  --------------------------  -----------------------------
                                                                                                                                
Borrower:                 Loan: EURO 7.5 million  Euribor + 2.0% p.a.  Interest will be paid on a  Principal Securities:        
Helios Plaza Real Estate                                               quarterly basis.            First ranking mortgage on    
and Development Company   Amount outstanding:                          Renewal every quarter.      land.                        
S.A. (our subsidiary)     EURO 7.5 million                                                                                      

Lender:                   Available amount: 0                                                                                   
Pireos Bank (Athens)                                                                                                            

Borrower:                 Loan: $46 million       LIBOR + 2.5%         The financing banks have    Principal Securities:        
S.L.S Sails Ltd.                                                       informed us in writing as   First ranking pledge on the  
                          Amount outstanding -                         to their consent to extend  land and the shopping center.
Lender:                   $46 million                                  the term of this credit                                  
Bank Discount Le'Israel                                                facility until January 1,   First ranking fixed lien on  
Ltd.                      Available amount: 0                          2007.                       shares of the subsidiary that
                                                                                                   owns the rights to the land. 
Project:                                                                                                                        
Arena (Herzliya, Israel)                                                                           Floating lien on the assets  
                                                                                                   of the subsidiary that owns  
                                                                                                   the rights to the land.      

                                                                                                   Fixed and floating lien on   
                                                                                                   the assets of the owning     
                                                                                                   subsidiary, on the land, the 
                                                                                                   Arena project and on rights  
                                                                                                   with respect to current and  
                                                                                                   future tenants and debtors in
                                                                                                   connection with the Arena    
                                                                                                   project.                     

                                                                                                   Lien on the bank account of  
                                                                                                   the Arena project.           

                                                                                                   A corporate guarantee by     
                                                                                                   Elscint.                     

                                                                                                   Negative pledge with regard  
                                                                                                   to the assets relating to the
                                                                                                   project.                     

Borrower:                 Loan: EURO 5.6 million  3.35%                Renewal every quarter.      Principal Securities:        
Plaza Centers (Europe)                                                                             Cash deposit                 
B.V.                      Amount outstanding:                                                                                   
                          EURO 5.6 million                                                                                      
Lender:                                                                                                                         
Bank Winter & Co. AG      Available amount: 0                                                                                   

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                           AMOUNT OF LOAN AND                                                                             
                         AMOUNT OUTSTANDING AS                                                 PRINCIPAL SECURITIES AND   
  BORROWER AND LENDER     OF DECEMBER 31, 2005    INTEREST ON LOAN       PAYMENT TERMS                COVENANTS           
  -------------------   -----------------------   ----------------  ----------------------  ----------------------------- 
                                                                                                                          
Borrower:               Loan: $3.75 million       Libor + 1.9%      Repayment done in 40    Principal Securities:         
Plaza Centers (Europe)                            per annum.        quarterly installments  Mortgage on the aircraft.     
B.V.                    Amount outstanding: $                       of USD 53.750                                         
                        3.6 million                                 principal plus a        Assignment of insurance.      
Lender:                                                             bullet payment of USD                                 
GEFA GmbH               Available amount: 0                         1.600.000 at the final                                
                                                                    repayment date on June                                
                                                                    23, 2014.                                             

Borrower:               Loan: EURO equivalent     Euribor + 2%      Repayment is due in 1   Principal Securities:         
Ercorner Kft.           of HUF 3,680,000,000                        amount on March 31,     First ranking Mortgage right  
                        (EURO 14.76 million)                        2007.                   on the real estate.           
Lender:                                                                                                                   
Magyar Kulkereskedelmi  Amount outstanding:                                                 Pledge on quotas of the       
Bank Rt.                EURO 12.7 million                                                   borrower and Dream Island.    

Project:                Available amount: 0                                                 Pledge on bank accounts.      
Dream Island Project                                                                                                      
                                                                                            Assignment of insurance.      

                                                                                            Option right on the real      
                                                                                            estates granted by Dream      
                                                                                            Island in favor of the bank.  

                                                                                            Suretyship of Dream Island    
                                                                                            and of EMI.                   

                                                                                            PC's guarantee.               

                                                                                            Security assignment of all    
                                                                                            revenues of Dream Island.     

                                                                                            Principal Financial Covenants:
                                                                                            The Loan-Minus-The-Equity to  
                                                                                            Value ratio shall not exceed  
                                                                                            53%.                          

Borrower:               Loan:                     Libor of          Tranch A: 50% will be   Principal Securities:         
Elscint Ltd.                                      relevant          paid in 2 semi-annual   First ranking pledge over the 
                        Tranche A: EURO 20        currency +        installments starting   entire share capital of BEA,  
Lender:                 million                   2.85%             June 30, 2006 until     PEP Trust Ltd., Elscint       
Bank Hapoalim B.M.                                                  December 31, 2015 and   Holdings and Investments N.V. 
                        Tranche B: EURO 9.6       For the loan      one bullet repayment    Astrid Park Plaza Hotel;      
                        million + Pound Sterling  taken in NIS      of the additional 50%   Astridplaza N.V.; Astrid      
                        16.7 million              currency - Bank   to be paid in the last  Hotel Holdings B.V.;          
                        Tranche C: EURO 2.4       of Israel's       payment date.           Andrassy, 25 kft. (all of     
                        million                   wholesale rate                            which are direct and indirect 
                                                  + 2.25%           Tranche B: 50% to be    holders of the hotels) and    
                        Tranche D: EURO 1.4                         paid on December 31,    Mango.                        
                                                                    2010 and 50% on                                       
                                                                    December 31, 2015.      Second ranking pledge over    
                                                                                            our holdings in Victory       
                                                                                            Enterprises II                

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                           AMOUNT OF LOAN AND                                                                                       
                                  AMOUNT                                                                                            
                            OUTSTANDING AS OF                                                                                       
  BORROWER AND LENDER        DECEMBER 31, 2005     INTEREST ON LOAN         PAYMENT TERMS         PRINCIPAL SECURITIES AND COVENANTS
-----------------------  ------------------------  ----------------  ---------------------------  ----------------------------------
                                                                                                                                    
                         million (stand-by letter                    Tranche C: 10 semi-annual    B.V., Grandis Hotel Holding B.V,  
                         of credit) + NIS 10.2                       installments starting        Victoria Hotel Holding B.V.,      
                         million                                     December 31 2007. Last       Riverbank Hotel Holding B.V.,     
                                                                     payment on June 30, 2012.    Africana Holding B.V., Victoria   
                                                                                                  Hotel and Restaurant Investments  
                                                                     Tranche D: Bullet payment    B.V. (all of which own directly or
                                                                     on December 31, 2010.        indirectly our hotels other than  
                                                                                                  our hotels in Romania and Hungary)
                                                                     Interest will paid on a                                        
                                                                     semi-annual basis until      An undertaken to register a       
                                                                     the final maturity date.     pledge on the Astrid Plaza        
                                                                                                  Hotel. The pledge has not yet     
                                                                                                  been registered.                  

                                                                                                  Principal Financial Covenants:    
                                                                                                  The ratio of Shareholder's Equity 
                                                                                                  to Balance Sheet Value is greater 
                                                                                                  than 1:4.                         

                                                                                                  The ratio of Operating Profit of  
                                                                                                  Astrid Plaza to the Debt Service  
                                                                                                  of Tranche A for a period should  
                                                                                                  be greater than 1.2.              

                                                                                                  Revenue per Available Room of     
                                                                                                  Astrid Plaza should be no less    
                                                                                                  than:                             

                                                                                                  1. EURO 52 for 2006               

                                                                                                  2. EURO 56 for 2007               

                                                                                                  3. EURO for 2008 and thereafter   

Borrower:                Loan: GBP 67 million +       LIBOR + 2.2%   Bullet payment on August     Principal Securities:             
Riverbank Hotel Holding  credit facility                             27, 2007 or the Economic     First ranking pledge on all       
B.V.                                                                 Completion Date as           assets, including leasehold rights
                         Amount outstanding: GBP                     determined in the            to the land and goodwill of hotel 
Lender:                  70.9 million                                agreement.                   owning subsidiary                 
Bank Hapoalim B.M.                                                                                                                  
                                                                                                  First ranking pledge over the     
Hotel:                                                                                            shares of the operating company of
Riverbank Hotel                                                                                   the hotel.                        

                                                                                                  First ranking pledge on all       
                                                                                                  borrower's shares.                

                                                                                                  Elscint's and Red Sea's guarantees
                                                                                                  for 7.1% of the outstanding loan. 


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                            AMOUNT OF LOAN AND                                                                                  
                          AMOUNT OUTSTANDING AS                                                              PRINCIPAL          
  BORROWER AND LENDER      OF DECEMBER 31, 2005     INTEREST ON LOAN          PAYMENT TERMS           SECURITIES AND COVENANTS  
------------------------  ----------------------  -------------------  --------------------------  -----------------------------
                                                                                                                                
                                                                                                   Principal Financial          
                                                                                                   Covenants:                   
                                                                                                   The Average Revenue per      
                                                                                                   Available Room shall be at   
                                                                                                   least GBP 74.5.              

                                                                                                   Operating Profit to Debt     
                                                                                                   Service shall be at least    
                                                                                                   1.2:1.                       

Borrower:                 Loan: GBP 39.5 million  LIBOR + 1.65%        GBP 14.7 million of the     Principal Securities:        
Victoria Hotel Holding                                                 loan repayable in           First priority mortgage on   
B.V.                      Amount outstanding:                          quarterly installments      the land and the building.   
                          GBP 3 35.8 million                           commencing March 2003;                                   
Lender:                                                                balance repayable in one    First ranking pledge on      
Bank Hapoalim B.M.                                                     payment in December 2012    borrower's shares.           

Hotel:                                                                                             Guarantees by each of Elscint
Victoria Hotel (London)                                                                            and Red Sea in the amount    
                                                                                                   equal to 2.5% of total costs 
                                                                                                   of the project.              

                                                                                                   Principal Financial          
                                                                                                   Covenants:                   
                                                                                                   The Average Revenue per      
                                                                                                   Available Room shall be at   
                                                                                                   least GBP 60.86.             

                                                                                                   Operating Profit After Tax to
                                                                                                   Debt Service shall be at     
                                                                                                   least 1.2:1.                 

Borrower:                 Loan: GBP 14.2 million  LIBOR + 1.4%         50% of the loan repayable   Principal Securities:        
Grandis Netherlands                                                    in quarterly installments   Fixed and floating charge on 
Holding B.V.              Amount outstanding:                          over 10 years commencing    rights to borrower's assets, 
                          GBP 12.1 million                             December 2002. Balance to   including goodwill First     
Lender:                                                                be repaid after 10 years    ranking charge on shares of  
Bank Hapoalim B.M.                                                     (December 2012)             subsidiary that owns the     
                                                                                                   rights to the land           
Hotel:                                                                                                                          
Sherlock Holmes Park                                                                               GBP 5.4 million of the loan  
Plaza Hotel                                                                                        is guaranteed by Elscint and 
                                                                                                   Red Sea in equal share.      

                                                                                                   Principal Financial          
                                                                                                   Covenants:                   
                                                                                                   The Average Revenue per Room 
                                                                                                   shall be at least GBP 65.    

                                                                                                   Occupancy rate is not less   
                                                                                                   than 70%.                    

                                                                                                   Operating Profit After Tax to
                                                                                                   Debt Service shall be at     
                                                                                                   least 1.2:1.                 

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                          AMOUNT OF LOSS AND                                                                  
                          AMOUNT OUTSTANDING                                                                  
                          AS OF DECEMBER 31,                                             PRINCIPAL SECURITIES 
  BORROWER AND LENDER            2005           INTEREST ON LOAN       PAYMENT TERMS         AND COVENANTS    
-----------------------  --------------------  ------------------  --------------------  ---------------------
                                                                                                              
Borrowers:               Loan: EURO 71.8       The Interest on     EURO 112,000 to be    Principal Securities:
Victoria Hotel C.V. and  million (divided      the loan is hedged  paid at the end of    Mortgage on both     
Utrecht Victoria Hotel   between Victoria      by a swap           each quarter          hotels.              
B.V.                     and Utrecht hotels:   transaction,        commencing December                        
                         Utrecht Victoria      accordingly the     30, 2004 and ending   First ranking pledge 
Lender:                  Hotel B.V. Euro 14    fixed interest      on March 30, 2007;    on moveable assets,  
Merill Lynch             million and           rate is 5.11% per                         bank accounts        
International            Victoria Hotel C.V.   annum               EURO 337,000 to be    (operating income and
                         Euro 57.8 million)                        paid at the end of    debt service         
Hotels:                                                            each quarter          reserve), rights of  
Victoria Hotel           Amount outstanding:                       commencing June 30,   the borrowers under  
(Amsterdam) and          Utrecht Victoria                          2007 and ending on    their management     
Utrecht Hotel            Hotel B.V. EURO                           June 30, 2009;        agreements and       
                         13.9 million and                                                insurance proceeds.  
                         Victoria Hotel C.V.                       EURO 67,664,000 to                         
                         EURO 57.3 million                         be paid at the end    First ranking pledge 
                                                                   of the term           on shares of         
                         Available amount: 0                       (September 30, 2009)  borrowers.           

                                                                                         Borrowers shall not  
                                                                                         create or permit to  
                                                                                         subsist any pledge   
                                                                                         and mortgages over   
                                                                                         the whole or any     
                                                                                         part of their assets.

                                                                                         Negative pledge on   
                                                                                         borrowers assets.    

                                                                                         Principal Financial  
                                                                                         Covenants:           
                                                                                         The amount of loans  
                                                                                         shall not exceed 75% 
                                                                                         of the total value   
                                                                                         of the hotels.       

                                                                                         On each interest     
                                                                                         payment date net     
                                                                                         operating income for 
                                                                                         each of the previous 
                                                                                         four financial       
                                                                                         quarters shall not   
                                                                                         be less than 135%    
                                                                                         of the interest      
                                                                                         service costs for    
                                                                                         the same period.     

Borrower:                Loan:                 Prime-1%            Payments commenced    Principal Securities:
Park Plaza Hotel         Rand 20 million                           on October 1, 2003    Unconditional and    
(Sandton)(Proprietary)                                             with monthly          irrevocable          
Ltd.                     Amount outstanding                        installments of       guarantee to Lender  
                         - Rand 18.7 million                       Rand 33,000. In       for $500,000 in      
Lender:                                                            each succeeding       effect until the     
Nedcor Investment        Available amount: 0                       year the monthly      loan is fully paid.  
Bank Ltd.                                                          installments will                          
                                                                   increase by Rand      Mortgage on hotel.   
Hotel:                                                             17,000 until making                        
Sandton Hotel                                                      full payment on       Rand 5 million bond  
                                                                   October 1, 2013       over the hotel's     
                                                                                         movables and debtors.

Borrower:                Two loans, each for   First loan-LIBOR+   Short term credit     Principal Securities:
                         $13                                       facility                                   

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                                                        [Enlarge/Download Table]

                        AMOUNT OF LOAN AND                                                                 
                        AMOUNT OUTSTANDING                                                                 
                        AS OF DECEMBER 31,                                            PRINCIPAL SECURITIES 
  BORROWER AND LENDER          2005          INTEREST ON LOAN       PAYMENT TERMS         AND COVENANTS    
  -------------------  -------------------  ------------------  --------------------  ---------------------
                                                                                                           
BEA Hotels Eastern     million              1.3%                                      Pledge on a security 
Europe B.V.                                 Second loan -                             deposit of $14       
                       Amount outstanding   LIBOR + 2.8%                              million              
Lender:                - $26 million                                                                       
Bank Leumi Le Israel                                                                  Pledge on Domino and 
Ltd.                   Available amount: 0                                            Bucuresti Turism SA  
                                                                                      shares               

                                                                                      Lien on BEA Hotel    
                                                                                      Eastern Europe       
                                                                                      shares and a floating
                                                                                      lien on its assets   

                                                                                      Pledge on Domino's   
                                                                                      present and future   
                                                                                      movable assets       

                                                                                      Unlimited guarantee  
                                                                                      by Elscint           

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Other than a refinancing loan agreement in a substantial amount, as   
described below, we have entered into various loan agreements and credit        
facilities agreements in the ordinary course of business.                       

   On March 2, 2006, we through our jointly controlled subsidiaries, holding
three hotels in the United Kingdom (the "Holding Companies") (Riverbank Hotel,  
Vicotria Hotel and Sherlock Holmes Park Plaza Hotel) and Park Plaza executed a  
refinance loan agreement together with Goldman Sachs in an aggregate amount of  
L195 million ($335 million) out of which our share in the loan amounted to      
L97.5 million ($168 million). The proceeds of the refinance agreement were      
used for the repayment of outstanding loans granted by Bank Hapoalim B.M. to the
Holding Companies in an aggregate amount of L120 million ($206 million)         
out of which our share is L60 million ($103 million).                           

     The loan bears interest at a rate of Libor + 3% per annum. The interest was
fixed under a swap transaction at a rate of 7.72% per annum. 0.375% of the      
principal is payable in quarterly installments commencing one year as of the    
draw-down for a period of 5 years and the remaining principal is due after five 
years. The borrowers have an option to extend the term by two years, subject to 
certain terms.                                                                  

    The securities provided include pledges of the entire share capital of the
Holding Companies and the entire share capital of Park Plaza, charges over each 
of the hotels and an assignment of rent, insurance proceeds and the hedging     
agreements, as well as a fixed charge over specified bank accounts. We undertook
towards Park Plaza to indemnify Park Plaza with respect to 50% of any damages   
caused to Park Plaza under the agreement.                                       

    Under the agreement, the borrowers undertook, among other things, that the
net operating income to debt service be over 1.05. We are also not allowed to   
distribute dividends.                                                           

   In the event of any cash distribution deriving from the sale, disposal or
refinancing of the any hotels, which were financed by the refinancing loan funds
(transactions), the borrowers shall pay to the financing bank an amount         
equivalent to 15% of the difference between the market value of the hotels as   
determined in such transaction and the current agreed value of the hotels for   
the purpose of the refinancing loan.                                            

   B. EMI's subsidiaries and jointly indirect controlled companies which are
engaged in construction and/or the operation of our commercial centers and      
hotels entered into loan agreements with banks and financial institutions, which
include an undertaking of those companies to comply with certain financial and  
operational covenants throughout the duration of the respective loans. The      
covenants include: achieving certain operational milestones on certain specified
dates (e.g. scope of lease, etc.); complying with debt cover ratio; "loan       
outstanding amount" to secured asset values ratio; complying with certain       
restrictions on interest rates; maintaining certain cash balances for current   
operations; maintaining equity to project cost ratio and net profit to current  
bank's debt; occupancy percentage; average room or rental fee rates; and others.
In the event the borrowers fail to comply with these covenants, the lenders will
have the right to call the loan for immediate repayment.                        

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURE                                    

See "- F. Tabular Disclosure of Contractual Obligations" below.       

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

 The Israeli government encourages industrial companies by funding their
research and development activities through grants by the OCS.                  

   InSightec's research and development efforts have been financed, in part,
through OCS grants. InSightec has applied and received grants totaling          
$11.3_million from the OCS since its inception in 1999. It is required to repay 
these grants to the OCS through royalties amounting to 3% of its revenues until 
the entire amount is repaid. These costs are recorded by EMI in its cost and    
expenses of medical systems operations.                                         

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     The following table shows EMI's consolidated total research and development
expenditures and royalty-bearing participation by the Israeli government for the
years 2003 through 2005, together with the percentages of net revenues for each 
year (in NIS thousands, except for percentages):                                

                                                        [Enlarge/Download Table]

                          CONVENIENCE                        YEAR ENDED DECEMBER 31,                     
                          TRANSLATION  ------------------------------------------------------------------
                            TO US $            2005                   2004                   2003        
                             2005      --------------------   --------------------   --------------------
                         THOUSANDS OF  THOUSANDS   % OF NET   THOUSANDS   % OF NET   THOUSANDS   % OF NET
                               $         OF NIS    REVENUES     OF NIS    REVENUES     OF NIS    REVENUES
                         ------------  ---------   --------   ---------   --------   ---------   --------
                                                                                                         
Total expenditures                                                                                       
   for research and                                                                                      
   development              13,649       62,825       7.7       45,842       6.2       51,187       8.6  
Royalty-bearing                                                                                          
   participation from                                                                                    
   the Government of                                                                                     
   Israel                      853        3,926       0.5        7,684       1.0        7,468       1.3  
Net research and                                                                                         
   development expenses                                                                                  
   funded by EMI            12,796       58,849       7.2       38,158       5.2       43,719       7.3  

All research and development expenses are attributed to InSightec.    

D.   TREND INFORMATION                                                          

SHOPPING AND ENTERTAINMENT CENTERS BUSINESS                           

The economies of most Central European countries are experiencing a   
moderate upward trend, as evidenced by gross domestic products ranging between  
3% to 7%. The shopping and entertainment centers business benefits from these   
trends, which are generally manifested in increased consumer spending, but at   
the same time are subject to local pressures of supply and demand. With the     
growth in the number of shopping and entertainment centers, especially in the   
capital and large regional cities, supply is beginning to outpace demand,       
resulting in increasingly aggressive competition for patronage. However, the    
negative impact of these market forces on our shopping and entertainment centers
is offset by the strong emphasis which PC places on the entertainment facilities
which it offers to its customers, which has been shown to be a dominant factor  
in attracting visitors to the centers.                                          

    In the smaller regional cities, where both local and foreign investors are
reluctant to develop projects, the shopping and entertainment centers generally 
operate in an environment devoid of similar concept shopping centers and thus   
benefit, notwithstanding that the catchment populations are smaller and the     
relative buying power of patrons is less than in the larger metropolitan        
locations. However the emergence of "power centers" (i.e. "big boxes" with cheap
merchandise outside the cities) in many regional cities is impacting upon       
patronage and constitute competition. The entry of Hungary, Poland, Romania, the
Czech Republic and Latvia into the European Union is anticipated to generate a  
significant increase in business oriented traffic and tourism, principally into 
the capital cities, which will in turn bolster the number of visitors to the    
shopping centers. However this trend is offset by very aggressive competition in
the capital cities.                                                             

  The shopping and entertainment centers may experience seasonal shifts in
retail activity. Generally speaking, peak holiday seasons (such as Christmas,   
Easter, Passover, the Jewish New Year (with respect to the Arena shopping and   
entertainment center in Herzliya, Israel) and other national holidays), will    
show an increase in patron traffic, both for the purchase of holiday gifts and  
for utilizing the entertainment facilities offered by the center. The periods   
immediately following such periods tend to show a decrease in the number of     
patrons visiting the centers and a corresponding slow down in retail activity.  
However, this may be offset by the fact that the indoor facilities offer a      
heated or an air-conditioned environment for shoppers and patrons which is of   
particular significance in areas with severe weather conditions.                

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HOTEL BUSINESS                                                        

Our hotel business is affected by the trends in each of the geographic
areas in which it operates.                                                     

   Contrary to the weak results of the hotel industry in years 2001 to 2003,
most of the western European markets experienced in 2005 an increase in revenue 
per available room (RevPAR), which was derived mainly from an increase in       
occupancy rates. Management believes this has resulted from the trends discussed
below.                                                                          

     In 2001 and 2002, the Western European hotel industry generally experienced
a decline in industry results, following the outbreak of "foot and mouth"       
disease and the subsequent September 11, 2001 terrorist attacks in New York.    
This trend continued in 2003 when the European hotel industry was challenged    
with operating and economic conditions that were affected by the war in Iraq and
the outbreak of SARS. These events caused a continuance in the slow down of     
corporate spending. In addition, weak domestic demand coupled with an           
appreciating Euro has resulted in a weak growth across the Euro-zone.           

   In 2005, the European hotel industry continued its strong recovery, which
had begun the previous year. Events such as the war in Iraq and the London      
bombing failed to have a negative impact on either the volume or value of       
hotels. In addition, low cost flight is changing the travel patterns across the 
region and is resulting in an increase of travel and revenues in our hotel      
business.                                                                       

     During the last 12 months, several new travel trends have been experienced:
(i) consumers are becoming more independent and show a clear preference for     
making their own travel arrangements, mainly due to the increased use and       
availability of Internet booking, the increasing number of online booking       
engines and the expansion of low-cost airlines; (ii) there has been an increase 
in price transparency available on the Internet, which combined with economic   
and social uncertainty, also means that booking lead times remain short while   
price sensitivity stays high; and (iii) the preference for more frequent and    
short stay trips has continued to be evident in travel patterns                 

Although slow in comparison to other regions of the world, hotel      
performance in Europe continues to move in the right direction - ending the year
with revenue per available room up 4.1%.                                        

    The strength of the Euro against the GBP is making the United Kingdom more
price competitive for Europeans than ever before. London, in particular, has    
enjoyed a remarkable comeback given the global events of the last three years.  
Exchange rates have played their part, with the euro zone becoming more         
attractive to visitors looking for value for money, especially those from North 
America and the UK. The growth in the European market was aided by the strength 
of the euro against the sterling. However, the weakness of the US dollar has    
been a concern throughout 2005 as it has had an impact on the number of visitors
from the United States. Nevertheless, the United States is still the leading    
overseas market, although its share declined by 6% in 2005.                     

Northern Europe, which comprises the United Kingdom and the Nordic    
countries, achieved the highest occupancy and average room rates of all the sub 
regions in Europe. This is mainly due to the strong performance of the UK       
market, which achieved occupancy levels of 71.8%. In addition, the Nordic       
countries have seen significant average room rate growth - up to 5.9% to 98     
Euro.                                                                           

After celebrating victory in the race to host the 2012 Olympic Games, 
London was subjected to terrorist attacks on July 7, 2006. Following the        
terrorist bombing, the United Kingdom suffered a short-term drop in visitor     
numbers. However, the country bounced back, reinforcing the view that tourists  
are no longer deterred by terrorist attacks in the longer term. According to the
UK national tourism agency, the United Kingdom welcomed almost 30 million       
international visitors in 2005, which is an increase of 8% compared to the year 
before. As a result of the above, average room rates in London grew 3.9% in     
local currency in 2005.                                                         

   Amsterdam, one of Europe's strongest hotel markets, has seen hotel values
gradually decline since 2001, albeit that this decline was marginal in 2004. In 
2005, hotel values in Amsterdam rose by 5.7% as the city experienced a 6.5%     
improvement in Revenues per Available Room ("RevPar"), compared to 2004.        

   However, the positive outlook and the continuation of a recovery from the
three years of decline will depend on                                           

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the global geopolitical situation and security stability. Appreciation of the   
Euro will also encumber growth of the European economy relative to the rest of  
the world.                                                                      

Some of the Central European countries joining the European Union are 
expected to have improved hotel operations and performance due to lower prices  
and cost of living and extra travel routes with cheaper flight prices.          

E.   OFF-BALANCE SHEET ARRANGEMENTS                                             

1. As of December 31, 2005, the Company guaranteed a credit facility  
extended to InSightec by an Israeli bank in the amount of approximately $5      
million.                                                                        

    2. With respect to the acquisition by a subsidiary of PC of the control of
the Hungarian company owning land on the Obuda Island, the minority shareholder 
in such company was granted a put option to sell to PC's subsidiary its share in
the Hungarian company. Such put option is exercisable until April 2007, and the 
purchase price payable by PC's subsidiary in the event that the put option is   
exercised will reflect the cost of the shares plus annual interest at a rate of 
Euribor + 2% less all dividends that shall have been paid to the minority       
shareholder by the Hungarian company through the date of exercise of the put    
option.                                                                         

 3. With respect to the purchase by PC's subsidiary of the shares in the
Hungarian company Ercorner Kft., the Company executed, in favor of a bank that  
financed such share acquisition, a guarantee for the obligation assumed by PC's 
subsidiary to cause the land zone of the island to be changed for office,       
commerce, tourism, entertainment, recreation and hotel purposes.                

 4. The Company engages in the trading of derivative and other financial
trading instruments for hedging and speculative purposes. The results of such   
activities, and the value of assets and liabilities arising therefrom, are      
affected by the volatility in foreign exchange rates and interest rates.        

5. In the course of the transaction for the sale of four operational  
shopping and entertainment centers in Hungary by PC to the Dawnay Day Group, PC 
agreed to guarantee certain portions of the rental revenues of one of the       
acquired shopping centers for a period of three years from the time of closing, 
as security for certain minimum rental revenues. EMI estimates the value of this
guarantee (as of the date of this report) to be in the aggregate amount of      
approximately E1.3 million                                                      

6. Within a course of a preliminary share purchase agreement between  
Klepierre and PC for the future acquisitions of four commercial centers in      
Poland and in the Czech Republic, Klepierre has furnished EMI with a bank       
guarantee in the amount of E115.0 million for the payment of the respective     
estimated purchase price of the said commercial centers. EMI has furnished      
Klepierre with its corporate guarantee for the fulfillment by PC of all its     
undertaking and obligations under the definitive agreement.                     

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS                              

  Our contractual obligations mainly consist of long-term loans from banks
and financial institutions and long-term operational leases as well as long term
non convertible an convertible debentures These obligations are linked to       
foreign currencies (mainly U.S dollar, GBP and the Euro). We summarize below our
significant contractual obligations as of December 31, 2005 in NIS, based upon  
the representative exchange rate as of December 31, 2005 between the NIS and the
currency in which the obligation is originally denominated. Actual payments of  
these amounts (as will be presented in the financial statements of the Company  
when executed) are significantly dependent upon the exchange rate of the NIS    
against the relevant foreign currencies prevailing as at the date of execution  
of such obligation, and therefore may significantly differ from the amounts     
presented hereinbelow:                                                          

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                                                        [Enlarge/Download Table]

                                                  Payments due by Period                  
                                                     (NIS in million)                     
                               -----------------------------------------------------------
                                         Less than                                        
                                Total      1 Year    2-3 Years   4-5 Years   After 5 Years
                               -------   ---------   ---------   ---------   -------------
                                                                                          
Contractual Obligations as                                                                
   of December 31, 2005                                                                   
Long-Term Debt (1)             2,586.5      140.6      807.8       610.9        1,027.2   
Capital (Finance) Leases            --         --         --          --             --   
Operating Leases (2)             726.3       12.7       25.7        21.0          666.9   
Purchase Obligations and                                                                  
   Commitments (3) (4)           235.2      175.8       59.4          --             --   
Other Long Term Liabilities                                                               
   Reflected on Balance Sheet       --         --         --          --             --   
                               -------      -----      -----       -----        -------   
Total                          3,548.0      329.1      892.9       631.9        1,694.1   
                               =======      =====      =====       =====        =======   

    (1) Long term debt includes interest that we will pay from January 1, 2006
until the loan maturity dates. The majority of our loans bear variable          
interest rates and the interest presented in this table is based on the Libor   
rates known as of December 31, 2005. Actual payments of such interest (as will  
be presented in the financial statements of the Company) are significantly      
dependent upon the Libor rate prevailing as of the date of payment of such      
interest. For additional information in respect of the long term loans, see Note
14 to our consolidated financial statements included in Item 18 of this report  
and in Item 5 "Operating and Financial Review and Prospects - Loans" above.     

   (2) Our operating lease obligations are subject to periodic adjustment of
the lease payments as stipulated in the agreements. In this table we included   
the lease obligation based on the most recent available information. For        
additional information in respect of our operating lease obligations see Note   
10B to our consolidated financial statements included in Item 18 of this report.

  (3) Excludes royalty payments that InSightec may have to pay to the OCS.
InSightec partially finances its research and development expenditures under    
programs sponsored by the OCS for the support of research and development       
activities conducted in Israel. In exchange for OCS participation in the        
programs, InSightec agreed to pay 3% of total sales of products developed within
the framework of these programs. At the time the OCS participations were        
received, successful development of the related projects was not assured. The   
obligation to pay these royalties is contingent on actual sales of the products 
and therefore cannot be estimated.                                              

     (4) This refers to contracts with supplier and subcontractors in respect of
the construction of our projects.                                               

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                              

A.   DIRECTORS AND SENIOR MANAGEMENT                                            

   The table below sets forth the directors and senior officers of EMI as of
the date of this report:                                                        

                                                                [Download Table]

NAME                         AGE                    POSITION                   
----                         ---                    --------                   
                                                                               
Mordechay Zisser (1)          50   Executive Chairman of the Board of Directors
Shimon Yitzhaki (1)           50   President and Director and Chief            
                                      Financial Officer                        
Rachel Lavine                 40   Director                                    
Yehoshua (Shuki) Forer (2)    62   Director                                    
David Rubner (2)              66   Director                                    
Yosef Apter (2)               51   External Director                           
Zvi Tropp (1)(2)              66   External Director                           
Abraham (Rami) Goren          46   Director                                    
Moshe Lion                    45   Director                                    
Shmuel Peretz                 66   Director                                    
Marc Lavine                   52   Corporate Secretary and General Counsel     

(1)  Member of the Donation Committee                                           

(2)  Member of the Audit Committee                                              

    MORDECHAY ZISSER. Mr. Zisser was appointed executive chairman of our board
of directors in May 1999. He has been President of Europe-Israel since March    
1998 and its Chairman of the board of directors from March 1998, and President  
and Chairman of the board of directors of Control Centers, a privately held     
company, which is the parent company of Europe-Israel, since 1983. Europe-Israel
and Control Centers are engaged, through their direct and indirect wholly and   
partially owned subsidiaries and affiliates, in the following core businesses:  
real estate investment, hotel ownership and management, development and         
operation of shopping and entertainment centers in Eastern European countries,  
in the venture capital investments and in the hi-tech, medical and              
bio-technology industries. Control Centers also holds direct interests in       
property development projects in Israel. Since May 1999 Mr. Zisser has been the 
executive chairman of Insightec Ltd, a subsidiary of the Company. Mr. Zisser is 
active in charitable organizations. He is a member of the management of the     
"Oranit" hostel.                                                                

   SHIMON YITZHAKI. Mr. Yitzhaki was appointed as the President and a member
of our board of directors in May 1999. In March 2005 Mr. Yitzhaki was appointed 
as the chief financial officer of the Company. In May 1999 he was also appointed
as a member of the board of directors of Elscint. Since March 1998, Mr. Yitzhaki
has served as the Vice President of Europe-Israel, and, since the mid-1980's, as
Vice President of Control Centers. Since May 1999 Mr. Yitzhaki has been serving 
as a member of the board of directors of InSightec Ltd. Mr. Yitzhaki holds a    
Bachelor of Arts degree in accounting from Bar Ilan University and is a         
certified public accountant.                                                    

RACHEL LAVINE. Ms. Lavine was appointed as a member of our board of   
directors in May 1999. In May 1999, Ms. Lavine was also appointed as President  
and a member of the board of directors of Elscint. Since March 1998, she has    
served as Vice President of Europe-Israel, and, from 1994 to 1998, Ms. Lavine   
served as Chief Financial Officer of Control Centers, the parent company of EMI.
Ms. Lavine has been President and CEO of Plaza Centers since January 2005. Ms.  
Lavine holds a Bachelor of Arts degree in accounting and is a certified public  
accountant.                                                                     

     YEHOSHUA (SHUKI) FORER. Mr. Forer was appointed as a member of our board of
directors in May 1999. He is the Mayor of the City of Rehovot in Israel. Mr.    
Forer is an attorney, and was the managing partner of Forer Azrieli and         
Partners, a law firm with offices in Tel-Aviv and Rehovot from 1994 to 1998. Mr.
Forer was the Acting Chairman of Herzliya Marina Ltd., Ashkelon Marina Ltd. and 
Control Centers from 1989 to 1994 and of Williger Ltd. from 1989 to 1991. Mr.   
Forer was also Managing Director of the Israel Ministry of Industry and Commerce
from 1983 to 1986 and of the Investment Center From 1981 to 1983. Mr. Forer was 
an Assistant to the Minister of Industry and                                    

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Commerce in charge of development areas from 1980 to 1981. Mr. Forer held       
positions as a member of the boards of directors of Bank Leumi Le-Israel Ltd.,  
Israel Chemicals Ltd., Negev Phosphates Company Ltd., Industrial Buildings      
Corporation Ltd., Red Sea Hotels Ltd. ("Red Sea") and Ackerstein Zvi Ltd. and   
was a member of the Presidium and Vice President of the Association of the      
Tel-Aviv Chamber of Commerce from 1987 to 1996. Mr. Forer is currently a member 
of the board of directors of Castro Model Ltd. Mr. Forer received his LL.B. with
Honors from the Hebrew University in Jerusalem.                                 

DAVID RUBNER. Mr. Rubner was appointed as a member of our board of    
directors in July 2003. Mr. Rubner serves as Chairman and Chief Executive       
Officer of Rubner Technology Ventures Ltd. as well as General Partner in        
Hyperion Israel Advisors Ltd., a venture capital firm. From 1991 until 2000, Mr.
Rubner served as President and Chief Executive Officer of ECI Telecom Ltd. Prior
thereto, Mr. Rubner held the positions of Chief Engineer, Vice President of     
operations and Executive Vice President and General Manager of the              
Telecommunications Division of ECI. Mr. Rubner serves on the boards of certain  
public companies including Check Point Software Ltd., Koor Industries Ltd.,     
Lipman Electronic Engineering Ltd as well as some privately held companies. Mr. 
Rubner serves on the board of trustees of Bar-Ilan University, and Shaare Zedek 
Hospital. Mr. Rubner holds a B.S. degree in engineering from Queen Mary College,
University of London and an M.S. degree from Carnegie Mellon University. Mr.    
Rubner was recipient of the Industry Prize in 1995.                             

  YOSEF APTER. Mr. Apter was appointed as an external director in December
2002 for a period of three years. On December 2005 Mr. Apter was re-elected as  
an external director of the Company for a three-year term commencing on December
25, 2005. Since July 2005, Mr. Apter has served as a consultant at JDA          
(Jerusalem Development Authority). Since 2003 Mr. Apter has been a board member 
in SecureOL Ltd. Between 1980 and 2002, Mr. Apter served as a member of the     
executive boards of the Center for Investigation of Driving and Casualties,     
Shiloh Hesder Yeshiva, Nature Life, Zamir Systems Ltd., Binyamin Regional       
Council, Binyamin Development Company and Elad Non-Profit Organization. Mr.     
Apter also served as a director and vice chairman of Security Funds. Mr. Apter  
is a graduate of the Jerusalem College of Technology (B.Sc.) and holds an MBA   
from the Hebrew University in Jerusalem.                                        

 ZVI TROPP. Mr. Tropp was appointed as an external director in September
2004. Mr. Tropp, shall continue to serve as external director for the remainder 
of his 3-year term, which terminates on September 1, 2007.Mr. Tropp has been a  
senior consultant with Zenovar Consultant Ltd. since 2003. From 2000 until 2003,
Mr. Tropp served as a chief finance officer of Enavis Networks, a member of the 
ECI group, a company engaged in the field of development of transport equipment 
for communications networks. Mr. Tropp served as a board member of various      
organizations, including Rafael (Armament Development Authority), Beit Shemesh  
Engines, Rada - Electronic Industries and as the chairman of the Investment     
Committee of Bank Leumi Le'israel Trust company Ltd. Since February 2006 Mr.    
Tropp serves as the chairman of Rafael. Mr. Tropp holds a B.Sc. degree in       
Agriculture and an M.Sc. degree in Agricultural Economics and business          
administration from the Hebrew University in Jerusalem.                         

   ABRAHAM (RAMI) GOREN. Mr. Goren became a member of our board of directors
as of April 11, 2005. Mr. Goren has also been the executive chairman of the     
board of directors of Elscint from July 1999. Mr. Goren is engaged in the       
explorations of new investments and heads the high-tech investment division of  
the Company. In addition, until 2004, Mr. Goren served as the executive chairman
of the board of directors of Nessuah Zannex Ltd., a leading Israeli investment  
house. Formerly, Mr. Goren had been a partner in the law firm of Prof. Joseph   
Gross, Hodak, Greenberg & Co. (now known as Gross, Kleinhendler, Hodak, Halevy &
Co.), a leading Israeli securities and corporate law firm. From September 1989  
until August 1992, Mr. Goren was an associate in the law firm of Weil, Gotshal &
Manges in New York City. Mr. Goren also serves as a director of various private 
companies in Israel and abroad. Mr. Goren received his LL.B. degree from Bar    
Ilan University in 1986 and an LL.M. degree from New York University in 1989.   
Mr. Goren was admitted to the Israeli Bar in 1987 and to the New York State Bar 
in 1990.                                                                        

    MOSHE LION. Mr. Lion became a member of our board of directors as of April
11, 2006. Mr. Lion is a senior partner of an accounting firm in Israel. . From  
April 2003 to April 2006 Mr. Lion was the chairman of Israel Railways. From     
October 2000 to December 2005, Mr. Lion served as a director of Elscint. From   
December 1997 to July 1999, Mr. Lion was Director General of the Israeli Prime  
Minister's Office and an economic advisor to the Israeli Prime Minister. From   
January 1997 to November 1997, he served as the Head of the Bureau of the       
Israeli Prime Minister's Office and as an economic advisor to the Israeli Prime 
Minister. Mr. Lion serves as a director of Massad Bank and the Israel Council   
for Higher Education and the Wingate Institute for Physical Education. Mr. Lion 
holds a Bachelor of Arts degree in accounting and economics and a Master's      
Degree in Law (LL.M.) from Bar Ilan University.                                 

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   SHMUEL PERETS. Mr. Perets became a member of our board of directors as of
April 11, 2006. Since 1997, Mr. Perets has served as the president of the Israel
Aircraft Industries European division. From March 2003 to December 2005, Mr.    
Perets served as a director of Elscint. Between 1991 and 1996, Mr. Perets served
as vice president (finance) of the Israel Aircraft Industries. Between the years
1980-2002, Mr. Perets served as a director of Elta Ltd., Magal Ltd., Medisel    
Technologies Inc., SpaceCom Ltd., and Belgium Advanced Technologies (a Belgium  
company). Mr. Perets holds a Bachelor of Arts degree in economics and political 
science from the Hebrew University in Jerusalem, as well as an MBA from the New 
York Institute of Technology.                                                   

    MARC LAVINE. Mr. Lavine was appointed as our General Counsel and Corporate
Secretary in May 1999. Mr. Lavine also serves as General Counsel and Corporate  
Secretary for Elscint and Europe-Israel. Prior thereto, Mr. Lavine was in       
private practice as an associate and as a partner in the law firms Miron,       
Bension & Priwes (Tel-Aviv) (1977 to 1997) and Raved, Magriso, Benkel & Caspi   
(Tel-Aviv) (1997 to 1998). Mr. Lavine is a graduate of the University of        
Zimbabwe (B.L., 1974). Mr. Lavine is married to Rachel Lavine, a director of EMI
and a President of Elscint and acting chief executive officer of PC.            

B.   COMPENSATION OF DIRECTORS AND OFFICERS                                     

The aggregate compensation paid to or accrued on behalf of all of our 
officers and directors for the year ended December 31, 2005, as a group, was    
approximately NIS 10.1 million (approximately $2.2 million) of which            
approximately NIS 447,700 (approximately $97,300) has been accrued by EMI to    
provide pension and retirement benefits, and NIS 351,700 (approximately $76,400)
was paid to directors in their capacities as directors.                         

  In addition to the above compensation, on May 31, 2006, our shareholders
approved additional compensation to certain directors and officers, as set forth
below:                                                                          

    (i) Payment to each of (1) Shimon Yitzhaki, our President, Chief Financial
Officer and a director, and (2) Ms. Rachel Lavine, our director who also serves 
as the President of Elscint and Acting Chief Executive Officer of PC, a bonus of
$100,000 for the 2004 fiscal year and a bonus of $175,000 for the 2005 fiscal   
year. For each fiscal year after 2005, the Company will pay to each of Mr.      
Yitzhaki and Ms. Lavine an annual bonus within 30 days following the approval by
the board of directors of our each year's audited consolidated financial        
statements which will be calculated, as follows: (i) 0.75% of the first NIS 125 
million of the Company's pre-tax annual profits as disclosed on our annual      
audited consolidated financial statements ("Profits"); (ii) 0.875% of Profits   
between NIS 125 million and NIS 150 million; and (iii) 1% of Profits exceeding  
NIS 150 million.                                                                

   (ii) Payment to Mordechay Zisser, our Executive Chairman of the Board, of
an annual bonus for each fiscal year after 2005, to be paid within 30 days      
following the approval by the board of directors of our each year's audited     
consolidated financial statements, to be calculated as follows: (i) 0% of the   
first NIS 100 million of Profits; (ii) 3% of Profits between NIS 100 million and
NIS 125 million; (iii) 3.5% of Profits between NIS 125 million and NIS 150      
million; and (iv) 4% of Profits exceeding NIS 150 million.                      

   (iii) An agreement for the receipt of executive chairman services between
EMI and a management company (the "Management Company") controlled by Mr.       
Mordechay Zisser, our Executive Chairman. Under the agreement, the Management   
Company will provide us with Executive Chairman services. The Management Company
may provide the Services to private subsidiaries and/or affiliates of the       
Company. The Services will be provided by Mr. Zisser only, as an employee of the
Management Company. Mr. Zisser will devote at least 80% of his time, skills and 
efforts to his position as Executive Chairman. The control of the Management    
Company will not be changed during the term of the agreement.                   

We will pay the Management Company a monthly amount of $50,000 plus   
applicable value added tax as well as reimbursement of expenses. In addition,   
the Management Company is entitled to other benefits, such as: an appropriate   
vehicle, telephone, facsimile, mobile phone, computer, printer and modem and we 
shall bear all their installation costs and all reasonable expenses related     
thereto.                                                                        

     The agreement is for a five-year term commencing retroactively on August 1,
2005. Termination of Mr. Zisser's service as Executive Chairman of the Board for
any reason whatsoever will result in an immediate termination of the agreement. 
Notwithstanding the above, at our request, Mr. Zisser will serve (through the   
Management Company)                                                             

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in addition to his service as Executive Chairman or in its stead as a director  
or officer of the Company, and in such event, the agreement will remain in      
effect with regard to the additional or other service of Mr. Zisser in EMI.     

  Mr. Zisser has guaranteed all of the Management Company's obligations as
far as they relate to Mr. Zisser and has further guaranteed the Management      
Company's indemnification undertakings and responsibility for damages in the    
event of determination of the existence of employer-employee relations between  
Mr. Zisser and EMI during the period of this agreement.                         

 (iii) Grant of 350,000 options exercisable into 350,000 of our ordinary
shares to our Executive Chairman of the Board. The options are exercisable upon 
their grant and will remain exercisable for a period of three years thereafter. 
The exercise price per each option is NIS 137.44. The options were issued to our
Executive Chairman on June 8, 2006.                                             

(iv) Grant of 353,500 options to the members of our board of directors
(except for the Executive Chairman), as follows: 90,000 options to Mr. Shimon   
Yitzhaki, 75,000 options to Ms. Rachel Lavine, 50,000 options to Mr. Abraham    
(Rami) Goren, 15,000 options to Mr. Yehoshua (Shuki) Forer, 16,750 options to   
each of Mr. Moshe Lion and Mr. Shmuel Perets and 30,000 Options to each of      
Messrs. David Rubner, Yosef Apter and Zvi Tropp. The options will be granted in 
accordance with our 2006 Employees, Directors and Officers Incentive Plan. See  
"- E. Share Ownership - 2006 Employees, Directors and Officers Incentive Plan"  
below. As of the date of this annual report the conditions precedent to the     
grant have not yet been satisfied. We expect the issuance of the options to take
place during July 2006.                                                         

    For information on the ownership of shares and/or options by our directors
and executive officers, see "- E. "Share Ownership" below.                      

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INSURANCE, INDEMNIFICATION AND EXEMPTION                              

  We purchased an insurance policy covering the liability of our directors
and officers, including as directors or officers of our subsidiaries. The policy
covers a total liability of $40 million per occurrence and during the duration  
of the policy, which represents the overall directors and officers liability    
policy covering the directors and officers of Europe Israel, our parent, and    
companies under its control (the liability of directors and officers of         
Europe-Israel and companies controlled by it, other than us and companies under 
our control, is limited to $10 million out of the aggregate coverage amount of  
$40 million). We pay substantially all the premium for such insurance policy.   
The policy is for a one-year period beginning on October 31, 2005 and ending on 
October 31, 2006. The coverage of such policy also includes acts and/or         
omissions performed by previous directors and officers of the Company for a     
one-year period beginning on October 31, 2005 and ending on October 31, 2006    
without any retroactive limitation and subject to the terms of the policy.      

    We provide our directors and officers (as shall be from time to time) with
a prospective undertaking to indemnify such directors and officers by virtue of 
their service as our directors or officers or by virtue of their service as     
directors or officers on behalf of us in companies under our control or in which
we hold interests. The aggregate indemnification amount pursuant to all our     
prospective indemnification undertakings shall not exceed the lower of: (i) 25% 
of our shareholders' equity, as set forth in our most recent consolidated       
financial statements prior to such payment; (ii) $40 million, in excess of any  
amounts paid (if paid) by insurance companies pursuant to insurance policies    
maintained by us from time to time with respect to matters covered by the       
prospective indemnification undertaking.                                        

   We have also granted our directors and officers (as shall be from time to
time), except to our Executive Chairman, an exemption from liability for damages
due to a breach by either of them of their duty of care towards us, in          
accordance with the Israeli Companies Law.                                      

C.   BOARD PRACTICES                                                            

ELECTION OF DIRECTORS                                                 

    Our directors are elected by our shareholders at the annual meeting of the
shareholders by an ordinary majority. Generally, the nominees for a director's  
office are recommended by the board of directors. The directors hold office     
until the next annual meeting of our shareholders. Our board of directors may   
appoint additional directors to our board of directors in the event the number  
of directors is less than the maximum number authorized by our articles of      
association. Any director so appointed will hold office until the next annual   
meeting of the shareholders. Our board of directors currently consists of 10    
members. Our current directors (other than the external directors) were         
appointed by our shareholders at their annual meeting on December 29, 2005 and  
will hold office until the next annual meeting of our shareholders. .           

Under an amendment to the Israeli Companies Law, each Israeli public  
company, including us, is required to determine, no later than April 19, 2006,  
the minimum number of directors with "accounting and financial expertise" that  
such company believes is appropriate in light of the particulars of such company
and its activities. A director with "accounting and financial expertise" is a   
person that, due to education, experience and qualifications, is highly skilled 
and has an understanding of business-accounting issues and financial statements 
in a manner that enables him/her to understand in depth the company's financial 
statements and stimulate discussion regarding the manner of presentation of the 
financial data. Our board of directors resolved on October 24, 2004 that the    
minimum number of directors with accounting and financial expertise appropriate 
for us in light of the size of the board of directors and nature and volume of  
our operations is one director.                                                 

SUBSTITUTE DIRECTORS                                                  

   Our articles of association provide that any director may appoint another
person to serve as a substitute director and may cancel such appointment. Under 
the Israeli Companies Law, the following persons may not serve as substitute    
directors: (i) any person who is not himself qualified to be appointed as a     
director; (ii) a person who is already serving as a director; or (iii) a person 
who is already serving as a substitute director for another director.           
Nevertheless, a director may be appointed as a substitute director for a        
committee of the board of directors if he or she                                

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is not already serving as a member of the committee. Under the Israeli Companies
Law, there shall not be appointed a substitute director for an external         
director.                                                                       

EXTERNAL DIRECTORS; INDEPENDENT DIRECTORS                             

   The Israeli Companies Law requires Israeli public companies to appoint at
least two external directors. The Israeli Companies Law provides for certain    
qualifications that a candidate for external directorship must comply with.     
Among such requirements, a person may not be appointed as an external director  
if such person or person's relative, partner or employer, or any entity         
controlled by such person, has, at the date of appointment, or had at any time  
during the two years preceding such date, any affiliation with the company, any 
entity controlling the company at the date of his appointment or any entity     
controlled by the company or by the entity controlling the company. The term    
"affiliation" is broadly defined in the Companies Law, including an employment  
relationship, a business or professional relationship maintained on a regular   
basis or control, service as a director or officer, other than service as a     
director who was appointed in order to serve as an external director of a       
company when such company was about to make an initial public offering.         

   In addition, no person may serve as an external director if such person's
position or other business creates, or may create, conflict of interest with the
person's position as an external director, or if such position or other business
may impair such person's ability to serve as a director. Until the lapse of two 
years from termination of office, a company may not engage an external director 
to serve as a director or officer and cannot employ or receive services from    
that person, either directly or indirectly, including through a corporation     
controlled by that person. The Companies Law provides for additional            
qualification requirements that are imposed on such candidates.                 

External directors are to be elected by a majority vote at the general
meeting of shareholders, provided that(i) such majority vote at the general     
meeting shall include at least one third (1/3) of the total votes of            
non-controlling shareholders present and voting at such general meeting,        
excluding abstaining votes, or (ii) the total number of votes of the            
shareholders mentioned in clause (i) above that voted against such proposal does
not exceed one percent (1%) of the total voting rights in the company.          

   The initial term of an external director is three years and such term may
be extended for an additional three-year period. External directors may be      
removed only in a general meeting, by the same percentage of shareholders as is 
required for their election, or by a court, and in both cases only if the       
external directors cease to meet the statutory qualifications for their         
appointment or if they violate their fiduciary duty to us. Each committee of a  
company's board of directors that is authorized to exercise powers of the board 
of directors is required to include at least one external director, and all     
external directors must be members of the company's audit committee.            

An external director is entitled to reimbursement of expenses and to  
monetary and other compensation as provided in regulations promulgated under the
Companies Law, but is otherwise prohibited from receiving any other             
compensation, directly or indirectly, in connection with services provided by   
such person as an external director.                                            

Mr. Yosef Apter and Mr. Zvi Tropp were elected in December 2002 and   
September 2004, respectively, as our external directors. Mr. Apter was          
re-elected as an external director in December 2005 for a second three-year term
which commenced on December 25, 2005. Mr. Tropp shall continue to serve as      
external director for the remainder of his 3-year term, which terminates on     
September 1, 2007.                                                              

  Pursuant to a recent amendment to the Israeli Companies Law at least one
external director is required to have "accounting and financial expertise" and  
the other director(s) are required to have "professional expertise" or          
"accounting and financial expertise". A director has "professional expertise" if
he or she satisfies one of the following:                                       

(i)  the director holds an academic degree in one of these areas:     
 economics, business administration, accounting, law or public
administration;                                             

   (ii) the director holds an academic degree or has other higher education,
        all in the main business sector of the company or in a relevant area
for the board position; or                                  

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  (iii) the director has at least five years' experience in one or more of
          the following (or a combined five years' experience in at least two or
     more of these: (a) senior management position in a corporation of
  significant business scope; (b) senior public office or senior
     position in the public sector; or (c) senior position in the main
business sector of the company.                             

   A director with "accounting and financial expertise" is a person that due
to his or her education, experience and skills has high skills and understanding
of business-accounting issues and financial reports which allow him to deeply   
understand the financial reports of the company and hold a discussion relating  
to the presentation of financial information. The company's board of directors  
will take into consideration in determining whether a director has "accounting  
and financial expertise", among other things, his or her education, experience  
and knowledge in any of the following:                                          

    (i)  accounting issues and accounting control issues characteristic to the
          segment in which the company operates and to companies of the size and
complexity of the company;                                  

   (ii) the functions of the external auditor and the obligations imposed on
such auditor;                                               

 (iii) preparation of financial reports and their approval in accordance
with the companies law and the securities law.              

     The above qualifications do not apply to external directors appointed prior
to January 19, 2006, such as our external directors. However, an external       
director may not be appointed to an additional term unless: (i) such director   
has "accounting and financial expertise"; or (ii) he or she has "professional   
expertise", and on the date of appointment for another term there is another    
external director who has "accounting and financial expertise" and the number of
"accounting and financial experts" on the board of directors is at least equal  
to the minimum number determined appropriate by the board of directors.         

 Under Nasdaq Marketplace Rules, a foreign private issuer may follow its
home country practice in lieu of the requirements of Rule 4350, provided,       
however, that such an issuer complies with selected rules as defined therein. We
currently comply with all mandatory requirements as are applicable to us by     
virtue of our foreign status. We also comply with certain other voluntary       
guidelines that correspond to certain Israeli mandatory rules, although there is
no assurance that we will continue to do so in the future should such Israeli   
rules cease to apply.                                                           

     Our current composition of the board of directors consists of a majority of
independent directors. Two of our independent directors serve as external       
directors as defined by the Companies Law. For further elaboration as to        
election, qualification and roles of external directors, see above.             

   Prior to such additional nomination, all our external directors served as
audit committee members and as such carried out regular executive sessions at   
which only independent directors were present. Under Israeli Law, no requirement
exists to oblige independent directors to conduct executive session. Although we
will endeavor to proceed with such practice, the frequency may be reduced.      

    The compensation of our President is approved, under the Companies Law, by
the audit committee and board of directors. Since our President also serves as  
director in us, his compensation is also approved by our shareholders.          

As to procedures governing the election of our directors, see above.  

Our audit committee is comprised of four members, all of whom meet the
independence and other professional requirements as stipulated by both Nasdaq   
Marketplace Rules and Rule 10A-3(b)(1) under the Securities Exchange Act of     
1934. The Nasdaq rules also require that at least one member of the audit       
committee be a financial expert. Our board of directors has determined that Mr. 
Tropp qualifies as a financial expert in terms of the Nasdaq requirements.      

BOARD COMMITTEES                                                      

  Our board of directors has established an audit committee and a donation
committee, as described below.                                                  

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    Audit committee. The Companies Law requires public companies to appoint an
audit committee. An audit committee must consist of at least three members, and 
include all of the company's external directors. However, the chairman of the   
board of directors, any director employed by the company or providing services  
to the company on a regular basis, any controlling shareholder and any relative 
of a controlling shareholder may not be a member of the audit committee. The    
responsibilities of the audit committee include identifying and examining flaws 
in the business management of a company's, in consultation with the internal    
auditor and the company's independent accountants and suggesting appropriate    
course of actions. In addition, an audit committee recommends approval of       
transactions that are deemed interested party transactions, including directors'
compensation and transactions between a company and its controlling shareholder 
or transactions between a company and another person in which its controlling   
shareholder has a personal interest. An "interested party" is defined in the    
Israeli Companies Law as a 5% or greater shareholder, any person or entity who  
has the right to designate one director or more or the general manager of ours  
or any person who serves as a director or as a general manager.                 

    In accordance with the Sarbanes-Oxley Act of 2002 and Nasdaq requirements,
our audit committee is comprised of four members, all of whom meet the          
independence and other professional requirements as stipulated by said rules.   

The Nasdaq rules also require that at least one member of the audit   
committee be a financial expert. Our board of directors has determined that Mr. 
Tropp qualifies as a financial expert in terms of the Nasdaq requirements.      

    Our audit committee operates in accordance with a charter adopted prior to
the enactment of the Sarbanes-Oxley Act of 2002.                                

   Our audit committee operates in accordance with a Charter adopted in July
2005 and written procedures governing approval of any proposed transactions with
our external auditors. Within the framework of such governing documents, the    
audit committee oversees the appointment, compensation, and oversight of the    
public accounting firm engaged to prepare or issue an audit report on our       
financial statements. The audit committee's specific responsibilities in        
carrying out its oversight role include the approval of all audit and non-audit 
services to be provided by the external auditor and quarterly review the firm's 
non-audit services and related fees. These services may include audit services, 
audit-related services, tax services and others. The audit committee approves in
advance the particular services or categories of services to be provided to us  
during the following yearly period and also sets forth a specific budget for    
such audit and non-audit services. Additional services may be pre-approved by   
the audit committee on an individual basis during the year. None of             
Audit-related Fees, Tax Fees or Other Fees provided to us by Brightman Almagor &
Co., were approved by the audit committee pursuant to the de minimis exception  
to the pre-approval requirement provided by Section 10A of the Securities       
Exchange Act of 1934.                                                           

Our audit committee has the authority to retain independent legal,    
accounting or other consultants as advisors, for which we will provide funding, 
and handle complaints relating to accounting, internal accounting controls or   
auditing matters.                                                               

    Donation committee. Our articles of association authorize us to make, from
time to time, contributions of reasonable sums for worthy causes, even if such  
contributions do not fall within our business considerations as referred to in  
section 11 of the Companies Law, 1999. Our donation committee is authorized to  
determine, in its discretion, with respect to any contribution, the amount      
thereof, its purpose, the entity to receive the contribution and any other term 
or condition relating thereto.                                                  

    Our balance-sheet committee which was established to thoroughly peruse the
financial statements and discuss certain key issues arising there from, and to  
recommend the board of directors whether or not to approve our financial        
statements was canceled by our board in December 2005. The authorities of our   
balance-sheet committee were transferred to our audit committee replaced the    
Balance sheet committee functions. In addition, the committee of independent    
directors established by our board of directors to consider and discuss a       
possible business combination between us and Elscint in a share-for-share       
transaction ceased to function upon completion of the merger by way of exchange 
of shares with Elscint during December 2005.                                    

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D.   EMPLOYEES                                                                  

   As of May 31, 2006, EMI employed 19 persons in investment, administration
and managerial services, all of whom were employed in Israel. As of May 31,     
2006, PC had approximately 68 employees in Eastern Europe and 27 freelancers.   
The decrease in the numbers of employees can be explained by the sale of 50%    
of our Hungarian management company to Klepierre, the sale of four of our Polish
shopping and entertainment centers and our Polish management company and the    
expected sale of the Novo Plaza project in the Czech Republic to Klepierre. See 
"Item 10. Additional Information - Material Contracts - Shopping and            
Entertainment Centers" below.                                                   

E.   SHARE OWNERSHIP                                                            

2001 EMPLOYEES, DIRECTORS AND OFFICERS INCENTIVE PLAN                 

     Our 2001 Employees, Directors and Officers Incentive Plan (the "2001 Plan")
provides for the issuance of up to 550,000 of our ordinary shares to our        
employees, directors and officers and to employees, directors and officers of   
companies controlled by us, of Europe-Israel and of companies controlled by     
Europe-Israel. The shares are issued to a trustee for the benefit of each       
recipient. Our board of directors approved on July 22, 2004 and on December 4,  
2005 an increase in the number of shares available for grant under the 2001 Plan
by 34,500 and 42,400 respectively. As of May 31, 2006, we have issued all       
626,900 available shares under the 2001 Plan of which 490,051 shares were sold. 

     All the shares issued under the 2001 Plan are purchased at a purchase price
of NIS 24.1 per share. Each recipient is granted a loan in an amount equal to   
the full purchase price of the shares to be issued to such recipient. The loan  
is for a five-year period bearing interest at an annual rate of 6%. The shares  
issued for the benefit of each recipient serve as sole collateral for the       
repayment of the loan granted to such recipient (non-recourse) except that the  
loan will become a recourse loan in the event of payment of the loan prior to   
the lapse of the five-year period as a result of transfer or sale of shares     
issued to such recipient with respect to the interest rate for the portion of   
shares so sold or transferred. On February 16, 2006, our board of directors     
extended the term of the loan for an additional two years until February 24,    
2008 for offerees, who do not serve as our directors or executive officers. As  
of May 31, 2006, all of the shares issued under the 2001 Plan have vested and   
may be exercisable.                                                             

     Under the Nasdaq Marketplace rules, foreign private issuers may follow home
country practice in lieu of certain Nasdaq corporate governance requirements    
provided that such foreign private issuer shall submit to the Nasdaq a written  
statement from an independent counsel in such issuer's home country certifying  
that the issuer's practices are not prohibited by the home country's laws.      
Nasdaq has in the past required that foreign private issuers shall be granted   
exemptions from its Marketplace rules before following home country practice. In
April 2004, we received an exemption from the Nasdaq Marketplace Rule requiring 
shareholders approval for an increase in the number of shares available for     
issuance under the Plan, and increased such number by additional 34,500 shares. 
In January 2006, in accordance with applicable Israeli law, we increased the    
number of shares available for issuance under the 2001 Plan by additional 42,400
shares without shareholder approval.                                            

ELSCINT'S 2001 EMPLOYEES, DIRECTORS AND OFFICERS INCENTIVE PLAN       

Elscint's 2001 Employees, Directors and Officers Incentive Plan (the  
"Elscint 2001 Plan") provided for the issuance of up to 850,000 ordinary shares 
of Elscint to employees, directors and officers of Elscint and its subsidiaries 
and to employees of Europe-Israel or other companies controlled by              
Europe-Israel. Under the Elscint 2001 Plan, 802,500 shares have been issued at a
price per share of NIS 15.65. The remaining 81,000 shares were subsequently     
transferred as available shares for a subsequent option plan adopted by Elscint 
in 2003, see below. The rights of the recipients to retain the shares vest over 
periods of two or three years following the issuance (i.e., 50% or 33% of the   
shares will become available for purchase at the end of each year). All other   
terms and conditions of the Elscint 2001 Plan are substantially similar to those
of our 2001 Plan. Elscint 2001 Plan was terminated by Elscint's board of        
directors on November 27, 2003.                                                 

    Upon the completion of the merger by way of exchange of shares between EMI
and Elscint during November 2005, the 522,500 shares that remained outstanding  
as of such date were exchanged for 276,925 shares of EMI. As of May 31, 2006,   
the number of shares outstanding under the Elscint 2001 Plan was 188,485 shares 
of EMI.                                                                         

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ELSCINT'S 2003 EMPLOYEES, DIRECTORS AND OFFICERS INCENTIVE PLAN       

Elscint's 2003 Employees, Directors and Officers Incentive Plan (the  
"Elscint 2003 Plan") provided for the grant of up to 116,000 options exercisable
into up to 116,000 ordinary shares of Elscint. Elscint granted 50,000 options   
exercisable into 50,000 shares of Elscint to two of its then serving directors  
at an exercise price of $4.68 per option. Elscint 2003 Plan was terminated by   
Elscint board of directors on November 27, 2003. Upon the completion of the     
merger by way of exchange of shares between EMI and Elscint during November     
2005, the 50,000 options were exchange for 26,500 options exercisabled into     
26,500 shares of EMI at an exercise price of NIS 38.67 per option. As of May 31,
2006, all of the above options were exercised into 27,964 shares of EMI (taking 
into consideration adjustments for distribution of dividends) pursuant to their 
terms.                                                                          

2006 EMPLOYEES, DIRECTORS AND OFFICERS INCENTIVE PLAN                 

     Our 2006 Employees, Directors and Officers Incentive Plan (the "2006 Plan")
provides for the grant of up to 1,000,000 non-marketable options to our         
employees, directors and officers and to employees, directors and officers of   
companies controlled directly or indirectly by us. The options will be granted  
to the recipients for no consideration. The exercise price per option will be   
the lower of: (i) NIS 100; or (ii) the average closing price of our ordinary    
shares on the TASE during the 30-trading day period preceding the date of grant 
of such options.                                                                

The options may be exercised into shares in such manner that on the   
exercise date we will issue to each recipient shares equivalent to the gain from
the exercise of the options (i.e.: each option may be exercised to such number  
of shares equaling to the opening price of EMI shares on the TASE on the        
exercise date minus the exercise price while the difference is then divided by  
the above opening price; provided however, that such opening price will not     
exceed 166% of the exercise price. Accordingly, the maximum number of shares    
issuable upon exercise of all of the options that may be granted under the 2006 
Plan is 397,590. The rights of the recipients to exercise the options vest over 
periods of three years following the grant (i.e., 33.33% of the options may be  
exercised at the end of each year). The options will expire after the lapse of  
five years from their date of grant. As of May 31, 2006, the conditions         
precedent to the grant have not yet been satisfied. We expect the conditions to 
the grant to be satisfied by July, 2006.                                        

   In accordance with Nasdaq rules applicable to foreign private issuers, we
have elected to follow home country practice, and accordingly, the 2006 Plan was
not approved by our shareholders. See "- 2001 Employees, Directors and Officers 
Incentive Plan" above.                                                          

ISSUANCE OF OPTIONS TO OUR EXECUTIVE CHAIRMAN OF THE BOARD            

   We have granted 350,000 options to our Executive Chairman of the board of
directors. For additional information, see "- B. Compensation of Directors and  
Officers" above.                                                                

INSIGHTEC EQUITY PLANS                                                

InSightec maintains four equity incentive plans:                      

   InSightec's 1999 Employee Stock Ownership Plan (the "1999 Plan") provides
for the grant of up to 2,650,000 options, at an exercise price of NIS 0.01. The 
rights of the recipients to exercise the options vest over a four-year period   
from the grant date, 50% after two years and 25% after each of the third and    
fourth years. The options generally expire following seven years as of their    
date of grant. On January 30, 2006, InSightec's board of directors extended the 
exercise period by additional 2-year period to nine years as of their date of   
grant.                                                                          

   InSightec's 2003 Employee Stock Ownership Plan (the "2003 Employee Plan")
provides for the grant of up to 1,094,000 options (700,000 plus 394,000 that    
were transferred from the 1999 Plan), at an exercise price that varies from     
$5.85 to $16. Options granted under the 2003 Employee Plan generally vest after 
a two-year period from the end of calendar year in which the options were       
granted. On January 30, 2005 InSightec's board resolved to amend the 2003       
Employee Plan so that the options granted under the 2003 Employee Plan after    
January 30, 2005, would generally vest over a four-year period from the grant   
date, 50% after two years and 25% after each of the third and fourth years. The 
options generally expire following seven years as of their date of grant.       

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     InSightec's 2003 Service Providers Plan (the "2003 Service Providers Plan")
provides for the grant of up to 300,000 options, at an exercise price of $5.50. 
The board of directors will determine vesting term. The options generally expire
following seven years as of their date of grant.                                

     InSightec's 2006 Stock Option Plan (the "2006 Plan") provides for the grant
of up to 400,000 options, at an exercise price equal to fair value at the date  
of grant. On the board of directors from January 30, 2006, a resolution was made
to transfer the balance of unallocated options from the 2003 Employee Plan and  
the 2003 Service Providers Plan to the 2006 Plan, in addition to the 400,000    
options. The rights of the recipients to exercise the options vest over a       
four-year period from the grant date, 50% after two years and 25% after each of 
the third and the fourth years. The options generally expire following seven    
years as of their date of grant or following 5 years if some criterions are met 
as stipulated in the 2006 Plan.                                                 

As of May 31, 2006 the total amount of options in pool sums up to     
4,050,000. 472,550 are available from which 250,000 options are reserved to Mr. 
Mordechay Zisser, at an exercise price of $5.50.                                

 Among the recipients of these plans InSightec issued 100,000 options to
Shimon Yitzhaki, a director of InSightec who also serves as a director of EMI.  
Such options are exercisable into ordinary shares of InSightec, at an exercise  
price of $3.33 per share until May 2010. Our shareholders approved the          
allotment. InSightec also granted one of our executive officers Marc Lavine     
options to purchase, at par value, 7,500 ordinary shares according to 2003      
Employee Plan, exercisable until May 2010.                                      

   All of these four plans automatically vest and become exercisable without
any discretion on the part of InSightec's board of directors or compensation    
committee upon certain events that constitute a material change to InSightec,   
such as: a change of control; a resolution of InSightec's shareholders or their 
board of directors for their dissolution or a distribution in kind of most of   
their assets; types of mergers etc. Each of the above four plans contains a     
first refusal right among the recipients.                                       

   The following table indicates share ownership and percentage ownership as
of May 31, 2006 in EMI and its subsidiaries, of all current directors and       
officers:                                                                       

                                                                [Download Table]

                          NUMBER OF                     
         NAME              SHARES       %        ENTITY 
         ----            ----------   -----    ---------
                                                        
Mordechay Zisser         12,403,634*  48.73*   EMI      
Shimon Yitzhaki              83,765        **  EMI      
                            100,000        **  InSightec
Rachel Lavine                53,000        **  EMI      
Yehoshua (Shuki) Forer        7,000        **  EMI      
Abraham (Rami) Goren         47,700        **  EMI      
Moshe Lion                   13,250        **  EMI      
Marc Lavine                   7,500        **  InSightec

*    Includes 12,053,634 shares of EMI held by Europe-Israel, which may be      
   deemed indirectly beneficially owned by Mr. Mordechay Zisser by virtue of
  his control of Europe-Israel through his control of Control Centers, see
"Item 7. Major Shareholders and Related Party Transactions - Major    
 Shareholders" below. On June 8, 2006, EMI granted to Mr. Zisser 350,000
  options exercisable into 350,000 ordinary shares of EMI in consideration
  for NIS 137.44 per option. The options were exercisable immediately upon
their grant for a three-year term.                                    

**   Less than 1% of the outstanding ordinary shares of the respective entity.  

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 EMI has one class of shares. All of EMI's ordinary shares have the same
voting and equity rights.                                                       

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                       

A.   MAJOR SHAREHOLDERS                                                         

EMI had, as of May 31, 2006, 25,454,262 shares outstanding, excluding 
2,800,000 ordinary shares held by EMI which do not have any voting and equity   
rights. The following table sets forth certain information as of May 31, 2006,  
concerning: (i) persons or entities who, to our knowledge, beneficially own more
than 5% of the outstanding ordinary shares of EMI, (ii) the number of ordinary  
shares of EMI beneficially owned by all officers and directors of EMI as a      
group:                                                                          

                                                                [Download Table]

                                           NUMBER OF SHARES               
          NAME AND ADDRESS              BENEFICIALLY HELD (1)   PERCENTAGE
          ----------------              ---------------------   ----------
                                                                          
Europe-Israel (M.M.S.) Ltd.                   12,053,634           47.35  
   13 Mozes Street                                                        
   Tel-Aviv, Israel (2)                                                   
Mordechay Zisser (3)                          12,403,634           48.73  
All officers and directors as a group                                     
   (11 persons) (4)                           12,608,349           49.53  

(1)  The number of shares and percentage ownership is based on 25,454,262       
ordinary shares outstanding as of May 31, 2006. Such number excludes  
2,800,000 ordinary shares held by EMI, which do not have any voting or
    equity rights. Beneficial ownership is determined in accordance with rules
  of the SEC and includes voting and investment power with respect to such
 shares. All information with respect to the beneficial ownership of any
  principal shareholder has been furnished by such shareholder and, unless
    otherwise indicated below, we believe that persons named in the table have
    sole voting and sole investment power with respect to all the shares shown
as beneficially owned, subject to community property laws, where      
applicable. The shares beneficially owned by the directors include the
ordinary shares owned by their family members to which such directors 
disclaim beneficial ownership.                                        

(2)  Europe-Israel is a private Israeli subsidiary wholly owned by Control      
Centers. Control Centers is controlled by Mr. Mordechay Zisser, the   
executive chairman of the board of directors of EMI.                  

(3)  Mordechay Zisser serves as Executive Chairman of our board of directors. In
addition, on June 8, 2006, EMI grant to Mr. Zisser of 350,000 options 
  exercisable into 350,000 ordinary shares of EMI in consideration for NIS
     137.44 per option. The options are exercisable immediately upon their grant
for a three-year term.                                                

(4)  Includes 12,053,634 shares of EMI held by Europe-Israel, which may be      
   deemed indirectly beneficially owned by Mr. Mordechay Zisser by virtue of
 his control of Europe-Israel through his control of Control Centers, as
    described in footnote (2) above. In addition, on June 8, 2006, EMI granted
to Mr. Zisser 350,000 options exercisable into 350,000 ordinary shares
of EMI in consideration for NIS 137.44 per option. The options are    
    exercisable immediately upon their grant for a three-year term. On May 31,
  2006, our shareholders approved a grant of options to our directors, see
 also "Item 6. Directors, Senior Management and Key Employees - E. Share
   Ownership - 2006 Employees, Directors and Officers Incentive Plan" above.
    As of the date of this annual report, the conditions to the grant have not
yet been satisfied, and we expect the grant to occur during July 2006.

CHANGES IN MAJOR SHAREHOLDERS' HOLDINGS DURING THE LAST THREE YEARS   

   The following is a list of changes in major shareholders' holdings during
the last three years:                                                           

  On May 17, 2006, Elscint sold 524,187 shares of EMI in consideration for
NIS 115 for each share, through a private transaction. The aggregate            
consideration with respect to such sale was approximately NIS 60.2 million      
(approximately $13.1_million). Prior to the reported transaction, part of these 
shares did not have voting rights inasmuch as they were held by a subsidiary of 
EMI. Following the transaction the shares sold will enjoy full equity and voting
rights.                                                                         

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On March 2, 2005 Bank Leumi Le'Israel Ltd. informed us that its mutual
funds and provident funds ceased to be a major shareholder of EMI.              

As a result of the completion of a merger by way of exchange of shares
between EMI and Elscint, Elscint became a wholly-owned subsidiary of EMI and    
each outstanding share of Elscint (other than Elscint ordinary shares held by   
EMI and by or for the benefit of Elscint) was exchanged for 0.53 ordinary shares
of EMI. On December 2, 2005, EMI issued 3,479,216 ordinary shares to Elscint    
shareholders (other than Elscint ordinary shares held by EMI and by or for the  
benefit of Elscint). Such number excluded approximately 26,500 ordinary shares  
of EMI that were issued upon exercise of options to purchase Elscint shares,    
which EMI assumed in connection with the above merger.                          

   As of May 31, 2006, there were approximately 887 holders of record of our
ordinary shares with addresses in the United States, holding approximately      
22.73% of our issued and outstanding ordinary shares (excluding 2,800,000       
ordinary shares held by us which do not have any voting and equity rights).     

B.   RELATED PARTY TRANSACTIONS                                                 

LEASE                                                                 

EMI and its direct and indirect subsidiaries lease office space from  
Control Centers and Europe-Israel, the parent of EMI.. See "Item 4. Information 
on the Company - D. Property, Plants and Equipment" above. The lease agreements 
were approved by our audit committee and board of directors as a                
non-extraordinary transaction within the meaning of the Israeli Companies Law.  

AMENDMENT TO TERMS OF OPTIONS GRANTED TO OUR EXECUTIVE CHAIRMAN OF THE
BOARD                                                                           

In September 2001, we granted to Mr. Mordechay Zisser, the Executive  
Chairman of our board of directors, options to purchase up to 350,000 of our    
ordinary shares. The exercise price of the options, originally set at NIS 35.7  
per share, was later amended to reflect changes in the exchange rate between the
NIS and the U.S. dollar and in December 2002, our shareholders approved a       
further amendment of the exercise price to unlinked NIS 44 per option. In       
September 2004, our shareholders approved a one-year extension of the exercise  
period until September 8, 2005 and amended the exercise price to NIS 45.7 per   
share. These options were exercised by Mr. Zisser on February 27, 2005, in      
consideration for approximately NIS 16.0 million (approximately $3.6 million).  

ALLOCATION OF COSTS AGREEMENT                                         

  At the annual general meeting of shareholders held on February 21, 2001,
our shareholders approved an agreement with Europe-Israel and Elscint, beginning
retroactively from January 1, 2000 and continuing until December 31, 2002, for  
the allocation of costs and expenses incurred in connection with services       
rendered to those companies by their in-house legal, economic and taxation and  
accounting departments. The allocation would be carried out so that             
Europe-Israel bears 35%, while Elscint and EMI each bear 32.5% of such costs.   
These percentage shares reflect a general estimate of the companies' management 
of the actual utilization rate of these departments' services by each of the    
companies based on the actual services provided thereby during the first half of
2000. Should these percentage rates deviate from the actual service rates by    
more than 10%, the parties will be charged on the basis of the actual cost      
allocation. In November 2002, our audit committee and board of directors        
approved the extension of the agreement for a three-year term until December 31,
2005 on which date the agreement was terminated.                                

MANAGEMENT SERVICES                                                   

    Pursuant to an agreement dated February 28, 2001 in effect as of August 1,
2000 among us, our subsidiaries, PC and Elbit Ultrasound (Netherlands) B.V. and 
Triple-S Holdings N.V. ("Triple-S"), an unrelated third party, Triple-S         
undertook either itself or through Mr. Shmuel S. Smucha, its controlling        
shareholder who acted at that time as the President and Chief Executive Officer 
of PC, to render management services to PC. As consideration for such services, 
Triple-S received a monthly fee of $40,000. In addition, Mr. Smucha was eligible
to receive from PC reimbursement of reasonable living expenses, as well as other
customary benefits. Triple-S was entitled to receive from PC a monthly loan of  
$5,000, bearing market interest rates and repayable no later than December 31,  
2004. This agreement was                                                        

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terminated on December 31, 2003. Mr. Smucha continued to render services to PC  
for one additional month, until January 31, 2004. Upon termination of the       
agreement and Mr. Smucha's services, the parties finalized and settled all open 
accounts and issues.                                                            

PRIVATE ISSUANCE OF SHARES TO TRIPLE-S                                

     In March 2004, we issued 623,362 ordinary shares to Triple-S pursuant to an
agreement, dated February 28, 2001, between us, our subsidiaries PC and Elbit   
Ultrasound (Netherlands) B.V. and Triple-S,. Under the agreement, we issued     
250,000 ordinary shares to Triple-S in exchange for services provided by        
Triple-S to PC and Triple-S's waiver of certain rights to purchase shares of    
companies held by PC. In addition, under the terms of the agreement, we         
undertook, following the lapse of approximately three years from the date of    
such agreement (January 15, 2004), to review the market value of the 250,000    
shares issued to Triple-S. In the event that the market value of such shares    
would have been lower than $6 million, we undertook to pay Triple-S the         
difference between the calculated market value and $6 million, either by cash or
by way of issuance of additional shares of EMI. According to our calculation,   
the market value of the 250,000 shares was lower than $6 million, and therefore,
our board of directors approved the payment to Triple-S of the aforementioned   
difference by way of issuance of additional 623,362 of our shares.              

AGREEMENT FOR AVIATION SERVICES                                       

Pursuant to an agreement between us and Jet Link Ltd. ("Jet Link"), an
aviation company wholly-owned indirectly by Control Centers, which was approved 
by our shareholders on September 10, 2000, we, or our subsidiaries, may purchase
aviation services from Jet Link for our operations in the shopping and          
entertainment centers business for up to 150 hours per annum in consideration   
for payments in accordance with Jet Link's price list to unaffiliated companies 
less a 5% discount. Due to our increasing business needs, we and our            
subsidiaries purchased during 2003, 2004 and 2005 additional approximately 20,  
70 and 200 flight hours from Jet Link, respectively under the same terms. The   
purchase of the additional flight hours was approved by our audit committee and 
board of directors as a non-extraordinary transaction within the meaning of the 
Israeli Companies Law.                                                          

AGREEMENT FOR THE PURCHASE OF COORDINATION, PLANNING AND SUPERVISION  
SERVICES OVER CONSTRUCTION PROJECTS                                             

   Companies controlled by the executive chairman of our board of directors,
are parties to various agreements with subsidiaries of PC, pursuant to which    
such entities have agreed to provide services of coordination, planning,        
execution and supervision over construction projects, to PC's subsidiaries, in  
consideration for 5% of the actual construction costs of each such project      
(excluding land acquisition cost, financing costs and general and administrative
costs), plus VAT. In addition, PC's subsidiaries will reimburse the said        
companies, for all reasonable costs incurred in connection with the services    
rendered thereby, not to exceed a total of $50,000 per project. Such agreements 
were entered into pursuant to a framework agreement signed by us and Control    
Centers (the parent company of these two companies), which was approved by our  
shareholders meeting during 2000. The framework agreement was terminated on     
December 31, 2002.                                                              

Following the termination of the above framework agreement pursuant to its      
terms, a similar agreement for the receipt of such services for real estate     
projects, subject to certain amendments, and the receipt of aviation service was
approved by our shareholders on May 31, 2006. Under the agreement entered into  
between us and Control Centers we will receive from Control Centers (either     
directly or through its subsidiaries or affiliates, other than the Company)     
coordination, planning, execution and supervision services over our real estate 
projects and/or real estate projects of our subsidiaries and/or affiliates in   
consideration for a fee equal to 5% of the actual execution costs (excluding    
land acquisition costs, financing cost and the consideration for Control Centers
under the agreement) of each such project. The agreement will apply to real     
estate projects initiated following the approval of the agreement by the        
Company's shareholders and to the following projects: (i) a shopping and        
entertainment center in Liberec, Czech Republic; (ii) a shopping and            
entertainment center in Kerepesi, Hungary; and (iii) a complex of shopping and  
entertainment center, hotels, congressional centers and other facilities in     
Obuda, Hungary, which are currently under early stage of development.           

 Such fee will be paid in installments upon the meeting of milestones as
stipulated in the agreement. In addition, the Company will reimburse Control    
Centers for all reasonable costs incurred in connection with the services       
rendered thereby, not to exceed a total of E75,000 ($88,000) per real estate    
project.                                                                        

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    If the purpose of a real estate project is changed for any reason prior to
the completion of the project or if the development of the real estate project  
is terminated for any reason (including the sale of the real estate project),   
the payment to Control Centers will be calculated as a percentage of the budget 
for the project, provided that such percentage shall not exceed the percentage  
determined for the next milestone of the project had it had continued as        
planned. The calculation of such payments to Control Centers will be subject to 
the approval of an external accountant and the approval of the audit committee  
and board of directors.                                                         

     In addition, the Company and/or its subsidiaries and/or affiliates may also
purchase from Control Centers through Jet Link up to 125 flight hours per       
calendar year in consideration for payments to Jet Link in accordance with its  
price list to unaffiliated companies less a 5% discount. This Agreement does not
derogate from a previous agreement entered into between us and Jet Link for the 
purchase of aviation services which was approved by our shareholders on         
September 10, 2000, see "- agreement for aviation service" above.               

   The agreement with Control Centers has a five-year term commencing on May
31, 2006.                                                                       

AGREEMENT FOR THE PURCHASE OF COORDINATION, PLANNING AND SUPERVISION  
SERVICES OVER THE BUCURESTI HOTEL COMPLEX                                       

In October 2001, an engagement between Bucuresti and Control Centers  
(thought its wholly owned subsidiary) was approved at an Elscint shareholders'  
meeting. In accordance with such engagement, Control Centers provides           
coordination, planning and supervision services with respect to the renovation  
works of the Bucuresti Hotel complex, for a fee equal to the lower of (i) 5% of 
total actual costs of the renovation works (excluding general and administrative
as well as financing costs); and (ii) 5% of $30 million. The parties are yet to 
execute a definitive agreement.                                                 

A TURN KEY CONTRACTOR AGREEMENT REGARDING THE ARENA CENTER            

  In May 2002, Elscint's shareholders approved a turn-key agreement by and
between S.L.S. Sails Ltd. ("SLS"), our indirect wholly owned subsidiary (which  
holds the rights in the Arena Center in Herzliya, Israel), and C.D.P.M. Kft.,   
("CDPM"), a subsidiary of Control Centers, for the completion of the            
construction of the Arena in consideration of $57.7 million. The consideration  
was determined on the basis of a calculation of the amount of work remaining to 
be preformed as at February 28, 2002. The consideration was subject to          
adjustments and reductions in respect of payments made by SLS to third parties  
sub-contractors, suppliers and consultants from March 1, 2002, up to the        
commencement of works by CDPM. In June 2003, CDPM assigned its rights and       
obligations under the agreement to another company controlled by Control        
Centers, Castara Construction Servicing Limited Liability Company ("CCS"). The  
total consideration paid to CCS by SLS (including adjustments which were        
approved by Elscint's audit committee and Elscint's board of directors          
subsequent to the assignment date) amounted to NIS 161.8 million. Such          
consideration includes approximately $2.3 million paid by SLS to CCS pursuant to
an arbitration held between the parties in March 2004 in connection with CCS'   
allegations regarding the construction works in the Arena. Elscint received from
Control Centers a construction performance quality guarantee, in the amount, as 
of December 31, 2005, of $1.6 million.                                          

We furnished the local municipality, with a bank guarantee to secure  
payment of certain land betterment tax, in an amount of approximately $1.0      
million. Arbitration is currently being held as to this tax liability between   
Marina Herzliya Limited Partnership Ltd. (a company controlled by Control       
Centers) and the local municipality. We estimate, based on professional opinion 
that no significant costs will be borne thereby, in respect of this guarantee.  

TAX ARRANGEMENT                                                       

  During 2004, we, Europe-Israel and Elscint have finalized an arrangement
with the Israeli Tax Authority, with effect from December 31, 2002, whereby a   
new tax basis has been determined for our investments (on consolidated basis) in
foreign subsidiaries ("regulated revaluation" and "regulated assets"). The      
arrangement provides for no additional tax to be imposed in Israel on gains     
generated from the realization of regulated assets, and on dividends distributed
therefrom, and all up to the amount of the regulated revaluation. Provision for 
those tax payments under the                                                    

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arrangement has been recorded in our statement of operations for the years 2002 
through 2004, under the tax expenses for previous years' item. Taxes which      
relate to capital reserves from foreign currency translation adjustments        
deriving from the regulated profits were charged to capital reserves.           

LOAN AGREEMENT WITH BANK HAPOALIM B.M.                                

 Within the framework of our loan agreements with Bank Hapoalim B.M. the
bank has agreed to waive all our financial covenants in the event certain       
conditions are met, including conditions relating to Europe-Israel. See "Item 5.
Operating and Financial Review and Prospects - B. Liquidity and Capital         
Resources - Other Loans" above.                                                 

COMPENSATION                                                          

   For details regarding compensation granted to our directors and officers,
including securities issued to our directors and officers under different       
incentive plans, see "Item 6. Directors, Senior Management and Key Employees -  
B. Compensation and E. - Share Ownership" above.                                

INDEMNIFICATION, INSURANCE AND EXEMPTION                              

     For details regarding the grant of insurance, exemption and indemnification
to our directors and officers, see "Item 6. Directors, Senior Management and Key
Employees - B. Compensation" above.                                             

RELATED PARTY GUARANTEES                                              

     We provide from time to time, guarantees to financial institutions or other
unrelated parties in connection with undertakings, monetary and others, that are
assumed by our subsidiaries. Details as to material guarantees are provided in  
"Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital
Resources - Loans" above.                                                       

ITEM 8. FINANCIAL INFORMATION                                                   

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION                    

See our consolidated financial statements included in Item 18 below.  

B.   SIGNIFICANT CHANGES                                                        

LEGAL PROCEEDINGS                                                               

     1. In November 1999, a number of institutional and other investors, holding
shares in Elscint, filed a lawsuit in the Haifa District Court against EMI,     
Elscint, Europe Israel, Control Centers and others. The plaintiffs also         
requested the certification of their claim as a class action suit on behalf of  
all those who had held Elscint shares on September 6, 1999, and continued to do 
so as at the filing date of the suit (excluding the Company and certain other   
shareholders). The claim alleges discrimination against Elscint's minority      
shareholders arising from various transactions or activities carried out by its 
controlling shareholders and directors, which allegedly caused them financial   
loss, manifested by the 45% ($100 million) decline in the value of Elscint's    
shares in the period from February 24, 1999 to the claim's filing date.         

  The principal remedy requested in the claim is a court order instructing
EMI to carry out a tender offer of Elscint's shares at $14 per share as the     
former allegedly undertook, in its letter to Elscint of February 1999, or       
alternatively, to purchase the shares in their possession, at a price to be     
determined by the Court. As another alternative, the plaintiffs requested the   
court to issue an injunction prohibiting execution of the September 9, 1999     
transactions (acquisition of the hotel operations and the Arena commercial      
center in the Herzliya Marina, by Elscint, from Europe Israel and Control       
Centers, respectively) and the refund of all and any amounts paid thereunder.   
Part of the remedies were requested as a derivative claim on behalf of Elscint. 

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     Although the Haifa District Court has rejected the class-action request, it
was ruled that the plaintiffs may, notwithstanding so rejecting the request for 
class-action proceedings, pursue their matter. In November 2001, the plaintiff's
were granted leave to appeal to the Supreme Court regarding the Court's         
decision. EMI and the plaintiffs presented their respective pleadings. As of May
31, 2006, the Court has not yet rendered its decision in the motion for leave to
appeal.                                                                         

    Management of EMI believes, based, inter alia, on legal opinions, that the
final outcome of this case cannot be estimated at this stage.                   

   In January 2003, EMI received a letter from one of the insurers of Europe
Israel, EMI and Elscint, that provides insurance to the Insured companies       
including insurance pertaining to the representative claim described above.     

  In this letter, the Insurer made certain allegations against the Insured
Companies, including, inter alia, that the Insured Companies breached their     
disclosure duties under Section 6(a) to the Insurance Contract Law, 1981, by    
failing to disclose to the Insurer material information prior to the issuance of
additional cover to the policy purchased by Europe Israel, effective as of July 
1999, and prior to the replacement of the Policy and the Additional Cover by the
issuance of a new policy effective as of August 1999. The letter states that the
Policy, Additional Cover and Replacement Cover issued by the Insurer will be    
cancelled unless the Insured Companies indicate that circumstances were         
different than those described in the letter. EMI's legal counsel sent a reply  
on behalf of the Insured Companies on March 20, 2003, in which the allegations  
of the Insurer were rejected. As of May 31, 2006 EMI has not received an answer 
from the Insurer to this letter. However, the parties are currently negotiating 
to reach a settlement.                                                          

    In January 2006, EMI and Elscint entered into an agreement with one of the
insurers, different from the insurer described above, which insured EMI and     
Elscint, inter alia, with respect to the lawsuit described above. In accordance 
with the terms of the agreement EMI, Elscint and their former and current       
directors and officers released the insurer from all liabilities that will arise
from the abovementioned claim in consideration for a one-time payment in the    
amount of $0.2 million (NIS 0.9 million).                                       

    2. EMI, Elscint and others were served with a claim as well as a motion to
recognize same as a class-action, in respect of damage amounting to $158        
million, allegedly caused to the represented class. Underlying the claim is the 
contention that EMI, through Elscint's board of directors, caused damage to and 
discriminated against minority shareholders of Elscint. Both parties agreed to  
postpone the hearing in this case until the Supreme Court hands down a decision 
on the leave to appeal, as detailed in section (1) above. Management, based on  
legal advice, is of the opinion that it is not possible at this stage to        
estimate the outcome of the claim and the motion for class-action recognition.  

3. As of December 31, 2005, we are a party to several additional court
claims as well as certain other written demands and/or claims, filed against us 
by third parties (including governmental institutions) in connection with       
terminated activity, some without any specified amount, while others, in the    
aggregate amount of $41.6 million, as royalties or compensation for damages     
allegedly caused as a result of the companies' actions and/or products, which   
mainly relate to the medical imaging business sold by EMI and Elscint in 1998   
and 1999. In respect of certain claims, totaling approximately $5.8 million, our
managements estimate, based on legal opinion and/or on past experience, that no 
significant costs will accrue thereto as a result of said claims exceeding the  
provisions included in respect thereof in the financial statements, and that    
such provisions are adequate for covering the costs and resources required to   
settle the liabilities arising therefrom. Elscint's legal advisers cannot       
presently determine the outcome of other written demands, totaling $35.8        
million in addition to claims without any specified amount. Elscint's management
believes that the prospects for realization of most such demands are remote,    
based on the time that has elapsed since serving said demand and on the nature  
thereof. We have included in our financial statements provisions that are, as   
per our discretion based inter alia on specific counsels and past experience,   
adequate to cover the costs and resources required to settle the liabilities    
under these claims.                                                             

    4. Elscint was served in 2003 with a motion filed by a third party seeking
an injunction to prohibit Elscint from using the trade name "Arena" for the     
entertainment and commercial center in the Herzliya Marina in Israel, on the    
grounds of unlawful usage of same, exploitation of goodwill and unfair          
competition. In the event the plaintiff's contention is upheld, Elscint may     
suffer certain indirect losses and costs. An application for an interim         
injunction, prohibiting the use of the trade name "Arena," was dismissed by the 
court. On March 20, 2006 the judge                                              

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dismissed the lawsuit against the Company. The Plaintiff has the right appeal   
the courts decision up to April 27, 2006. Since the period to serve the appeal  
has expired we expect, inter alia, on legal opinion that such appeal will not be
served.                                                                         

5.                                                                    

a. A criminal investigation carried out against a number of suspects  
(including former officers in the State Ownership Fund of the Romanian          
government who were involved in the privatization procedures and the sale of    
control in Bucuresti Tourism S.A. ("Bucuresti") to a wholly owned Romanian      
subsidiary of BEA known as "Domino") for certain events relating to the period  
prior to the acquisition of control in Bucuresti by B.H., culminated in the     
filing of an indictment against 17 defendants. Such criminal proceedings may    
have an indirect effect on the validity of the privatization and thereby an     
indirect effect on Domino's rights in Bucuresti, notwithstanding that Domino was
not an accused party under the indictment. The Court has decided to return the  
indictment to the Prosecution Office for its resubmission. After the appeal     
against this decision has been rejected by the court, this case is no longer    
pending in front Romanian Courts of justice.                                    

   b. In the framework of an agreement to establish a joint company owned by
Bucuresti and a third party, which was signed prior to the acquisition of       
Bucuresti by BEA, such third party undertook to invest $27.0 million (NIS 124.3 
million) in the joint company and in consideration Bucuresti undertook to       
transfer its rights in the Bucuresti Complex to the ownership of the joint      
company. As a result of the third party's failure to meet its obligations       
thereunder, Bucuresti has terminated the partnership agreement and filed an     
application to the Court to liquidate the joint company. This application was   
approved by the Court. The third party has submitted an appeal to the Supreme   
Court. On June 3, 2005, the Supreme Court irrevocably rejected this appeal.     
Accordingly, there is no risk that Bucuresti will be forced to transfer its     
rights in the Bucuresti Complex to the joint company.                           

    c. Bucuresti was served with two claims, which challenged its ownership in
the Bucuresti Hotel Complex. Both of the claims are pending on the Bucharest    
Court of Appeals. Management believes based, inter alia, on legal opinion that  
Bucuresti is expected to win those claims.                                      

  d. In June 2005, certain individuals submitted their final appeal to the
Supreme Court requesting the nullification of the public tender for the sale of 
the Bucuresti shares, the privatization contract and the transfer of the        
Bucuresti shares to Domino. This case was ruled in favour of Domino in the      
previous procedural stages (first instance and appeal) on technicalities, since 
the application for the cancellation of the privatization contract was served   
after the 3 months term during which any interested person could file an        
application for the cancellation of the privatization. EMI expects - based,     
inter alia, on legal opinion- that Domino will win this case. In addition our   
legal counsel stated that in the event that the Supreme Court will rule in favor
of the plaintiffs, the privatization contract will be cancelled with the effect 
of returning the parties to their original position before the contract was     
accepted.                                                                       

    e. In addition to the above, certain legal proceedings are being conducted
from time to time in Romania within the framework of which it is claimed that   
resolutions passed at the general meetings of shareholders of Bucuresti         

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were not validly adopted - for procedural reasons only - and are therefore not  
binding. Some were approved by the Courts, in respect of some Domino has filed  
appeals, and others were rejected.                                              

   BEA's management is of the opinion that the claims will not significantly
affect BEA's rights in the shares of Bucuresti and in the Bucuresti Complex.    

   8. On April 5, 2006, Cukierman Real Estate Ltd. filed a summary procedure
claim before the District Court of Tel-Aviv against EMI and PC. Within the      
framework of this claim, the District Court has been requested to order the     
Defendants to pay the Plaintiff the amount of NIS 10,751,920 (approximately     
E1,899,632) as an intermediary brokerage fee arising out of the sale by EMI     
to Klepierre S.A. of its shopping centers in Poland and Czech Republic. An      
application for leave to defend has not yet been filed. On May 8, 2006, EMI     
filed a motion to strike out the claim in limine or alternatively to strike out 
the title "summary procedure". EMI believes, based, inter alia, on legal        
opinions, that the chances that a substantial part of the claim or the claim as 
a whole to be dismissed are good.                                               

   9. In December 2005, Elscint was served with a statement of a claim filed
with the Regional Court by Elscint's former employee requesting that Elscint    
compensate him for damages resulting from his Cancer disease, allegedly caused  
to him by exposure to radiation, in the amount of NIS 315,000 and other         
undefined compensation. The insurance company rejected its liability and claimed
that such radiation is excluded from the policy. Elscint has approached a       
radiation expert to receive an expert opinion. A statement of defense and third 
party notice against the insurance company has not yet been submitted.          
Management of the Company, based, inter alia, on legal opinion received,        
believes that the potential financial consequences of this claim can not be     
estimated at this early stage of legal proceedings.                             

  10. On April 11, 2006, Eliahu Razin, Bellway LLC and Monilen Enterprises
Limited filed a claim before the District Court of Tel-Aviv against Elscint, the
chairman of the board of directors of Elscint, Elscint's directors and officers 
and against companies controlled by Elscint.                                    

Pursuant to this claim, the District Court has been asked to declare that       
Bellway LLC is the legal owner of 20% of the shares of Domino, to enforce an    
agreement signed by the parties and to order the defendants to pay the          
plaintiffs their damages in the amount of NIS 25 million (approximately $5.43   
million). A Statement of Defense has not yet been filed.                        

 EMI's management believes based, inter alia, on legal opinions that the
chances of a substantial part of the claim or the claim as a whole to be        
dismissed are good.                                                             

10. In March 2005, an action was instituted at the Regional Labor Court in      
Tel-Aviv-Jaffa by an employee of Europe Israel against Mr. Mordechay Zisser     
(executive chairman of EMI's Board of Directors), Control Centers and Vectory   
Investment Company Ltd. (controlling shareholders of EMI), in terms of which,   
the Court was requested to issue a declaratory order establishing the           
Plaintiff's entitlement to 14% of the shares of the companies specified in the  
statement of claim - including shares of EMI, Elscint, InSightec, Gamida, Olive,
Easy Run and VCON - which are directly or indirectly, owned and/or controlled by
the defendants and/or by companies under control thereof. The Court was further 
requested to order the transfer of such 14% to escrow.                          

The Plaintiff also filed, simultaneously, a motion to grant an interim
injunction prohibiting the defendants and/or any party on their behalf, from    
making any change to and/or transfer and/or assignment and/or pledge of and/or  
disposition in 14% of the shares of those companies detailed in the motion.     
Underlying the claim is the contention that the Plaintiff's rights under the    
statement of claim derive from agreements executed by and between the Plaintiff 
and the defendant companies.                                                    

On March 27, 2005, the Labor Court dismissed substantially all of the 
Plaintiff's motion, in determining that the Plaintiff failed to provide evidence
establishing: (i) his prima facie right to 14%, as he claimed; (ii) his         
entitlement to rights in and to companies aside from those directly invested by 
Europe Israel; (iii) his right to shares in EMI, Elscint, Insightec and Gamida. 
The above action was erased at the request of the plaintiff.                    

    The Plaintiff filed in October 2005, a lawsuit in the Regional Labor Court
in Tel-Aviv-Jaffa against Vectory. The Plaintiff requested the court to issue a 
mandatory injunction against Vectory ordering it to transfer the Plaintiff      
shares of the companies specified in the statement of claim - including 2,500   
shares of EMI, 1,000 shares of Elscint,                                         

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1,250 shares of InSightec, 1,500 of Gamida, 2,000 of EasyRun, 2,000 of Olive and
shares of other companies within the Europe Israel group of companies. The      
Plaintiff evaluated his claim to an aggregate amount of NIS 285,000             
(approximately $61,900). In January 2006, Vectory filed a statement of defense] 

  Underlying the claim is the contention that the Plaintiff's rights under
the statement of claim derive from an agreement executed in 1998 by and between 
the Plaintiff and Vectory. This Agreement was terminated by Vectory due to      
different breaches of the Agreement by the Plaintiff. It should be noted that   
the conclusions made by the court in the framework of the provisional           
proceedings of the above previous claim sided with Vectory's interpretation of  
the Agreement.Although we are not parties to the claim, the outcome thereof     
might indirectly affect the nature and scope of their rights in their investee  
companies.                                                                      

   Vectory is of the opinion that this claim, insofar as it relates to us as
included in the claim, is provocative, fundamentally unfounded and groundless   
(both with respect to the number of the companies in which rights are sought and
with respect to the scope of rights claimed) and that it will not materially    
affect its rights in us. However, the defendants' legal counsel cannot, at this 
early stage, estimate the outcome of the claim.                                 

    In May 25, 2006, the Plaintiff filed an additional lawsuit in the District
Court in Tel-Aviv-Jaffa against EMI, Mr. Zisser and/or Control Centers and/or   
EMI's board members and/or the management companies related to Mr. Zisser and   
Control Centers, requesting the court to state the annulment of any decision    
made by EMI for granting of any benefits to Mr. Zisser and/or Control Centers   
using shares the subject of Plaintiff's claimed.                                

Alternatively, the Plaintiff requested the court to determine that the
Plaintiff's claimed rights to EMI's shares will be taken into account as an     
opposing side to any decision made in any general meetings of EMI, while        
reserving the Plaintiff's rights to take legal proceedings to prevent           
infringement of his rights as a minority shareholder in EMI. Alternatively, the 
Plaintiff requested the court to determine that in every general meeting that   
convenes for determining the above stated decisions, the Plaintiff's claimed    
rights to EMI's shares will not be considered as taking any side in the         
decisions, while reserving his above legal rights. Management, based on legal   
advice received is of the opinion that it is not possible at this early stage to
estimate the outcome of the claim.                                              

ORDINARY COURSE OF BUSINESS                                                     

 We are involved from time to time in litigation arising in the ordinary
course of our business. Although the final outcome of each of these cases cannot
be estimated at this time, our management believes, based on legal advice, that 
the resolution of such litigation will not have a material adverse effect on our
financial position.                                                             

ITEM 9. THE OFFER AND LISTING                                                   

A.   OFFER AND LISTING DETAILS                                                  

  The ordinary shares of EMI are quoted on Nasdaq under the symbol "EMITF"
and are listed on the TASE.                                                     

  The annual high and low sale prices for our ordinary shares for the five
most recent full financial years are:                                           

                                                                [Download Table]

                                NASDAQ                TASE       
                          ------------------   ------------------
YEAR ENDED DECEMBER 31,   HIGH ($)   LOW ($)   HIGH ($)   LOW ($)
-----------------------   --------   -------   --------   -------
                                                                 
          2005              19.54       8.9      19.18      9.01 
          2004                 10      6.92       9.97      7.21 
          2003               7.14      3.70       6.91      3.80 
          2002               7.71      4.50       7.40      4.50 
          2001               6.30      4.23       6.60      4.45 

    The quarterly high and low sale prices for our ordinary shares for the two
most recent full financial years and the first subsequent quarter are:          

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                                                                [Download Table]

                       NASDAQ                TASE       
                 ------------------   ------------------
                 HIGH ($)   LOW ($)   HIGH ($)   LOW ($)
                 --------   -------   --------   -------
                                                        
2006                                                    
First Quarter      20.04     15.28      20.05     15.37 

2005                                                    
First Quarter      16.21      8.9       16.00      9.01 
Second Quarter     19.54     14.38      19.37     14.40 
Third Quarter      19.32     15.74      19.18     15.70 
Fourth Quarter     16.99     14.75      16.78     14.84 

2004                                                    
First Quarter      9.35       6.92      9.76       7.21 
Second Quarter     8.61       7.24      8.28       7.35 
Third Quarter      9.43       7.28      9.35       7.36 
Fourth Quarter      10        7.71      9.97       7.82 

     The monthly high and low sale prices for our ordinary shares during the six
months of December 2005 through May 2006 were:                                  

                                                                [Download Table]

                      NASDAQ                TASE       
                ------------------   ------------------
MONTH           HIGH ($)   LOW ($)   HIGH ($)   LOW ($)
-----           --------   -------   --------   -------
                                                       
May 2006          26.2      23.04      26.13     23.40 
April 2006        22.76     19.03      23.67     18.40 
March 2006        20.04     16.16      20.05     16.43 
February 2006     16.9      15.52      17.04     15.55 
January 2006      17.5      15.28      17.67     15.37 
December 2005     16.54     14.78      16.64     15.48 

The closing price of our ordinary shares on Nasdaq on May 31, 2006 was
$24.49, and on the TASE was $24.88.                                             

  The closing prices of our ordinary shares listed on the TASE for each of
the periods referred to in the tables above have been translated into dollars   
using the representative rate of exchange of the NIS to the U.S. dollar as      
published by the Bank of Israel on the same dates.                              

B.   PLAN OF DISTRIBUTION                                                       

Not applicable.                                                       

C.   MARKETS                                                                    

 Since our initial public offering in November 1996, our ordinary shares
have been traded both on the Tel-Aviv Stock Exchange and on NASDAQ Stock Market 
under ticker symbol "EMITF". Prior to such date, EMI was a privately held       
corporation.                                                                    

D.   SELLING SHAREHOLDERS                                                       

Not applicable.                                                       

E.   DILUTION                                                                   

Not applicable.                                                       

F.   EXPENSES OF THE ISSUE                                                      

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Not applicable.                                                       

ITEM 10. ADDITIONAL INFORMATION                                                 

A.   SHARE CAPITAL                                                              

Not applicable                                                        

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION AND GENERAL PROVISIONS OF ISRAELI   
LAW                                                                   

TRANSFER AGENT                                                                  

Our transfer agent in the United States is American Stock Transfer and
Trust Company whose address is 59 Maiden Lane New York, New York 10038.         

PURPOSES AND OBJECTS OF THE COMPANY                                             

    We are a public company registered under the Israeli Companies Law of 1999
as Elbit Medical Imaging Ltd., registration number 52-004303-5.                 

    Pursuant to Section 2 of our memorandum of association, we were formed for
the purpose of operating in the development, manufacture, compilation, sale and 
service of technological and electronic systems in the field of medical imaging 
and ancillary products. In addition, we are also empowered to operate in any    
business or matter for profit purposes as shall be determined by the board of   
directors of the Company from time to time. In addition, our articles of        
association authorizes us to make, from time to time, contributions of          
reasonable sums for worthy causes even if such contributions do not fall within 
our business considerations as referred to in Section 11 of the Companies Law.  

APPROVAL OF CERTAIN TRANSACTIONS                                                

Generally, under the Companies Law, engagement terms of directors,    
including the grant of an exemption from liability, purchase of directors' and  
officers' insurance, or grant of indemnification (whether prospective or        
retroactive) and engagement terms of such director in other positions require   
the approval of the audit committee, the board of directors and the shareholders
of the company. In addition, transactions between a public company and its      
officers (other than directors) or a transaction between such company and other 
person in which such officer (other than directors) has a personal interest must
be approved by such company's board of directors, and if such transaction is    
considered an extraordinary transaction (as defined below) it must receive the  
approval of such company's audit committee as well.                             

    The Companies Law also requires that any extraordinary transaction between
a public company and its controlling shareholder or an extraordinary transaction
between such company and other person in which such company's controlling       
shareholder has a personal interest must be approved by the audit committee, the
board of directors and the shareholders of the company by a an ordinary         
majority, provided that (i) such majority vote at the shareholders meeting shall
include at least one third (1/3) of the total votes of shareholders having no   
personal interest in the transaction, present and voting at the meeting         
(excluding abstaining votes); or (ii) the total number of votes of shareholders 
mentioned in clause (i) above who voted against such transaction does not exceed
one percent (1%) of the total voting rights in the company.                     

   The Companies Law prohibits any director who has a personal interest in a
matter to participate in the discussion and voting pertaining to such matter in 
the company's board of directors or audit committee except for in circumstances 
when the majority of the board of directors have a personal interest in the     
matter and then such matter must be approved by the company's shareholders.     

    Our articles of association further provide that, subject to the Companies
Law, all actions executed by the board of directors or by a committee thereof or
by any person acting as a director or a member of a committee of the            

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board of directors or by the general manager will be deemed to be valid even if,
after their execution, it is discovered that there was a certain flaw in the    
appointment of such persons or that any one of such persons was disqualified    
from serving at his or her office.                                              

For the purpose of this section:                                      

  An "extraordinary transaction" is defined in the Companies Law as any of
the following: (i) a transaction not in the ordinary course of business; (ii) a 
transaction that is not on market terms; or (iii) a transaction that is likely  
to have a material impact on the company's profitability, assets or liability.  

A "personal interest" is defined in the Companies Law as a personal   
interest of a person in an act or transaction of a company, including: (i) a    
personal interest of that person's relative (i.e. spouse, brother or sister,    
parent, grandparent, child, child of such person's spouse or the spouse of any  
of the above); or (ii) a personal interest of another entity in which that      
person or his or her relative (as defined above) holds 5% or more of such       
entity's issued shares or voting rights, has the right to appoint a director or 
the chief executive officer of such entity, or serves as director or chief      
executive officer of such entity. A personal interest resulting merely from     
holding the company's shares will not be deemed a personal interest.            

FIDUCIARY DUTY AND DUTY OF CARE OF DIRECTORS AND OFFICERS                       

The Companies Law codifies the duties Officers owe to a company. An   
"Officer" is defined in the Companies Law as a director, general manager,       
general business manager, executive vice president, vice president, any other   
person assuming the responsibilities of any of the foregoing positions without  
regard to such person's title and other managers directly subordinate to the    
general manager. The Officer's principal duties to the company are a duty of    
care and a fiduciary duty to act in good faith for the company's benefit as     
detailed in the Companies Law.                                                  

DUTY OF A SHAREHOLDER                                                           

Under the Companies Law, a shareholder, in exercising his rights and  
fulfilling his obligations to the company and the other shareholders, must act  
in good faith and in a customary manner and refrain from improperly exploiting  
his power in the company, including when voting at general or class meetings of 
shareholders on: (a) any amendment to the articles of association; (b) an       
increase of the company's authorized share capital; (c) a merger; or (d) the    
approval of related party transactions. In addition, a shareholder shall refrain
from prejudicing the rights of other shareholders. The laws governing breach of 
contracts apply, with necessary modifications, to a breach of the above         
obligations. Furthermore, any controlling shareholder, any shareholder who knows
that he possesses power to determine the outcome of the shareholders' vote at a 
general or a class meeting, and any shareholder that, pursuant to the provisions
of the articles of association, has the power to appoint or prevent the         
appointment of an officer in the company or possesses any other power towards   
the company, is subject to a duty to act in fairness towards the company. A     
breach by any such shareholder of this duty is treated similarly to a breach of 
a fiduciary duty of an officer, with the applicable changes. The Companies Law  
does not detail the substance of this duty.                                     

BOARD OF DIRECTORS                                                              

 In accordance with our articles of association, the directors may, from
time to time, at their discretion, raise or borrow or secure the payment of any 
sum or sums of money for the purposes of EMI. The directors may secure the      
repayment of such sum or sums in such manner and upon such terms and conditions 
in all respects as they think fit, and in particular by the issue of debentures 
or debenture stock of EMI charged upon all or any part of the property of EMI   
(both present and future) including its uncalled capital for the time being.    

    Neither our memorandum or our articles of association, nor the laws of the
State of Israel require retirement or non-retirement of directors at a certain  
age, or share ownership for director's qualification, nor do they contain any   
restriction on directors' borrowing powers.                                     

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Our articles of association provide that the board of directors may   
delegate all of its powers to such committees of the board of directors as it   
deems appropriate, subject to the provisions of the Companies Law. See "Item 6. 
Directors, Senior Management and Employees - C. Board Practices" above.         

INDEMNIFICATION, EXEMPTION AND INSURANCE OF DIRECTORS AND OFFICERS              

 The Israeli Companies Law permits a company to insure its directors and
officers, provide them with indemnification, either in advance or retroactively,
and exempt its directors and officers from liability resulting from their breach
of their duty of care towards the company, all in accordance with the terms and 
conditions specified under Israeli law. Our articles of association include     
clauses allowing us to provide our directors and officers with insurance,       
indemnification and to exempt them from liability subject to the terms and      
conditions set forth by the Companies Law, as described below.                  

    Subject to statutory limitations, our articles of association provide that
we may insure the liability of our directors and officers to the fullest extent 
permitted by the Companies Law. Without derogating from the aforesaid we may    
enter into a contract to insure the liability of our directors and officers for 
an obligation imposed on them in consequence of an act done in their capacity as
directors or officers of EMI, in any of the following cases:                    

     -    a breach of the duty of care vis-a-vis us or vis-a-vis another person;

-    a breach of the fiduciary duty vis-a-vis us, provided that the   
         director or officer acted in good faith and had a reasonable basis to
believe that the act would not harm us;                     

-    a monetary obligation imposed on him in favor of another person. 

-    any other matter in respect of which it is permitted or will be  
          permitted under applicable law to insure the liability of our director
or officer.                                                 

Our articles of association further provide that we may indemnify our 
directors and officers, to the fullest extent permitted by the Companies Law.   
Without derogating from the aforesaid, we may indemnify our directors and       
officers for liability or expense imposed on him in consequence of an action    
made by him in the capacity of his position as a director or officer of EMI, as 
follows:                                                                        

     -    Any financial liability he incurs or imposed on him or her in favor of
      another person in accordance with a judgment, including a judgment
       given in a settlement or a judgment of an arbitrator, approved by a
court.                                                      

    -    Reasonable litigation expenses, including legal fees, incurred by the
         director or officer or which he was ordered to pay by a court, within
          the framework of proceedings filed against him by or on behalf of EMI,
    or by a third party, or in a criminal proceeding in which he was
         acquitted, or in a criminal proceeding in which he was convicted of a
felony which does not require a finding of criminal intent. 

    -    Reasonable litigation expenses, including legal fees he incurs due to
        an investigation or proceeding conducted against him by an authority
        authorized to conduct such an investigation or proceeding, and which
        was ended without filing an indictment against him and without being
    subject to a financial obligation as a substitute for a criminal
      proceeding, or that was ended without filing an indictment against
him, but with the imposition of a financial obligation, as a
          substitute for a criminal proceeding relating to an offence which does
         not require criminal intent, within the meaning of the relevant terms
in the Companies Law.                                       

     -    Any other obligation or expense in respect of which it is permitted or
          will be permitted under law to indemnify a director or officer of ENI.

In addition, our articles of association provide that we may give an  
advance undertaking to indemnify a director and/or an officer in respect of all 
of the matters above, provided that with respect to the first matter above, the 
undertaking is restricted to events, which in the opinion of our board of       
directors, are anticipated in light of our actual                               

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activity at the time of granting the obligation to indemnify and is limited to a
sum or measurement determined by our board of directors as reasonable under the 
circumstances. We may further indemnify an officer therein, save for the events 
subject to any applicable law. Our articles of association further provide that 
we may exempt a director or officer in advance and retroactively for all or any 
of his liability for damage in consequence of a breach of the duty of care      
vis-a-vis EMI, to the fullest extent permitted by the Companies Law.            
Notwithstanding the foregoing, the Companies Law prohibits a company to exempt  
any of its directors and officers in advance from their liability towards such  
company for the breach of its duty of care in distribution, as defined in the   
Companies Law, for such company's shareholders (including distribution of       
dividend and purchase of such company's shares by the company or an entity held 
by it).                                                                         

    The above provisions with regard to insurance, exemption and indemnity are
not and shall not limit the Company in any way with regard to its entering into 
an insurance contract and/or with regard to the grant of indemnity and/or       
exemption in connection with a person who is not an officer of the Company,     
including employees, contractors or consultants of the Company, all subject to  
any applicable law.                                                             

  All of the above shall apply mutatis mutandis in respect of the grant of
insurance, exemption and/or indemnification for persons serving on behalf of the
Company as officers in companies controlled by the Company, or in which the     
Company has an interest.                                                        

The Companies Law provide that companies may not give insurance,      
indemnification (including advance indemnification), or exempt their directors  
and/or officers from their liability in the following events:                   

   -    a breach of the fiduciary duty, except for a breach of the fiduciary
  duty vis-a-vis the company with respect to indemnification and
      insurance if the director or officer acted in good faith and had a
        reasonable basis to believe that the act would not harm the company;

   -    an intentional or reckless breach of the duty of care, except for if
such breach was made in negligence;                         

   -    an act done with the intention of unduly deriving a personal profit;
or                                                          

-    a fine imposed on the directors or officer.                      

RIGHTS ATTACHED TO SHARES                                                       

Our registered share capital consists of a single class of 50,000,000 
ordinary shares, par value NIS 1 per share, of which 28,254,262 ordinary shares 
were issued and outstanding as of June 20, 2006. Such number includes 2,800,000 
shares held by us or for our benefit which do not have any voting or equity     
right so long as they are held by us.                                           

The rights attached to all of the ordinary shares are as follows:     

DIVIDEND RIGHTS                                                       

   Subject to the rights of persons, if any, entitled to shares with special
rights as to dividend, or whose rights to dividend are limited in any way, all  
dividends shall be declared and paid according to the amounts paid or credited  
as paid on the shares in respect whereof the dividend is paid, but no amount    
paid or credited as paid on a share in advance of calls shall be treated as paid
on the share. All dividends shall be apportioned and paid proportionately to the
amounts paid or credited as paid on the shares during any portion or portions of
the period in respect of which the dividend is paid; but if any share is issued 
on terms providing that it shall rank for dividend as from a particular date,   
such share shall rank for dividend accordingly.                                 

The board of directors may propose a dividend only out of profits, in 
accordance with the provisions of the Companies Law. Declaration of a dividend  
requires approval by an ordinary shareholders' resolution, which may decrease,  
but not increase, the amount proposed by the board of directors.                

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If a year passes after a dividend has been declared and such dividend 
remains unclaimed, the board of directors is entitled to invest or utilize the  
unclaimed amount of dividend in any manner to the benefit of the Company until  
it is claimed. We are not obligated to pay interest on an unclaimed dividend.   

VOTING RIGHTS                                                         

  Holders of ordinary shares have one vote for each ordinary share held by
them on all matters submitted to a vote of the shareholders. Such voting rights 
may be affected by the creation of any special rights to the holders of a class 
of shares with preferential rights that may be authorized in the future in the  
manner provided for under the Companies Law and our Articles of Association. The
quorum required for an ordinary meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent, in the        
aggregate, at least 33 1/3% of the issued voting share capital. In the event    
that a quorum is not present within half an hour of the scheduled time, the     
meeting shall be adjourned to the same day of the following week, at the same   
time and place, or to such other day, time and place as the board of directors  
shall determine by notice to the shareholders. If at such adjourned meeting a   
quorum is not present within half an hour of the scheduled time, the two members
present in person or by proxy will constitute a quorum.                         

  As the Nasdaq Marketplace Rules provide for a quorum to be not less that
33.33% of the outstanding shares of the Company's common voting stock, our      
independent counsel have informed Nasdaq our practice is not prohibited under   
our home country's law.                                                         

RIGHTS TO THE COMPANY'S PROFITS                                       

   Our shareholders have the rights to share in our profits distributed as a
dividend and any other permitted distribution.                                  

RIGHTS IN THE EVENT OF LIQUIDATION AND WINDING UP                     

     If the Company shall be wound up voluntarily, the liquidators may, with the
sanction of the majority of shareholders at the general meeting, divide among   
the members in specie any part of the assets of the Company, and may, with the  
like sanction, vest any part of the assets of the Company in trustees upon such 
trusts for the benefit of the members as the liquidators with the like sanction 
shall think fit.                                                                

CHANGING RIGHTS ATTACHED TO SHARES                                    

   If at any time the share capital of the Company is divided into different
classes of shares, then, unless otherwise provided for by the terms of issuance 
of that class of shares, in order to change the rights attached to any class of 
shares, the consent in writing of the holders of the majority of the issued     
shares of the affected class must be obtained, or at a separate meeting of the  
shareholders of that class of shares convened for such purpose must adopt a     
resolution to change such rights. The provisions of our articles of association 
relating to general meetings shall apply, mutatis mutandis, except that the     
necessary quorum required shall be two persons holding or representing by proxy 
at least two-thirds of the issued shares of that class. In an adjourned meeting,
those shareholders present in person or by proxy shall be deemed to constitute a
quorum. The rights conferred upon the holders of the shares of any class issued 
with preferred or other rights shall not, unless expressly provided for by the  
terms of the shares of that class, be deemed to be varied by the creation or    
issue of further shares ranking pari-passu with that class.                     

ANNUAL AND SPECIAL MEETINGS                                                     

   In accordance with the Companies Law, the board of directors must convene
an annual meeting of shareholders at least once every calendar year, and no     
later than within fifteen months from the last annual meeting. Notice of at     
least 21 days prior to the date of the meeting is required. An extraordinary    
meeting may be convened by the board of directors, either at its discretion or  
upon a demand of (i) any two directors or 25% of the serving directors; or (ii) 
one shareholder or more holding in the aggregate at least 5% of our issued      
capital and at least 1% of the voting rights in the Company or one shareholder  
or more holding at least 5% of the voting rights in the Company. An             

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extraordinary meeting must be held not more than 35 days from the publication   
date of the announcement of the meeting.                                        

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES                                     

   Our memorandum and articles of association do not restrict in any way the
ownership of our shares by non-residents of Israel and neither the memorandum or
articles of association nor Israeli law restricts the voting rights of          
non-residents of Israel, except that under Israeli law, any transfer or issue of
shares of the Company to a resident of an enemy state of Israel is prohibited   
and shall have no effect, unless authorized by the Israeli Minister of Finance. 

CHANGES TO OUR CAPITAL                                                          

     Changes to our capital are subject to the approval of our shareholders at a
general meeting by an ordinary majority.                                        

ANTI TAKEOVER PROVISIONS                                                        

 The Companies Law prohibits the purchase of our shares in the event the
purchaser's holding following such purchase increase above certain percentages  
without conducting a tender offer, see "Item 3. Key Information - D. Risk       
Factors - Risks Relating to Israel - Anti-takeover provisions could negatively  
impact our shareholders" above.                                                 

AMENDMENT OF ARTICLES OF ASSOCIATION                                            

    Any amendment to our Articles requires the approval of our shareholders by
an ordinary majority.                                                           

C.   MATERIAL CONTRACTS                                                         

     The following is a list of material agreements entered into by us or any of
our subsidiaries during the last two years prior to the filing of this annual   
report:                                                                         

SHOPPING AND ENTERTAINMENT CENTERS                                              

   SALE OF FOUR OPERATIONAL SHOPPING AND ENTERTAINMENT CENTERS IN POLAND AND
FOUR SHOPPING AND ENTERTAINMENT CENTERS UNDER DEVELOPMENT IN POLAND AND THE     
CZECH REPUBLIC TO KLEPIERRE                                                     

  On July 29, 2005, Plaza Centers (Europe) B.V., our indirect wholly owned
subsidiary, signed an agreements with Klepierre for the sale of four operational
shopping and entertainment centers in Poland and four shopping centers under    
development in Poland and in the Czech Republic upon their construction. In     
addition, PC has awarded Klepierre with an option to acquire an additional      
center under development in Poland, subject to certain conditions. The          
transaction is comprised of two stages.                                         

Within the framework of the first stage of the transaction, Klepierre 
(through its subsidiaries) acquired the entire equity and voting rights (100%)  
of the companies owning four operational shopping centers in Poland (Sadyba Best
Center, Krakow Plaza, Ruda Slaska Plaza and Poznan Plaza) as well as the entire 
outstanding share capital of PC's Polish subsidiary which operates the          
operational centers. The consideration was based on asset value of the centers  
sold which amounted to approximately E204 million (approximately $241 million). 
The asset value was calculated on the basis of the gross rentals of such centers
as at the closing, capitalized at certain agreed yields, together with monetary 
and other balances, after deduction of bank and other monetary liabilities      
pertaining thereto. The net consideration received by us as of the date of      
closing was approximately E73.8 million (approximately $88.7 million) which is  
subject to post closing adjustments in accordance with the rental fees received 
as at December 31, 2005 (with respect to three centers) and as at May 31, 2006  
(with respect to the remaining center) as well as deductions in the event a     
certain license is not received. As of the date of this annual report, final    
settlement has not yet been finalized, but we expect to receive an additional   
net consideration in the amount of approximately E15 million (approximately     
$17.7 million).                                                                 

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Under the second stage of the transaction, Klepierre entered into a   
preliminary share purchase agreement for the future acquisition by Kelpierre of 
the entire equity and voting rights in the companies presently developing two   
shopping centers in Poland (Rybnik Plaza and Sosnowiec Plaza) and two companies 
developing shopping centers in the Czech Republic (Novo Plaza and Pilsen Plaza) 
for an estimated asset values which amounts to approximately E158.4 million     
(approximately $187.4 million). As of the date of this annual report, the       
completion of the Novo Plaza shopping and entertainment center was completed in 
March 2006 and delivery to Klepierre is expected to take place on June 30, 2006.
Klepierre was also awarded an option to acquire an additional shopping center   
presently under development in Poland for an estimated assets value which       
amounts to approximately E62 million (approximately $73.4 million), upon the    
fulfillment of certain conditions. Upon the exercise of such option, the        
construction and delivery of the shopping center will be subject to the same    
terms and conditions applicable to the remaining centers. If Klepierre does not 
exercise the option to acquire the shares of such third Polish company, PC will 
be obligated to pay a penalty of up to E1.6 million (approximately $1.9         
million). The option granted to Klepierre was extended to November 29, 2006.    

  Upon the completion and delivery of the shopping centers, Klepierre will
pay a purchase price calculated on the basis of the gross rentals on the date of
delivery, capitalized at agreed yields. A final price adjustment of the purchase
price for each of these development centers will be conducted not later than 10 
months following delivery, on the basis of actual gross rentals prevailing on   
their respective adjustment dates, capitalized at the agreed yields. As security
for payment of the purchase price on completion of the shopping centers,        
Klepierre furnished PC at the closing held on July 29, 2005 with irrevocable    
bank guarantee in the amount of approximately E115 million (approximately $136.0
million) for the payment of the respective purchase prices of those development 
centers in respect of which building permits have been issued. Klepierre has    
undertaken to furnish PC with a similar bank guarantee in respect of the        
remaining development centers immediately upon the issuance of the building     
permit. The completion of the purchase of each center under the second stage of 
the transaction is subject, among other things, to completion of the            
construction works, opening of the center and minimum occupancy rates.          

  PC has further undertaken not to own, operate or manage shopping centers
within an agreed distance of each center sold to Klepierre. EMI has undertaken  
towards Klepierre to guarantee all of PC's undertakings under the agreement.    

SALE OF FOUR OPERATIONAL SHOPPING AND ENTERTAINMENT CENTERS IN HUNGARY

On April 21, 2005, PC consummated the transaction for the sale of the 
entire equity and voting rights in four (4) companies owning shopping centers in
Hungary to a subsidiary of the Dawnay Day Group ("Dawnay Day"). The aggregate   
net cash consideration paid to PC and its subsidiaries totaled approximately    
E17.2 million (approximately $20.7 million). Such consideration was determined  
according to the asset value of the acquired companies on the basis of audited  
financial statements as of the closing date, which was approximately E54.4      
million (approximately $64.3 million) less the deduction of financial           
liabilities (mainly, long term bank loans in the aggregate amount of            
approximately E40 million (approximately $47.2 million).                        

    PC also agreed to guarantee certain portions of the rental revenues of one
of the acquired shopping centers for a period of three years until December 2007
and of an additional shopping center for a 6-month period, as security for      
certain minimum rental revenues. EMI estimates the value of these guarantees (as
of the date of this report) to be in the aggregate amount of approximately E1.3 
million (approximately $1.5 million). In addition, EMI granted Dawnay Day a     
guarantee for the fulfillment by PC of certain financial obligations and        
indemnities within the framework of this transaction.                           

  SALE BY PC TO KLEPIERRE OF TWELVE OPERATIONAL SHOPPING AND ENTERTAINMENT
CENTERS IN HUNGARY                                                              

    On July 30, 2004, PC entered into an agreement with Klepierre (through its
subsidiaries), as amended, for the sale of all of PC's equity and voting rights 
in 12 companies owning shopping and entertainment centers in Hungary and 50% of 
PC's equity and voting rights in a Hungarian company which operates and manages 
the above centers to Klepierre. The net cash consideration paid to PC and its   
subsidiaries totaled approximately E94.1 million (approximately $116.5 million).
Such consideration was determined according to the asset value of the centers,  
which was estimated at approximately E287 million (approximately $340 million)  
in addition to monetary and other balances                                      

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and following deduction of banking and other monetary liabilities relating to   
these centers. The sale of these centers resulted in an aggregate profit of NIS 
185 million (approximately $40 million).                                        

     Such profits doe not include additional profit from a potential acquisition
of 129,000 square feet to be constructed by PC as an extension of the Duna Plaza
shopping center in Budapest, if executed. Construction of the extension and the 
completion of the transaction are subject, among other things, to the execution 
of a turn-key construction agreement between the parties, to obtaining          
regulatory approvals and permits from various competent governmental            
authorities, during a specific period stipulated in the agreement, as well as to
utilization of premises while fulfilling certain operational targets. The amount
of consideration and schedule of payments, follows an agreed upon methodology,  
as well as assets value based on revenues and agreed upon capitalization rate.  

    A bank guarantee in the amount of E7.5 million provided by PC to Klepierre
as a security for the fulfillment of certain future revenues was returned to PC 
by Klepierre unexercised and Klepierre waived any and all claims, arguments or  
contentions of whatsoever nature or kind against PC relating to and/or in       
connection with and/or arising out of the future sale of utilities in all or any
of the centers sold to Klepierre under this agreement in respect of which the   
guarantee has been furnished. In addition, a E6.8 million deposit deposited by  
PC as a security for the fulfillment of certain tax conditions was released by  
Klepierre to PC against the provision by EMI of a 5-year guarantee for 125% of  
the above amount in order to secure certain payments for foreign tax authorities
if imposed on the centers sold under this agreement and which relate to the     
periods prior to the consummation of the sale of such centers.                  

  Since the Duna Plaza Offices are built as part of the Duna Plaza Center,
the parties agreed to perform a de-merger between the Duna Plaza Offices and the
Duna Plaza center, and to sell the new company which will consist of the Duna   
Plaza Offices to PC. The parties will conduct a settlement upon finalization of 
such procedures. As part of such settlement, an amount of approximately E490,000
will be set off from PC's receivables from the Duna Plaza Offices. As of the    
date hereof, the condominium was registered in June 2006 and the de-merger is   
expected to be completed by the end of 2006.                                    

  PC has further undertaken not to own, operate or manage shopping centers
within an agreed distance of each center sold to Klepierre. EMI has undertaken  
towards Klepierre to guarantee all of PC's undertakings under the agreement.    

Under an amendment of the above agreement and concurrently with the   
consummation of Stage A of the agreement with Klepierre (see above), PC sold the
remaining 50% of PC's equity and voting rights in the Hungarian company which   
operates and manages the above centers to Klepierre in a net consideration for  
approximately E900,000 ($1.1 million).                                          

HOTELS BUSINESS                                                                 

MANAGEMENT AGREEMENT WITH PARK PLAZA                                  

   See "Item 4. Information on the Company - B. Business Overview - Hotels -
Management of Hotels - Management Agreement with Park Plaza" above attached as  
Exhibit 4.22 is a form of Management Agreement which we have entered into with  
Park Plaza.                                                                     

LEASED REAL ESTATE PROPERTY                                                     

LONG TERM LEASE OF ONE OF OUR HOTELS IN LONDON                        

    See "Item 4. Information on the Company - B. Business Overview - Long Term
Lease of Real Estate Property" above.                                           

SALE OF ONE OF OUR HOTELS IN THE UNITED KINGDOM                       

    See "Item 4. Information on the Company - B. Business Overview - Long Term
Lease of Real Estate Property" above.                                           

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GENERAL                                                                         

  AGREEMENT AND PLAN OF MERGER AND CONSUMMATION OF THE MERGER WITH ELSCINT

    On August 21, 2005, EMI and Elscint signed an Agreement and Plan of Merger
pursuant to which each ordinary share of Elscint (other than Elscint ordinary   
shares held by EMI and by or for the benefit of Elscint) would be converted into
0.53 ordinary share of EMI. Immediately prior to the merger EMI held, directly  
and indirectly approximately 61% of Elscint's issued and outstanding share      
capital. As a result of the merger, EMI issued 3,479,216 shares of EMI to the   
public shareholders of Elscint, which constituted approximately 13.71% of EMI's 
issued share capital at that time. The merger was completed on November 23, 2005
and as of such date, Elscint ordinary shares have ceased to trade on the New    
York Stock Exchange and Elscint became a wholly-owned subsidiary of EMI.        

ISSUANCE OF NON CONVERTIBLE DEBENTURES                                

  See "Item 5. Operating and Financial Review and Prospects - B. Liquidity
and Capital Resources - Liquidity" above.                                       

LOAN AGREEMENTS                                                       

Two loan agreements entered into by and between EMI, Elbit Ultrasound 
(Netherlands) B.V. and Bank Hapoalim B.M. and an additional loan agreement      
entered into by and between Elscint and Bank Hapoalim B.M. See "Item 5.         
Operating and Financial Review and Prospects - B. Liquidity and Capital         
Resources - Other Loans" above.                                                 

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D.   EXCHANGE CONTROLS                                                          

  In 1998, the government of Israel promulgated a general permit under the
Israeli Currency Control Law. Pursuant to such permit, substantially all        
transactions in foreign currency are permitted.                                 

   Our Memorandum and Articles of Association do not restrict in any way the
ownership of our shares by non-residents and neither the Memorandum of          
Association nor Israeli law restricts the voting rights of non-residents.       

E.   TAXATION                                                                   

   Following is a discussion of certain tax laws that may be material to our
shareholders, all as in effect as of the date of this report and all of which   
are subject to changes, possibly on a retroactive basis, to the extent that such
laws are still subject to judicial or administrative interpretation in the      
future. This discussion is not intended, and should not be construed, as legal  
or professional tax advice and does not cover all possible tax considerations.  
For further information as to taxes that apply to us and our subsidiaries, see  
Note 16 to our consolidated financial statements included in Item 18 below.     

     WE ENCOURAGE EACH INVESTOR TO CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE PURCHASE, OWNERSHIP AND 
DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE ISRAELI,
U.S. FEDERAL, STATE, AND LOCAL, AND FOREIGN TAX LAWS AND POSSIBLE CHANGES IN    
SUCH TAX LAWS.                                                                  

TAXATION IN ISRAEL                                                              

 In general, the corporate tax rate applicable to companies in Israel in
2005 is 34% which will gradually decrease in the coming years from 31% in 2006  
through 25% tax rate in 2010.                                                   

TAXATION UNDER INFLATIONARY CONDITIONS                                

   The Income Tax Law (Inflationary Adjustments) (1985), or the Inflationary
Adjustments Law, affects the taxation of earnings of Israeli companies. This    
statute attempts to overcome some of the problems presented to a traditional tax
system by an economy undergoing rapid inflation, which was the case in Israel at
the time the law was enacted. Israel's inflation rate has been materially       
reduced in recent years.                                                        

The Inflationary Adjustments Law is characterized by a high degree of 
complexity. Its main features can be described generally as follows:            

     (a) A special tax adjustment for the preservation of equity whereby certain
corporate assets are classified broadly into Fixed (inflation resistant) Assets 
and Non-Fixed (soft) Assets. Where a company's equity, as defined in the law,   
exceeds the depreciated cost of Fixed Assets, a deduction from taxable income   
that takes into account the effect of the applicable annual rate of inflation on
the excess is allowed, up to a ceiling of 70% of taxable income in any single   
tax year, with the unused portion permitted to be carried forward on a linked   
basis. If the depreciated cost of Fixed Assets exceeds a company's equity, then 
the excess multiplied by the applicable annual rate of inflation is added to    
taxable income.                                                                 

     (b) Subject to certain limitations, depreciation deductions on Fixed Assets
and losses carried forward are adjusted for inflation based on the increase in  
the consumer price index.                                                       

   (c) Gains on the sale of certain traded securities are taxable in certain
circumstances, subject to detailed rules which were modified as of January 1,   
1999.                                                                           

 Today, all Israeli companies, except certain companies which are wholly
owned by individuals, are subject to reporting and taxation requirements under  
this law. Dealers in securities are subject to the regular tax rules applicable 
to business income in Israel.                                                   

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TAX REFORM IN ISRAEL                                                  

  As of January 1, 2003, statutory provisions came into force, concerning,
among other things, tax reform in Israel, in connection with:                   

 (1)  (i)  Taxation of profits of foreign resident companies regarded as
             Controlled Foreign Companies ("CFC"), if: (i) its shares or its
              rights on it are not listed in a stock exchange, however if they
           are partly listed, then less than 30% of the shares or of the
          rights of the company were offered to the public(ii) most of
             their revenues are passive, as defined by law, or most of their
               profits derive from passive revenues, (iii) the tax rate applying
             to their passive profits in their country of residence does not
               exceed 20%, and (iv) over 50% of the means of control in them are
             held, directly or indirectly, by Israeli residents or more than
               40% of one of its means of control are held by Israeli residents,
               who together with a relative of one of them hold more than 50% of
             one or more of its means of control, or an Israeli resident has
               the right to prevent adoption of substantive management decisions
               in it. In accordance with the statutory provisions, a controlling
              shareholder, which is an Israeli resident holds more than 10% in
         the company's means of control, in such companies that have
       unpaid profits, as defined by law, will be deemed to have
             received his relative proportion in these profits as a dividend
(hereinafter: "deemed dividend").                 

          (ii) Taxation of a dividend received in Israel, originating in profits
        generated or accrued outside Israel, as well as a dividend
originating outside Israel.                       

        A deemed dividend and/or the distribution of dividends, as
             stated, will be subject to a tax rate of 25%, or, upon election
         by the company and provided certain conditions are met, the
              income from which the dividend was distributed may be subject to
            tax at the corporate tax rate (for instance, 34% in 2005) less
            taxes paid abroad in respect of these profits (including under
       certain circumstances taxes paid by a company held by the
distributing company), as the case may be.        

    (2) Taxation of an Israeli resident's profits accrued or generated outside
Israel (until the end of 2002, Israeli residents were taxed on such profits only
if received in Israel).                                                         

   (3) Taxation of capital gains from the realization of assets at a reduced
rate of 25%. The reduced rate will apply to realization of assets commencing    
January 1, 2003 and onwards, and will be calculated for the part of the profits 
relating to the period subsequent to this date up to the realization date.      

   (4) Guidance on the ability to offset losses - regarding business losses,
capital losses, passive losses and CFC losses.                                  

(5) Imposition of capital gains tax on capital gains realized by      
individuals as of January 1, 2003, from the sale of shares of publicly traded   
companies (such gain was previously exempt from capital gains tax in Israel).   
For information with respect to the applicability of Israeli capital gains taxes
on the sale of ordinary shares, see " - Capital Gains Tax on Sales of Our       
Ordinary Shares" below;                                                         

 (6) Introduction of a new regime for the taxation of shares and options
issued to employees and officers (including directors);                         

CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES                     

  Israeli law generally imposes a capital gains tax on the sale of capital
assets located in Israel, including shares in Israeli companies, by both        
residents and non-residents of Israel, unless a specific exemption is available 
or unless a double tax convention concluded between Israel and the shareholder's
country of residence provides otherwise. The law distinguishes between real gain
and inflationary surplus. The inflationary surplus is equal to the increase in  
the                                                                             

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purchase price of the relevant asset attributable solely to the increase in the 
Israeli consumer price index between the date of purchase and the date of sale. 
The real gain is the excess of the total capital gain over the inflationary     
surplus.                                                                        

   Prior to the tax reform, sales of our ordinary shares by individuals were
generally exempt from Israeli capital gains tax so long as (i) our ordinary     
shares were quoted on Nasdaq or listed on a stock exchange in a country         
appearing on a list approved by the Controller of Foreign Currency and (ii) we  
qualified as an Industrial Company.                                             

  Pursuant to the tax reform, generally, capital gains tax is imposed at a
rate of 15% on real gains derived on or after January 1, 2003, from the sale of 
shares in companies (i) publicly traded on the Tel Aviv Stock Exchange ("TASE") 
or; (ii) (subject to a necessary determination by the Israeli Minister of       
Finance) Israeli companies publicly traded on a recognized stock exchange or    
regulated market outside of Israel. This tax rate is contingent upon the        
shareholder not claiming a deduction for financing expenses and does not apply  
to: (i) dealers in securities; (ii) shareholders that report in accordance with 
the Inflationary Adjustment Law; or (iii) shareholders who acquired their shares
prior to an initial public offering (that are subject to a different tax        
arrangement). The tax basis of shares acquired prior to January 1, 2003 will be 
determined in accordance with the average closing share price in the three      
trading days preceding January 1, 2003. However, a request may be made to the   
tax authorities to consider the actual adjusted cost of the shares as the tax   
basis if it is higher than such average price(however, if a calculation based on
the latter request, in converse to the first calculation, constitutes a loss,   
this loss cannot be offset against future profit).                              

Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, and are      
exempt from Israeli capital gains tax on any gains derived from the sale of     
shares of Israeli companies publicly traded on a recognized stock exchange      
outside of Israel, provided such shareholders did not acquire their shares prior
to an initial public offering. However, non-Israeli corporations will not be    
entitled to such exemption if an Israeli resident (i) has a controlling interest
of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is
entitled to 25% or more of the revenues or profits of such non-Israeli          
corporation, whether directly or indirectly.                                    

In any event, the provisions of the tax reform shall not affect the   
exemption from capital gains tax for gains accrued before January 1, 2003, as   
described above.                                                                

  In some instances where our shareholders may be liable to Israeli tax on
the sale of their ordinary shares, the payment of the consideration may be      
subject to the withholding of Israeli tax at the source.                        

U.S.-ISRAEL TAX TREATY                                                

   Pursuant to the Convention between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended
(the "the U.S.- Israel Tax Treaty"), the sale, exchange or disposition of       
ordinary shares by a person who (i) holds the ordinary shares as a capital      
asset, (ii) qualifies as a resident of the United States within the meaning of  
the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded 
to such resident by the U.S.-Israel Tax Treaty generally will not be subject to 
Israeli capital gains tax unless either such resident holds, directly or        
indirectly, shares representing 10% or more of the voting power of a company    
during any part of the 12-month period preceding such sale, exchange or         
disposition, subject to certain conditions, or the capital gains from such sale,
exchange or disposition can be allocated to a permanent establishment in Israel.
In the event that the exemption shall not be available, the sale, exchange or   
disposition of ordinary shares would be subject to such Israeli capital gains   
tax to the extent applicable; however, under the U.S.-Israel Tax Treaty, such   
residents would be permitted to claim a credit for such taxes against U.S.      
federal income tax imposed with respect to such sale, exchange or disposition,  
subject to the limitations in U.S. laws applicable to foreign tax credits. The  
U.S.-Israel Tax Treaty does not relate to state or local taxes.                 

TAXATION OF NON-RESIDENTS                                             

Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income   
such as dividends, royalties and interest, as well as non-passive income from   
services rendered in Israel. On distributions of dividends other than bonus     
shares or stock dividends, income tax at the rate of 25% is withheld at source, 
unless a reduced rate is provided in double tax convention concluded between    
Israel                                                                          

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and the shareholder's country of residence. Under the U.S.-Israel Tax Treaty,   
the maximum tax on dividends paid to a holder of ordinary shares who is a U.S.  
resident will be 25%; provided, however, that under the Investment Law,         
dividends generated by an Approved Enterprise are taxed at the rate of 15%.     
Furthermore, dividends not generated by an Approved Enterprise paid to a U.S.   
company holding 10% or more of our ordinary shares in the 12 month period       
preceding the distribution of such dividends, are taxed at a rate of 12.5%.     

Under an amendment to the Inflationary Adjustments Law, non-Israeli   
corporations may be subject to Israeli taxes on the sale of securities of an    
Israeli company, subject to the provisions of any applicable taxation treaty or 
unless a specific exemption is available.                                       

FOREIGN EXCHANGE REGULATIONS                                          

    Dividends (if any) paid to the holders of our ordinary shares, any amounts
payable upon our dissolution, liquidation or winding up, and as the proceeds of 
any sale of our ordinary shares in Israel may be paid in non-Israeli currency   
or, if paid in Israeli currency, may be converted into freely repatriable       
dollars at the rate of exchange prevailing at the time of conversion.           

TAXATION OF DIVIDENDS DISTRIBUTIONS                                   

 On distributions of dividends to Israeli individuals, income tax at the
rate of 25% is withheld while a distributions to an Israeli companies is        
tax-exempt. Dividend distributions from Approved Enterprises earnings is subject
to 15% tax withheld at source to both Israeli individuals and Israeli companies,
if the dividend is distributed during the tax exemption period or within a      
specified period. In addition a company that distributed dividends out of income
that was tax exempt according to the Investment Law would be subject to company 
tax in the year the dividend is distributed in respect of the amount distributed
at the rate that would have been applicable had the company not elected the     
tax-exempt course (generally 25%).                                              

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959                

Two investment programs of InSightec were granted the status of an    
"Approved Enterprise" ("AE"). Pursuant to the Law for the Encouragement of      
Capital Investments, 1959 (under this heading: the "Law"), under which income   
stemming from an AE will be exempt from tax during the initial two years,       
starting from the first year in which the AE has taxable income, and            
subsequently subject to a reduced tax rate of 25% during the remaining five-year
period. In January 2004, InSightec's expansion program of the existing factory  
has been approved.                                                              

    Should the holding rate of foreign residents in InSightec exceeds 25%, the
period of benefits would then increase from seven to ten years. If this rate    
exceeds 49%, the tax rate would decrease from 25% to 10%-20%, based on the level
of ownership by non-Israeli investor in each relevant taxable year. The benefits
period to these AEs, is limited to the earlier of either 12 years from          
commencement of production or 14 years following receipt of the approval        
documents. The benefits are determined by the ratio of the additional revenues  
during the benefits period over the revenues in the entire last year of         
production prior to the activation of each program (adjusted for the change in  
the wholesale price index of the industrial output) to total annual revenues    
during the benefit period.                                                      

 Those benefits are subject to the conditions stipulated in the Law, the
regulation thereunder and the approval documents based on which the investments 
were made. Failure to meet those conditions may lead to the cancellation of the 
benefits and to demand for reimbursement of the amounts received on account of  
these benefits (in whole or in part), including interest and linkage. Change in 
ownership structure of a company owned by an AE, including a public offering of 
over 49%, or any private placement during the period of the approved investment 
program through the end of the benefits period, is subject to the advanced      
approval by the Investment Center.                                              

    In the event of a distribution of tax-exempt earnings such as dividend, as
aforementioned, the distributing company would be subject to tax of up to 25%.  
In the event of a distribution of earning of an AE as dividends, recipient will 
be subject to tax of up to 15% (for a period of 12 years from the end of the    
benefit period).                                                                

U.S. FEDERAL INCOME TAX CONSIDERATIONS                                          

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     Subject to the limitations described herein, this discussion summarizes the
material U.S. federal income tax consequences of the purchase, ownership and    
disposition of our ordinary shares to a U.S. holder. A U.S. holder is a holder  
of our ordinary shares who is:                                                  

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

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

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

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

    Unless otherwise specifically indicated, this discussion does not consider
the U.S. tax consequences to a person that is not a U.S. holder and considers   
only U.S. holders that will own the ordinary shares as capital assets.          

     This discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), current and proposed Treasury regulations     
promulgated under the Code and administrative and judicial interpretations of   
the Code, all as currently in effect and all of which are subject to change,    
possibly with a retroactive effect. This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular U.S.     
holder based on the U.S. holder's particular circumstances. In particular, this 
discussion does not address the U.S. federal income tax consequences to U.S.    
holders who are broker-dealers or who own, directly, indirectly or              
constructively, 10% or more of our outstanding voting shares, U.S. holders      
holding the ordinary shares as part of a hedging, straddle or conversion        
transaction, U.S. holders whose functional currency is not the U.S. dollar, real
estate investments trusts, regulated investment companies, insurance companies, 
tax-exempt organizations, financial service entities, financial institutions,   
certain former citizens or long term residents of the United States and persons 
subject to the alternative minimum tax, who may be subject to special rules not 
discussed below. Additionally, the tax treatment of persons who are, or hold the
ordinary shares through, a partnership or other pass-through entity is not      
considered, nor is the possible application of U.S. federal estate or gift taxes
or any aspect of state, local or non-U.S. tax laws.                             

 EACH HOLDER OF OUR ORDINARY SHARES IS ADVISED TO CONSULT HIS OR HER TAX
ADVISOR WITH RESPECT TO THE SPECIFIC U.S. FEDERAL, STATE, LOCAL AND FOREIGN     
INCOME TAX CONSEQUENCES TO HIM OR HER OF PURCHASING, HOLDING OR DISPOSING OF OUR
ORDINARY SHARES.                                                                

DISTRIBUTIONS                                                                   

     Subject to the discussion below under "Tax Consequences if We are a Passive
Foreign Investment Company," a distribution paid by us with respect to the      
ordinary shares to a U.S. holder will be treated as dividend income to the      
extent that the distribution does not exceed our current and accumulated        
earnings and profits, as determined for U.S. federal income tax purposes. The   
amount of a distribution with respect to the ordinary shares will equal the     
amount of cash and the fair market value of any property distributed and will   
also include the amount of any Israeli taxes withheld as described above under  
"Taxation of Non-Residents." Dividends that are received by U.S. holders that   
are individuals, estates or trusts will be taxed at the rate applicable to      
long-term capital gains (a maximum rate of 15%), provided that such dividends   
meet the requirements of "qualified dividend income." Dividends that fail to    
meet such requirements, and dividends received by corporate U.S. holders are    
taxed at ordinary income rates. No dividend received by a U.S. holder will be a 
qualified dividend (1) if the U.S. holder held the ordinary share with respect  
to which the dividend was paid for less than 61 days during the 121-day period  
beginning on the date that is 60 days before the ex-dividend date with respect  
to such dividend, excluding for this purpose, under the rules of Code section   
246(c), any period during which the U.S. holder has an option to sell, is under 
a contractual obligation to sell, has made and not closed a short sale of, is   
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or  
has otherwise diminished its risk of loss by holding other positions with       
respect to, such ordinary share (or substantially identical securities); or (2) 
to the extent that the U.S. holder is under an obligation (pursuant to a short  
sale or otherwise) to make related payments with respect to positions in        
property substantially similar or related to the ordinary share with respect to 
which the dividend is paid. If we were to be a "passive foreign investment      
company" (as such                                                               

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term is defined in the Code) for any year, dividends paid on our ordinary shares
in such year or in the following year would not be qualified dividends. In      
addition, a non-corporate U.S. holder will be able to take a qualified dividend 
into account in determining its deductible investment interest (which is        
generally limited to its net investment income) only if it elects to do so; in  
such case the dividend will be taxed at ordinary income rates.                  

The amount of any distribution which exceeds the amount treated as a  
dividend will be treated first as a non-taxable return of capital, reducing the 
U.S. holder's tax basis in its ordinary shares to the extent thereof, and then  
as capital gain from the deemed disposition of the ordinary shares. Corporate   
holders will not be allowed a deduction for dividends received in respect of the
ordinary shares.                                                                

    Dividends paid by us in NIS will be included in the income of U.S. holders
at the dollar amount of the dividend (including any Israeli taxes withheld      
therefrom), based upon the spot rate of exchange in effect on the date the      
distribution is included in income. U.S. holders will have a tax basis in the   
NIS for U.S. federal income tax purposes equal to that dollar value. Any        
subsequent gain or loss in respect of the NIS arising from exchange rate        
fluctuations will generally be taxable as U.S. source ordinary income or loss.  

     Subject to certain conditions and limitations set forth in the Code and the
Treasury regulations thereunder, including certain holding period requirements  
U.S. holders may elect to claim as a foreign tax credit against their U.S.      
federal income tax liability the Israeli income tax withheld from dividends     
received in respect of the ordinary shares. The limitations on claiming a       
foreign tax credit include, among others, computation rules under which foreign 
tax credits allowable with respect to specific classes of income cannot exceed  
the U.S. federal income taxes otherwise payable with respect to each such class 
of income. In this regard, dividends paid by us will be foreign source "passive 
income" for U.S. foreign tax credit purposes or, in the case of a financial     
services entity, "financial services income" (and, for the years beginning after
2006, as "general category income"). U.S. holders that do not elect to claim a  
foreign tax credit may instead claim a deduction for the Israeli income tax     
withheld if they itemize deductions. The rules relating to foreign tax credits  
are complex, and U.S. holders should consult their tax advisors to determine    
whether and to what extent they would be entitled to this credit.               

DISPOSITION OF ORDINARY SHARES                                                  

     Subject to the discussion below under "Tax Consequences if We are a Passive
Foreign Investment Company," upon the sale, exchange or other disposition of our
ordinary shares, a U.S. holder will recognize capital gain or loss in an amount 
equal to the difference between the amount realized on the disposition and the  
U.S. holder's tax basis in the ordinary shares. The gain or loss recognized on  
the disposition of the ordinary shares will be long-term capital gain or loss if
the U.S. holder held the ordinary shares for more than one year at the time of  
the disposition and is eligible for a maximum 15% rate of taxation for          
individuals. Capital gain from the sale, exchange or other disposition of       
ordinary shares held for one year or less is short-term capital gain and taxed  
at a maximum rate of 35%. Gain or loss recognized by a U.S. holder on a sale,   
exchange or other disposition of ordinary shares will be treated as U.S. source 
income or loss for U.S. foreign tax credit purposes. A U.S. holder that receives
foreign currency upon disposition of ordinary shares and converts the foreign   
currency into dollars after the settlement date (in the case of a cash method   
tax paper) or trade date (in the case of an accrual method tax paper ) will have
foreign exchange gain or loss based on any appreciation or depreciation in the  
value of the foreign currency against the dollar, which will generally be U.S.  
source ordinary income or loss.                                                 

TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY                 

     We will be a passive foreign investment company, or PFIC, if either (1) 75%
or more of our gross income in a taxable year is passive income; or (2) 50% or  
more of the value, determined on the basis of a quarterly average, of our assets
in a taxable year are held for the production of passive income. If we own      
(directly or indirectly) at least 25% by value of the stock of another          
corporation, we will be treated for purposes of the foregoing tests as owning   
our proportionate share of the other corporation's assets and as directly       
earning our proportionate share of the other corporation's income. If we are a  
PFIC, a U.S. holder must determine under which of three alternative taxing      
regimes it wishes to be taxed.                                                  

The "QEF" regime applies if the U.S. holder elects to treat us as a   
"qualified electing fund" ("QEF") for the first taxable year in which the U.S.  
holder owns our ordinary shares or in which we are a PFIC, whichever is later,  
and if we comply with certain reporting requirements. If the QEF regime applies,
then each year that we are a PFIC such U.S. holder will include in its gross    
income a proportionate share of the our ordinary earnings (which is taxed as    
ordinary                                                                        

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income) and net capital gain (which is taxed as long-term capital gain), subject
to a separate election to defer payment of taxes, which deferral is subject to  
an interest charge. These amounts would be included in income by an electing    
U.S. holder for its taxable year in which our taxable year ends, whether or not 
such amounts are actually distributed to the U.S. holder. A U.S. holder's basis 
in our ordinary shares for which a QEF election has been made would be increased
to reflect the amount of any taxed but undistributed income. Generally, a QEF   
election allows an electing U.S. holder to treat any gain realized on the       
disposition of its ordinary shares as capital gain.                             

    Once made, the QEF election applies to all subsequent taxable years of the
U.S. holder in which it holds our ordinary shares and for which we are a PFIC   
and can be revoked only with the consent of the Internal Revenue Service. A     
shareholder makes a QEF election by attaching a completed Internal Revenue      
Service Form 8621, including the PFIC annual information statement, to a timely 
filed United States federal income tax return. Even if a QEF election is not    
made, a U.S. person who is a shareholder in a PFIC must file a completed        
Internal Revenue Service Form 8621 every year.                                  

If a QEF election is made after the first taxable year in which a U.S.
holder holds our ordinary shares and we are a PFIC, then special rules would    
apply.                                                                          

     A second regime, the "mark-to-market" regime, may be elected so long as our
ordinary shares are "marketable" (i.e., regularly, traded on certain securities 
exchanges). Pursuant to this regime, an electing U.S. holder's ordinary shares  
are marked-to-market each year and the U.S. holder recognizes as ordinary income
or loss an amount equal to the difference as of the close of the taxable year   
between the fair market value of our ordinary shares and the U.S. holder's      
adjusted tax basis in our ordinary shares. Losses are allowed only to the extent
of net mark-to-market gain previously included by the U.S. holder under the     
election for prior taxable years. An electing U.S. holder's adjusted basis in   
our ordinary shares is increased by income recognized under the mark-to-market  
election and decreased by the deductions allowed under the election.            

    Under the mark-to-market election, gain on the sale of our ordinary shares
is treated as ordinary income, and loss on the sale of our ordinary shares, to  
the extent the amount of loss does not exceed the net mark-to-market gain       
previously included, is treated as ordinary loss. The mark-to-market election   
applies to the tax year for which the election is made and all later tax years, 
unless the ordinary shares cease to be marketable or the Internal Revenue       
Service consents to the revocation of the election.                             

If the mark-to-market election is made after the first taxable year in
which a U.S. holder holds our ordinary shares and we are a PFIC, then special   
rules would apply.                                                              

A U.S. holder making neither the QEF election nor the mark-to-market  
election is subject to the "excess distribution" regime. Under this regime,     
"excess distributions" are subject to special tax rules. An excess distribution 
is either (1) a distribution with respect to shares that is greater than 125% of
the average distributions received by the U.S. holder from us over the shorter  
of either the preceding three taxable years or such U.S. holder's holding period
for our shares, or (2) 100% of the gain from the disposition of our shares      
(including gain deemed recognized if the ordinary shares are used as security   
for a loan).                                                                    

Excess distributions must be allocated ratably to each day that a U.S.
holder has held our ordinary shares. A U.S. holder must include amounts         
allocated to the current taxable year, as well as amounts allocated to taxable  
years prior to the first year in which we were a PFIC, in its gross income as   
ordinary income for that year. All amounts allocated to prior years of the U.S. 
holder during which we were a PFIC would be taxed at the highest tax rate for   
each such prior year applicable to ordinary income. The U.S. holder also would  
be liable for interest on the deferred tax liability for each such prior year   
calculated as if such liability had been due with respect to each such prior    
year. The portions of gains and distributions that are not characterized as     
"excess distributions" are subject to tax in the current year under the normal  
tax rules of the Code.                                                          

    A U.S. person who inherits shares in a foreign corporation that was a PFIC
in the hands of the decedent (who did not make a QEF election either of the     
elections described above), is denied the otherwise available step-up in the tax
basis of such shares to fair market value at the date of death.                 

We believe that we were not a PFIC in 2005 or in prior years. However,
since the determination of whether we are a PFIC is based upon such factual     
matters as the valuation of our assets and, in certain cases, the assets of     
companies held by us, there can be no assurance with respect to the position of 
the Internal Revenue Service on our status as a PFIC. In addition, there can be 
no assurance that we will not become a PFIC for the current fiscal year         

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ending December 31, 2006 or in a future year. We will notify U.S. holders in the
event we conclude that we will be treated as a PFIC for any taxable year to     
enable U.S. holders to consider whether or not to elect to treat us as a QEF for
U.S. federal income tax purposes, or to "mark - to - market" the ordinary shares
or to become subject to the "excess distribution" regime.                       

U.S. holders are urged to consult their tax advisors regarding the    
application of the PFIC rules, including eligibility for and the manner and     
advisability of making, the QEF election or the mark-to-market election.        

    U.S. holders (other than exempt recipients such as corporations) generally
are subject to information reporting requirements with respect to dividends paid
on Ordinary Shares in the United States or by a U.S. payor or U.S. middleman or 
the gross proceeds from disposing of Ordinary Shares. U.S. holders generally are
also subject to backup withholding (currently 28% for taxable years through     
2010) on dividends paid in the United States or by a U.S. payor or U.S.         
middleman on Ordinary Shares and on the gross proceeds from disposing of        
Ordinary Shares, unless the U.S. holder provides an IRS Form W-9 or is otherwise
exempt from backup withholding.                                                 

Non-U.S. holders generally are not subject to information reporting or
backup withholding with respect to dividends paid on Ordinary Shares in the     
United States or by a U.S. payor or U.S. middleman or the gross proceeds from   
the disposition of Ordinary Shares, provided that such Non-U.S. holder certifies
to its foreign status, or is otherwise exempt from backup withholding or        
information reporting.                                                          

   The amount of any backup withholding may be allowed as a credit against a
holder's U.S. federal income tax liability and may entitle such holder to a     
refund provided that certain required information is timely furnished to the    
IRS.                                                                            

F.   DIVIDENDS AND PAYING AGENTS                                                

Not applicable.                                                       

G.   STATEMENT BY EXPERTS                                                       

Not applicable.                                                       

H.   DOCUMENTS ON DISPLAY                                                       

     EMI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, EMI files annual
reports with and furnishes other information to the SEC. These materials,       
including this annual report and the exhibits hereto, may be inspected and      
copied at the SEC's Public Reference Room at 100 F Street, N.W., Washington,    
D.C. 20549. Copies of the materials may be obtained from the Public Reference   
Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed 
rates. The public may obtain information on the operation of the SEC's Public   
Reference Room by calling the SEC in the United States at 1-800-SEC-0330.       
Additionally, copies of the materials may be obtained from the SEC's website at 
http://www.sec.gov.                                                             

I.   SUBSIDIARY INFORMATION                                                     

Not applicable.                                                       

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS             

EXCHANGE RATE EXPOSURE                                                          

OPERATIONS                                                            

The main transactions and balances (including long-term bank loans) of
companies in our hotels segment, in our shopping and entertainment centers      
segment and in our image guided treatment segment, which are measured as        
autonomous entities, are denominated or linked to the functional currency of    
each company. As of December 31,                                                

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2005 and for the year then ended, our hotels and/or centers segments did not    
have any significant exchange rate exposure, except for the hotel division's    
operations in Romania.                                                          

  Significant changes in the exchange rate between certain currencies in a
given territory (mainly, Euro, GBP, Lei and dollar) is likely to affect the     
respective prices of hotel services in our hotel division, for overseas         
customers. Such changes may result in a gap between price levels of services    
paid in different countries. As a result, the revenue might decrease and the    
revenues mix between geographic segments may also vary as a result of these     
currency fluctuations.                                                          

MONETARY ASSETS (LIABILITIES), NET                                    

The functional currency of our holding companies in Israel is the NIS,
while the same of our holding subsidiaries which operate in the Netherlands, is 
the Euro. We have monetary assets and monetary liabilities in substantial       
amounts, denominated in or linked to the U.S. dollar, and are therefore exposed 
to a substantial fluctuations thereof. We do not actively hedge against         
fluctuations of the NIS and/or the Euro in relation to the U.S. dollar.         

NET INVESTMENT VALUE OF FOREIGN INVESTEES                             

   As for the translation method of our foreign autonomous entities to their
holding company's functional currency and the changes therein during 2005, see  
Note 2A.(3)(i) to our consolidated financial statements.                        

  Our exposure to fluctuations in exchange rates of foreign currencies, in
respect of inter-company balances (see table I below) is reflected only by the  
value of the net investment in the autonomous entities (capital and             
shareholders' loans with a nature of investments). A decrease/increase in the   
value of foreign currencies of the autonomous investees in relation to their    
holding companies' functional currency may, therefore, have a negative/positive 
impact on our shareholders' equity. In order to mitigate our exposure to the    
effect of frequent fluctuations in the exchange rate of these currencies, as    
mentioned above, some of our bank loans that have been obtained, mainly to      
finance investments in foreign subsidiaries in our hotels division, in the same 
currency of the investee's functional currency.                                 

 At the end of May 2005, Arena converted the linkage currency of certain
bank loans (NIS 213.0 million obtained, from U.S. dollar into NIS, which is the 
functional currency of the Arena). See also "- Table I - Foreign Currency Risks"
below.                                                                          

  In addition, our exposure to the foregoing fluctuations has an impact on
the extent of the assets, liabilities and operations of the autonomous          
companies, as reflected in our financial statements, and on the date-to-date and
period-to-period comparison of our financial statements.                        

 Further details about our foreign currency exposure, as of December 31,
2005 are set forth in Table I below.                                            

RATE OF INFLATION                                                               

As for the accounting principle regarding the adjustment of financial 
statements to the inflation and for the changes therein commencing January 1,   
2004, see Note 2A.1 to our consolidated financial statements.                   

Fluctuations in the rate of inflation may impact labor costs in       
circumstances where labor contracts are linked to domestic CPI, whether by      
mandatory rules or by union agreements. An increase in inflation could also     
result in an increase in the cost of our variable rate borrowings. Failure to   
adjust revenues of companies (especially in the hotel segment) with the rate of 
inflation may result in a decrease in operating profits. This potential loss    
will be more clearly reflected as we had changed, commencing January 2004, our  
reporting method to the nominal basis (instead of adjusted basis). However, most
of our leases, in the commercial centers' businesses, contain provisions        
designed to partially mitigate the adverse impact of inflation. Most of our     
leases contain effective annual rent escalations (that are, indexed based on the
Consumer Price Index or other related indices). A portion of the lease          

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agreements include conditions enabling us to receive percentage rents based on a
tenant's gross sales above predetermined levels, which sales generally increase 
as prices rise. Accordingly, we do not believe that our earnings or cash flows  
from real estate operations (in the commercial centers' businesses) are subject 
to a significant economic risk of inflation.                                    

INTEREST RATE RISKS                                                             

  Part of the credit and the deposits are obtained at or invested at fixed
interest rates while most of the credit and deposits are obtained at or invested
at variable rates (see Table III below). Changes in short-term interest rates in
the countries in which we operate will affect our results of operations and our 
future cash flows. In general, we do not actively hedge against the impact of   
the interest rate risks on our net monetary assets/liabilities. We limit, in    
certain cases, a part of these risks by using derivative financial instruments  
to manage or hedge interest rate risk, especially, on long term bank loans (see 
Note 23D. to our consolidated financial statements).                            

     We are also subject to the risk of increases in long-term variable interest
rates that may occur over a period of several years. This may affect our        
discount rate applicable to our assets and consequently may decrease the overall
value of our real estate.                                                       

     Short-term interest rates influence directly and indirectly on the economic
and business atmosphere, which, in turn, has an effect on the commercial and    
leisure industry. An increase in the short-term interest rates generally results
in the decrease in the spending of monies for leisure purposes and may result in
a decrease in our operational results.                                          

CREDIT RISKS                                                                    

Cash, cash equivalents and bank deposits are maintained with reputable
banks. In the commercial centers business and in the hotels segment, services   
and sales are rendered to a large numbers of customers and we are not           
significantly exposed to credit risks arising from dependence on any single     
customer. In relation to anchor tenants, see "Item 3 - Key Information - Risk   
Factors - Risk Relating to the Shopping and entertainment centers Business".    

The balance of long term receivables as of December 31, 2005 included:

   1.   Two loans in the aggregate amount of NIS 23.0 million ($5.0 million)
          which were granted by us to the Management Company in the framework of
        an option agreement to acquire 33% of the Park Plaza chain in Europe
  (See Notes 8A.(2)(i) and 17A.(2) to our financial statements).

     2.   PC has invested an amount of NIS 19.1 million in Joint Venture Project
        Company which is in excess of the amount invested by the JV partner.
 Part of this loan amount to NIS 10.9 million arising from the
          shareholders agreement with the JV partner and the remaining amount is
    due to excess investments of Shareholders loan by PC over the JV
      partner as a result of a dispute with the JV partner regarding the
          increase in the budget of the Project. See Note 8A. (ii) and 10 B.6 to
our consolidated financial statements.                      

     Realization of these debts substantially depends on the financial stability
of the debtors in the long run.                                                 

See also "Item 3 - Key Information - Risk Factors" above.             

MARKETABLE AND EQUITY SECURITIES                                                

     For information on the or composition of the short and long-term investment
portfolio- see Note 4 and Note 9 to our consolidated financial statements       
included in Item 18 below. Such investments are exposed to market-price         
fluctuation.                                                                    

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VENTURE CAPITAL INVESTMENTS                                                     

For information on exposures relating to venture capital investments, see "Item 
3. Key Information - D. Risk Factors - Risks relating to our Other Activities"  
above.                                                                          

RENT INCOME FROM SHOPPING AND ENTERTAINMENT CENTERS                             

     For information on risks relating to the market price of lease of spaces in
commercial centers, see "Item 3. Key Information - Risk Factors - Risk Relating 
to the Shopping and entertainment centers Business" above.                      

  Our financial results are affected by general economic conditions in the
markets in which our properties are located. An economic recession, or other    
adverse changes in general or local economic conditions could result in the     
inability of some of our existing tenants to meet their lease obligations and   
could otherwise adversely affect our ability to attract or retain tenants.      

LAND AND REAL ESTATE RATES                                                      

Some of our real estate properties are subject to leases of land or buildings.  
Annual payments for those leasehold properties are linked to various real estate
indexes. Strength in the real estate market may influence the level of those    
indexes and result in increasing annual payments. However, we are generally able
to offset higher rental fees paid by us with greater revenues from our tenants. 

FINANCIAL INSTRUMENTS                                                           

   From time to time, throughout the reported year, we engage in the trading
of derivative and other financial instruments for hedging and speculative       
purposes. The results of such activities and the value of the trading           
instruments are affected by the changes and volatility in foreign exchange rates
and interest rates and equity indices. Changes in Israeli and global foreign    
exchange rates, interest rates and equity indices may significantly affect our  
financial results and our assets, liabilities, equity capital and cash flow, as 
a result of the aforementioned trading activity.                                

    The highest balance of open positions of derivatives for currency sale and
purchase during 2005 was NIS 717 million ($155.7 million). Subsequent to        
December 31,2005 the maximum balance of open positions totaled NIS 60 million   
($13.0 million). It should be noted that due to the high volatility of global   
financial markets, foreign exchange, interest rate and equity trading involve   
significant risks, mainly in the short term.                                    

     For currency transactions outstanding as at December 31, 2005, see Table II
- Derivative contracts on foreign exchange rates below.                         

FAIR VALUE OF FINANCIAL INSTRUMENTS                                             

    The Company's and its subsidiaries' financial instruments include monetary
assets (cash and cash equivalents, short and long-term deposits, trade accounts 
receivable, marketable securities as well as other receivables and current      
account) and monetary liabilities (short-term credits, long-term liabilities,   
trade accounts payable as well as payables and other credit balances). Due to   
the nature of the financial instruments included in working capital, their fair 
values approximate those presented in the balance sheet.                        

   The fair value of long term trade accounts receivable, deposits and other
long-term liabilities is ordinarily based on the present value of future        
receipts and payments, discounted by the interest rate applicable to our lending
or borrowing activities under similar terms as of the balance sheet date, and it
is not materially different from what is presented in the financial statements. 

    For information on the presentation of long-term balances not under market
conditions - see Note 2K to our consolidated financial statements included in   
Item 18 below.                                                                  

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 Derivative financial instruments that have an active market were valued
based on market value.                                                          

The assets included among long term investments or that are stated as 
treasury stock, for which market value differ from their carrying amount, are as
follows:                                                                        

                                                                [Download Table]

                                                  December 31, 2005      
                                           ------------------------------
                                           Carrying amount   Market value
                                           ---------------   ------------
                                                  NIS (in millions)      
                                                                         
Elbit - treasury stock (see Note 18A. to                                 
our consolidated financial statements)          162.3            243(1)  

Bucuresti (See Note 9.B(4), to our                                       
consolidated financial statements.)             235.7           44.0(2)  

(1)  Includes 2,842,400 shares held by EMI and 524,187 shares held by Elscint.  
Shares are traded on the Tel Aviv Stock Exchange and in the NASDAQ.   

(2)  Shares are traded on the Bucharest stock exchange, in Romania ("RASDAQ").  

TABLE I - FOREIGN CURRENCY RISKS                                                

The table below provides information as at December 31, 2005 regarding our      
financial assets and liabilities (including - inter company balances)           
denominated or linked to foreign currencies:                                    

NIS (IN MILLIONS)                                                               

                                                        [Enlarge/Download Table]

                                                     BRITISH                                                       
                                                     POUND                                                         
                                ISRAELI SHEKELS     STERLING              ROMANIAN                                 
                                     (NIS)             (L)     EURO (E)   LEI (ROL)          RECONCILIATION        
FUNCTIONAL CURRENCY            -----------------    --------  ---------  ----------  OTHERS        FOR             
Linkage Currency (2)            $      E      L         E       $    L     E     $    (1)    CONSOLIDATION    TOTAL
--------------------           ---    ---    ---    --------  ----  ---  ----  ----  ------  --------------  ------
                                                                                                                   
CURRENT ASSETS:                                                                                                    
Cash and cash equivalents       17     --     26        --       1    1    --    --     444          --         489
Short term deposits and                                                                                            
   investments                 145     --     --        --       1   --     1     2      91          --         240
Trade accounts receivable and                                                                                      
other debit balances             3     --     --        --      --   --    --    --     106           3         112
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
                               165     --     26        --       2    1     1     2     641           3         841
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
LONG TERM INVESTMENTS AND                                                                                          
   RECEIVABLES:                                                                                                    
Deposits, debentures, loans                                                                                        
   and  receivables             --     (4)    --        --      23   --    --    --      43          --          62
Investments in investees and                                                                                       
   other companies:                                                                                                
   Shares                       21    400     --        --     (25) (85)   --    --    (699)        445          57
   Loans                       552    276    137        --     118  133    --    --     433      (1,649)         --
Assets related to                                                                                                  
   discontinuing operations             3     --        --      --   --    --    --      10                      13
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
                               573    675    137        --     116   48    --    --    (213)     (1,204)        132
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
TOTAL ASSETS                   738    675    163        --     118   49     1     2     428      (1,201)        973
                               ===    ===    ===      ====    ====  ===  ====  ====  ======      ======      ======
CURRENT LIABILITIES:                                                                                               
Short term credits             140(4)  --     --        --       1   --    39   127      94          59         460
Trade accounts payable and                                                                                         
   other credit balances         6      6      1        --       8   --    --     2     223         (14)        232
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
                               146      6      1        --       9   --    39   129     317          45         692
                               ---    ---    ---      ----    ----  ---  ----  ----  ------      ------      ------
LONG TERM LIABILITIES:                                                                                             
Long term liabilities:                                                                                             
   Group companies              69     --     --       200     552  136    98    --     565      (1,620)         --
   Others                      307(4) 334(3) 133(3)     --      20   --     1    --   1,206         (36)      1,965

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                                                        [Enlarge/Download Table]

                                                BRITISH                                                         
                                                 POUND                                                          
                              ISRAELI SHEKELS   STERLING              ROMANIAN                                  
                                   (NIS)           (L)     EURO (E)   LEI (ROL)          RECONCILIATION         
FUNCTIONAL CURRENCY          -----------------  --------  ---------  ----------  OTHERS        FOR              
Linkage Currency (2)          $      E      L       E       $    L     E     $    (1)    CONSOLIDATION    TOTAL 
--------------------         ---    ---    ---  --------  ----  ---  ----  ----  ------  --------------  ------ 
                                                                                                                
Liabilities related to                                                                                          
   discontinuing operations   57      5     --      --      --   --    --    --      --          --          62 
                             ---    ---    ---    ----    ----  ---  ----  ----  ------      ------      ------ 
                             433    339    133     200     572  136    99    --   1,771      (1,656)      2,027 
                             ---    ---    ---    ----    ----  ---  ----  ----  ------      ------      ------ 
TOTAL LIABILITIES            579    345    134     200     581  136   138   129   2,088      (1,611)      2,719 
                             ---    ---    ---    ----    ----  ---  ----  ----  ------      ------      ------ 
TOTAL ASSETS LESS TOTAL                                                                                         
   LIABILITIES (5)           159    330     29    (200)   (463) (87) (137) (127) (1,660)        410      (1,746)
                             ===    ===    ===    ====    ====  ===  ====  ====  ======      ======      ====== 

FOOTNOTES:                                                                      

(1)  Includes mainly, unlinked balances of financial assets (liabilities) and   
  linkage currencies which total financial assets or financial liabilities
   that are denominated therein or linked thereto, do not exceed 5% of total
    financial assets or financial liabilities, respectively (on a consolidated
basis).                                                               

(2)  As for investments in investees' shares - "linkage currency" means the     
     functional currency of each investee. As for loans to investees with nature
of investment - "linkage currency" means the currency that the loan is
denominated in or linked to.                                          

(3)  Primarily loans for financing an investment in an autonomous investee taken
   in the functional currency of the investee (for hedging, qualified hedges
   for accounting purposes). The effect of the exchange rates on these loans
  are charged directly to shareholders equity and not to the statements of
operations.                                                           

(4)  NIS 46 million short term bank loan and NIS 92 long term bank loans used   
for financing an investment in an autonomous investee taken in the    
functional currency of the investee (for hedging, qualified hedges for
   accounting purposes). The effect of the exchange rates on these loans are
charged directly to shareholders equity and not to the statements of  
operations.                                                           

(5)  Comprised as follows:                                                      

                                                        [Enlarge/Download Table]

                                                  BRITISH                                                             
                                                   POUND                                                              
                                                 STERLING                 ROMANIAN                                    
                          ISRAELI SHEKELS (NIS)     (L)     EURO (E)     LEI (ROL)             RECONCILIATION         
FUNCTIONAL CURRENCY       ---------------------  --------  ----------   -----------   OTHERS         FOR              
Linkage Currency (2)         $      E      L         E       $     L      E      $      (1)     CONSOLIDATION   TOTAL 
--------------------       ----   ----   ----    --------  ----   ---   ----   ----   ------   --------------  ------ 
                                                                                                                      
Net monetary items (6)     (345)  (346)  (108)       --      (4)    1    (39)  (127)    (829)        (6)       (1,803)
Intercompany balances                                                                                                 
   (loans with nature of                                                                                              
   investment) (7)          483    276    137      (200)   (434)   (3)   (98)    --     (132)       (29)           -- 
Investment in investees'                                                                                              
   shares (7)                21    400     --        --     (25)  (85)    --     --     (699)       445            57 
                           ----   ----   ----      ----    ----   ---   ----   ----   ------        ---        ------ 
                            159    330     29      (200)   (463)  (87)  (137)  (127)  (1,660)       410        (1,746)
                           ====   ====   ====      ====    ====   ===   ====   ====   ======        ===        ====== 

(6)  The impact of exchange rates exposure, on net monetary items, is charged   
directly to the statements of operations.                             

(7)  The impact of exchange rates exposure on these items is charged directly to
the shareholders equity and not to the statements of operations.      

(8)  Exchange rates:                                                            

                                                                [Download Table]

                                               BRITISH                        
                                                POUND                1,000    
                                              STERLING    EURO      ROMANIAN  
                      ISRAELI SHEKELS (NIS)      (L)      (E)      LEI (ROL)  
FUNCTIONAL CURRENCY   ---------------------   --------   -----   -------------
Linkage Currency        $       E       L         E        $       $       E  
-------------------   -----   -----   -----   --------   -----   -----   -----
                                                                              
May 31, 2006          4.518   5.810   8.478     0.685    0.778   27.56   35.43
                      =====   =====   =====    ======    =====   =====   =====
December 31, 2005     4.603   5.447   7.941    0.6857    0.845   31.08   31.77
                      =====   =====   =====    ======    =====   =====   =====
December 31, 2004     4.308   5.877   8.308     0.704    0.732   29.07   39.66
                      =====   =====   =====    ======    =====   =====   =====

(9)  Changes in the exchange rates (%)                                          

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                                                                [Download Table]

                                               BRITISH                          
                                                POUND                           
                                              STERLING    EURO   1,000 ROMANIAN 
                      ISRAELI SHEKELS (NIS)     (L)       (E)       LEI (ROL)   
FUNCTIONAL CURRENCY   ---------------------   --------   -----   -------------- 
Linkage Currency        $       E       L         E        $        $       E   
-------------------   -----   -----   -----   --------   -----   ------   ----- 
                                                                                
May 31, 2006          (1.85)   6.67    6.77    (0.10)    (7.97)  (11.32)  (3.35)
                      =====   =====   -====    =====     =====   ======   ===== 
December 31, 2005      6.85   (7.32)  (4.42)   (2.64)    15.44     6.92   (7.29)
                      =====   =====   =====    =====     =====   ======   ===== 
December 31, 2004     (1.62)   6.21    5.85    (0.07)    (7.87)  (10.82)  (3.54)
                      =====   =====   =====    =====     =====   ======   ===== 

TABLE II - DERIVATIVE CONTRACTS ON FOREIGN EXCHANGE RATES                       

   The following presents a summary of the currency transactions outstanding
at December 31, 2005:                                                           

   (1) As for loans denominated in foreign currency obtained for the purpose
of accounting hedging - see comment (3) to Table 1 above.                       

     (2) Swap transaction - in order to hedge the risk on variable interest rate
on long-term loans - see Note 23A. to our consolidated financial statements.    

TABLE III - INTEREST RISKS                                                      

The following table presents a summary of balances classified according to      
interest rate, at December 31, 2005:                                            

1.   LONG TERM LOANS AND DEPOSITS - (IN MILLIONS NIS)                           

                                                        [Enlarge/Download Table]

                                                            REPAYMENT YEARS                    
                                        -------------------------------------------------------
FUNCTIONAL   LINKAGE                                               5 AND       NOT YET         
CURRENCY     CURRENCY  INTEREST RATE %   1     2     3     4    THEREAFTER   DETERMINED   TOTAL
----------  ---------  ---------------  ---   ---   ---   ---   ----------   ----------   -----
                                                                                               
EURO        US Dollar       (1)                8                                  16        24 
EURO        EURO         1.95-4.9                                     9           27        36 
NIS         US Dollar  Libor + 1.5-2.0    1                                        1         2 
NIS         NIS              --          20                                                 20 
                                        ---   ---   ---   ---       ---          ---       --- 
                                         21    8     --    --         9           44        82 
                                        ===   ===   ===   ===       ===          ===       === 

(1)  See Note 8A.(2)(i) to our consolidated financial statements.               

2.   LONG TERM LOANS - (IN MILLIONS NIS)                                        

                                                        [Enlarge/Download Table]

                                                                   REPAYMENT YEARS                  
                                        AVERAGE  ---------------------------------------------------
FUNCTIONAL  LINKAGE                    INTEREST                                   6 AND             
CURRENCY    CURRENCY  INTEREST RATE %   RATE %    1     2     3     4     5    THEREAFTER   TOTAL   
----------  --------  ---------------  --------  ---   ---   ---   ---   ---   ----------   -----   
                                                                                                    
EURO        EURO      5.1(i)              5.1      2     3     4   186    --        --        195   
EURO        USD       Libor +1.9%         5.9      1     1     1     1     1        12         17   
EURO        EURO      Euribor +                                                                     
                      1.5-3.35          3.8-5.7   44    85    17    17    17       204        384   
UK Pound    UK Pound                                                                                
Sterling    Sterling  Libor +                                                                       
                      1.4-1.65            6.4      8    12    23    24    24       382        473   

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                                                        [Enlarge/Download Table]

                                                                   REPAYMENT YEARS                  
                                        AVERAGE  ---------------------------------------------------
FUNCTIONAL  LINKAGE                    INTEREST                                      6 AND          
CURRENCY    CURRENCY  INTEREST RATE %   RATE %    1     2        3     4     5    THEREAFTER   TOTAL
----------  --------  ---------------  --------  ---   ---      ---   ---   ---   ----------   -----
                                                                                                    
            US        Libor +                                                                       
NIS         Dollar    2.5-3.35          6.5-7.3   --   305(ii)   --    --    --        --        305
NIS         EURO      Euribur +                                                                     
                      2.85-3.35           5.5      4   165(ii)    8     8    34       115        334
            UK                                                                                      
            Pound                                                                                   
NIS         Sterling  Libor + 2.85        7.6     --    --       --    --    66        66        132
SA Rand     SA Rand   Prime-1             9.5     --    --       --    --    --         4          4
NIS         NIS       Prime+2.25          7.6     --     2       --    --    11        --         13
                                                 ---   ---      ---   ---   ---       ---      -----
                                                  59   573       53   236   153       783      1,857
                                                 ===   ===      ===   ===   ===       ===      =====

    (i)  The interest rates on this loan have been fixed by swap transactions.

(ii) See Note 14D&F to our consolidated financial statements.         

3.   SHORT TERM CASH AND DEPOSITS - see notes 3 and 4 to our financial          
statements.                                                           

4.   SHORT TERM LOANS - see note 12 to our consolidated financial statements.   

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                 

Not applicable.                                                       

 PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                       

None.                                                                 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF    
PROCEEDS                                                              

Not applicable.                                                       

ITEM 15. CONTROLS AND PROCEDURES                                                

(A)  DISCLOSURE CONTROLS AND PROCEDURES.                              

   Our chief executive officer and chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in Rule 
13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31,
2005, have concluded that, as of such date, our disclosure controls and         
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is accumulated and  
communicated to our management, including our chief executive officer and chief 
financial officer, to allow timely decisions regarding required disclosure and  
is recorded, processed, summarized and reported within the time periods         
specified by the SEC's rules and forms.                                         

(B)  INTERNAL CONTROL OVER FINANCIAL REPORTING.                       

Not Applicable.                                                       

(C)  ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM.     

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Not Applicable.                                                       

(D)  CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.            

   There has been no change in our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) identified  
with the evaluation thereof that occurred during 2005, that has materially      
affected, or is reasonably likely to materially affect our internal controls    
over financial reporting.                                                       

ITEM 16. [RESERVED]                                                             

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                      

Our board of directors has determined that Mr. Zvi Tropp is an "audit 
committee financial expert" as defined in Item 16A of the instructions to Form  
20-F and is independent in accordance with the Nasdaq listing standards for     
audit committees applicable to us.                                              

ITEM 16B. CODE OF ETHICS                                                        

 Our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions, as    
well as all other directors, officers and employees are bound by a Code of      
Ethics and Business Conduct. Our Code of Ethics was filed as an exhibit to our  
annual report on Form 20-F for the year ended December 31, 2003. On December 11,
2005, following the merger by way of exchange of shares between us and Elscint, 
we amended our Code of Ethics and Business Conduct so that it would apply to    
Elscint, as a wholly owned subsidiary of us. We will provide any person, without
charge, upon request, a copy of such code. Any person so requesting a copy is   
required to submit such request to the Corporate Secretary at 13 Mozes St.,     
Tel-Aviv, Israel, 67442 and provide a mailing address for such person.          

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                

   Brightman Almagor & Co., a firm of certified public accountants in Israel
and a member firm of Deloitte Touche Tohmatsu have served as our independent    
registered public accounting firm for the fiscal year ended December 31, 2005,  
for which audited financial statements appear in this annual report on Form     
20-F.                                                                           

(A)  AUDIT FEES                                                       

The aggregate fees billed for professional services constituting Audit
Fees, rendered to us by Brightman Almagor & Co., in 2004 and 2005 were $482,000 
and $447,000, respectively.                                                     

(B)  AUDIT RELATED FEES                                               

The aggregate fees billed for professional services constituting Audit
Related Fees, rendered to us by Brightman Almagor & Co., in 2005 were $108,000. 
Such fees were incurred in connection with our merger by way of exchange of     
shares with Elscint and a preparation of a prospectus for the initial public    
offering of one of our subsidiaries. During 2004 we were not provided with any  
Audit Related Fees.                                                             

(C)  TAX FEES                                                         

    The aggregate fees billed for professional services constituting Tax Fees,
rendered to us by Brightman Almagor & Co., in 2004 and 2005 were $66,000 and    
$99,000, respectively. Such services related to tax consulting services provided
to us.                                                                          

(D)  ALL OTHER FEES                                                   

    The aggregate fees billed for professional services constituting All Other
Fees rendered to us by Brightman Almagor & Co., in 2005 were $28,000. During    
2004, we did not receive any other service from our auditors which do not fall  
within the Audit Services, Audit Related Fees and Tax Fees.                     

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(E)  PRE-APPROVAL POLICIES AND PROCEDURES                             

   Our Audit Committee oversees the appointment, compensation, and oversight
of the public accounting firm engaged to prepare or issue an audit report on the
financial statements of the Company. The audit committee's specific             
responsibilities in carrying out its oversight role include the approval of all 
audit and non-audit services to be provided by the external auditor and         
quarterly review the firm's non-audit services and related fees. These services 
may include audit services, audit-related services, tax services and other      
services, as described above. The audit committee approves in advance the       
particular services or categories of services to be provided to the Company     
during the following yearly period and also sets forth a specific budget for    
such audit and non-audit services. Additional services may be pre-approved by   
the audit committee on an individual basis during the year.                     

None of Audit-related Fees, Tax Fees or Other Fees provided to us by  
Brightman Almagor & Co., were approved by the Audit Committee pursuant to the de
minimis exception to the pre-approval requirement provided by Section 10A of the
Securities Act of 1934.                                                         

(F)  PERCENTAGE                                                       

Not applicable.                                                       

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES            

Not Applicable.                                                       

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED          
PURCHASERS                                                            

                                                        [Enlarge/Download Table]

                                                                           (D) MAXIMUM NUMBER 
                                                      (C) TOTAL NUMBER     (OR APPROXIMATELY  
                                                    OF SHARES PURCHASED     DOLLAR VALUE) OF  
               (A) TOTAL NUMBER                     AS PART OF PUBLICLY   SHARES THAT MAY YET 
                   OF SHARES     (B) AVERAGE PRICE   ANNOUNCED PLANS OR    BE PURCHASED UNDER 
    PERIOD         PURCHASED       PAID PER SHARE         PROGRAMS       THE PLANS OR PROGRAMS
    ------     ----------------  -----------------  -------------------  ---------------------
                                                                                              
February 2005     350,000(1)     NIS 45.7 ($10.47)           --                    --         
February 2006     287,259(2)          $16.35                 --                    --         
March 2006         22,757(2)          $19.05                 --                    --         
May 2006           14,517(2)          $24.96                 --                    --         

(1)  On February 27, 2005, Mr. Mordechay Zisser, our Executive Chairman of the  
  Board of Directors, who owns a controlling interest in us, exercised the
     350,000 options held by him into 350,000 ordinary shares of par value NIS 1
each of the Company at a total price of approximately $ 3.7 million.  

(2)  Between February 2006 and May 2006 Europe-Israel purchased a total of      
324,533 shares of EMI in consideration for $5,492,382.                

ITEM 17. FINANCIAL STATEMENTS.                                                  

  In lieu of responding to this item, we have responded to Item 18 of this
annual report.                                                                  

ITEM 18. FINANCIAL STATEMENTS.                                                  

    The information required by this item is set beginning on page F-1 of this
annual report.                                                                  

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PART III

ITEM 19. EXHIBITS                                                               

                                                                [Download Table]

           Exhibits.                                                            
           ---------                                                            
                                                                                
1.1(1)     Memorandum of Association of the Company.                            

1.2(1)     Articles of Association of the Company.                              

1.3(2)@    Notice dated March 4, 2001, sent by the Registrant to the Israeli    
           Companies Registrar with respect to an amendment to the Articles of  
           Association.                                                         

4.2(3)     Loan facility agreement dated January 22, 2002 between OVAG, MKB and 
           OPT banks, Amanati Ltd., Duna Plaza Kft. Sopron Plaza Kft. and Plaza 
           Centers Europe BV with respect to a credit facility in the amount of 
           Euro 82.9 million.                                                   

4.3(2)@    Loan facility agreement dated September 27, 2000, between the        
           Registrant and Bank Hapoalim BM with respect to a $150 million line  
           of credit.                                                           

4.4(2)     Loan Agreement dated March 1, 2001, between Krakow Plaza Sp.z.o.o.   
           and OVAG with respect to a credit facility in the amount of $35      
           million.                                                             

4.5(4)     Loan agreement among, inter alia, Depfa Bank AG, Victoria Hotel C.V. 
           and Utrecht Victoria Hotel B.V. dated March 24, 1999.                

4.6(4)     Hotel management agreement between Euston Road Hotel Operators Ltd.  
           and Park Plaza Europe Ltd. dated December 1997.                      

4.7(4)     Management agreement between Victoria Hotel C.V. and Park Plaza Hotel
           Europe, Ltd. (previously Prestige Hotels International Ltd.) dated   
           October 4, 1993.                                                     

4.8(4)     Management support and sub-license agreement between Astrid Park     
           Plaza N.V. and Park Plaza Hotels Europe Ltd. dated April 15, 1997.   

4.9(5)     Loan agreement dated December 21, 2000 with Bank Hapoalim B.M. with  
           respect to the financing of the Victoria Park Plaza Hotel.           

4.10(5)@   Loan facility agreement dated October 23, 2000 between Elscint and   
           Bank Hapoalim BM with respect to a $110 million line of credit.      

4.11(5)@   Development agreement dated December 17, 2000 between Elscint and the
           Israeli Land Administration with respect to the Monfort Project.     

4.12(6)@   Agreement dated April 14, 2002 between SLS Sails Ltd. and C.D.P.M.   
           Kft. for the completion of the construction works of Elscint's       
           commercial and entertainment center in Herzliya.                     

4.13(8)    Framework Transaction Agreement, dated as of July 30, 2004, by and   
           among Klepierre S.A., Klepierre Hongrie S.A.S., LP7 S.A.S. and       
           Segece, as Buyers, and Plaza Centers (Europe) B.V., Elbit Ultrasound 
           Netherlands B.V., Szeged 2002 Kft., and Plaza Centers Management     
           B.V., as Vendors.                                                    

4.14(8)    Transaction Agreement, dated January 31, 2005, Plantridge Limited, as
           Purchaser, Plaza Centers (Europe) B.V., Elbit Ultrasound Netherlands 
           B.V., and Amanati Limited, as Vendors.                               

4.15*      Framework Transaction Agreement, dated of July 29, 2005, by and among
           Klepierre S.A., Klepierre Sadyba Sp.z.o.o. Klepierre Krakow          
           Sp.z.o.o., Klepierre Poznan Sp.z.o.o, LP7 S.A.S. and Segece S.C.S, as
           Buyers, and Plaza Centers (Europe) B.V. as Vendor.                   

4.16*      Share Sale And Purchase Agreement relating to the shares in Shaw     
           Hotel Holding B.V. dated 19 December 2005 by and between Euro Sea    
           Hotel N.V., B.E.A. Hotels N.V.and Shawpark Investments B.V. as       
           Sellers and WG Mitchell (Scotland) Ltd as Purchaser                  

4.17*      Unofficial Translation of Deed of Trust dated February 21, 2006,     
           entered into between the Company and Orora Fidelity Trust Company    
           Ltd. for the issuance of series A debentures.                        

4.18*      Unofficial Translation of Deed of Trust, dated February 21, 2006,    
           entered into between the Company and Orora Fidelity Trust Company    
           Ltd. for the issuance of series A debentures.                        

4.19(9)    Agreement and Plan of Merger dated August 21, 2005 between the       
           Company and Elscint.                                                 

4.20*      Amended and Restated Loan Agreement, Multicurrency Term Credit       
           Facility, dated December 5, 2005, between Elscint and Bank Hapoalim  
           B.M.                                                                 

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                                                                [Download Table]
                                                                                
4.21*      Lease Agreement dated January 6, 2003 between Euston Road Hotel      
           Limited and Accor SA for a long term lease of the hotel property     
           located on Euston Road in London, England (previously Bernard Shaw   
           Park Plaza) for a period of 25 years.                                

4.22*      A form of Hotel Management Agreement entered into with Park Plaza.   

4.23*      Amended and Restated Loan Agreement dated July 9, 2003 between       
           Elscint and Bank of Hapoalim B. M.                                   

4.24*      Amended and Restated Loan Agreement dated July 9, 2003 between       
           Elbit Ultrasound (Netherlands) B. V. and Bank of Hapoalim B. M.      

8.1*       List of subsidiaries (Incorporated by reference to "Item 4 -         
           Information on Company - Organizational Structure).                  

10.1*      Consent of Brightman Almagor & Co.                                   

10.2*      Consent of KPMG Hungaria kft.                                        

10.3*      Consent of Mazars Paar de Koper Hoffman N. V.                        

10.4*      Consent of Kost, Forer Gabbay & Kasierer.                            

11.1*      Code of Ethics and Business Conduct for Directors, Officers and Other
           Employees                                                            

12.1*      Certification of the Principal Executive Officer and Principal       
           Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act 
           of 2002                                                              

13.1*      Certification of the Principal Executive Officer and Principal       
           Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act 
           of 2002                                                              

----------                                                                      
(1)  Previously filed as an Exhibit to EMI's Annual Report on Form 20-F, File   
    No. 0-28996, filed with the Securities and Exchange Commission on November
22, 1996 and incorporated by reference herein.                        

(2)  Previously filed as an exhibit to EMI's Annual Report on Form 20-F for the 
   year ended December 31, 2000, File No. 0-28996, filed with the Securities
and Exchange Commission on July 16, 2001 and incorporated by reference
herein.                                                               

(3)  Previously filed as an exhibit to EMI's Annual Report on Form 20-F for the 
   year ended December 31, 2001, File No. 0-28996, filed with the Securities
and Exchange Commission on July 1, 2002 and incorporated by reference 
herein.                                                               

(4)  Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F for 
the year ended December 31, 1999, File No. 2-44872, filed with the    
 Securities and Exchange Commission on June 2, 2000, and incorporated by
reference herein.                                                     

(5)  Previously filed as an Exhibit to Elscint's Annual Report on Form 20-F for 
the year ended December 31, 2000, File No. 2-44872, filed with the    
 Securities and Exchange Commission on July 10, 2001 and incorporated by
reference herein.                                                     

(6)  Previously filed as an exhibit to Elscint's Annual Report on Form 20-F for 
the year ended December 31, 2001, File No. 2-44872, filed with the    
 Securities and Exchange Commission on June 28, 2002 and incorporated by
reference herein.                                                     

(7)  Previously filed as an exhibit to EMI's Annual Report on Form 20-F for the 
   year ended December 31, 2003, File No. 0-28996, filed with the Securities
and Exchange Commission on June 30, 2004 and incorporated by reference
herein.                                                               

(8)  Previously filed as an exhibit to EMI's Annual Report on Form 20-F for the 
   year ended December 31, 2004, File No. 0-28996, filed with the Securities
and Exchange Commission on June 30, 2005 and incorporated by reference
herein.                                                               

(9)  Previously filed as an exhibit to Joint Proxy Statement Prospectus filed   
with the Securities and Exchange Commission on September 21, 2005 and 
incorporated by reference herein.                                     

*    Filed herewith.                                                            

@    Translation from Hebrew.                                                   

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SIGNATURES

   The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned  
to hereby sign this annual report on its behalf.                                

                          Elbit Medical Imaging Ltd.

                       By: /s/ Shimon Yitzhaki
                                            ------------------------------------
                     Name: Shimon Yitzhaki
                                  Title: President & Chief Financial
                     Officer

Date: June 30, 2006                                                             

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ELBIT MEDICAL IMAGING LTD.
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2005

CONTENTS

                                                                [Download Table]

                                                                          PAGE  
                                                                        --------
                                                                                
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                    2 - 3
CONSOLIDATED FINANCIAL STATEMENTS:                                              
   Balance sheets                                                          4 - 5
   Statements of operations                                                    6
   Statements of changes in shareholders' equity                           7 - 8
   Statements of cash flows                                               9 - 11
   Notes to the consolidated financial statements                       12 - 131
   Appendix                                                                  132

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                         

TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF                     
ELBIT MEDICAL IMAGING LTD.                                            

We have audited the accompanying consolidated balance sheets of Elbit 
   Medical Imaging Ltd. and its subsidiaries ("the Company"), as of December
   31, 2005 and 2004, and the related consolidated statements of operations,
statements of changes in shareholders' equity, and the consolidated   
   statements of cash flows, for each of the three years in the period ended
     December 31, 2005. These financial statements are the responsibility of the
    Company's management. Our responsibility is to express an opinion on these
  financial statements based on our audits. We did not audit the financial
    statements of certain subsidiaries, whose assets included in consolidation
     constitute 31% and 37% of the total consolidated assets, as of December 31,
   2005 and 2004, respectively, and whose revenues included in consolidation
  constitute 45%, 44% and 50% of total consolidated revenues for the years
     ended December 31, 2005, 2004 and 2003, respectively. We also did not audit
   the financial statements of affiliates accounted for by use of the equity
    method. The Company's equity of NIS 35 million and NIS 33 million in those
    affiliates' net assets as of December 31, 2005 and 2004, respectively, and
    of NIS 7 million, NIS 4 million and NIS 7 million in those affiliates' net
     loss for each of the three years ended December 31, 2005, respectively, are
     included in the accompanying financial statements. The financial statements
of those companies prepared in accordance with International Financial
   Reporting Standards or in accordance with accounting principles generally
   accepted in the United States of America or in accordance with accounting
 principles generally accepted in Israel, as applicable, were audited by
     other auditors whose reports thereon were furnished to us, and our opinion,
insofar as it relates to amounts included for those companies, on such
    basis of accounting, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public
     Company Accounting Oversight Board (United States). Those standards require
 that we plan and perform the audit to obtain reasonable assurance about
 whether the financial statements are free of material misstatement. The
   Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included  
   consideration of internal control over financial reporting as a basis for
   designing audit procedures that are appropriate in the circumstances, but
  not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we  
     express no such opinion. An audit also includes examining, on a test basis,
     evidence supporting the amounts and disclosures in the financial statements
    (including the Company's conversion of amounts in the financial statements
   of subsidiaries and affiliates, prepared in accordance with International
   Financial Reporting Standards or accounting principles generally accepted
     in the United States of America or accounting principles generally accepted
in Israel to amounts in accordance with generally accepted accounting 
  principles in Israel and in the United States of America). An audit also
     includes assessing the accounting principles used and significant estimates
   made by management, as well as evaluating the overall financial statement
    presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.                           

In our opinion, based on our audits and on the reports of the other   
   auditors, the consolidated financial statements referred to above present
   fairly, in all material respects, the financial position of Elbit Medical
     Imaging Ltd. and its subsidiaries as of December 31, 2005 and 2004, and the
  consolidated results of operations and cash flows, for each of the three
    years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in Israel.                              

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     Accounting principles generally accepted in Israel vary in certain respects
from accounting principles generally accepted in the United States of 
    America. Information relating to the nature and effect of such differences
is presented in Note 25 to the consolidated financial statements.     

     As described in Note 2A(2), the financial statements for dates and reported
    periods subsequent to December 31, 2003 are presented in reported amounts,
in accordance with the accounting standards of the Israeli Accounting 
  Standards Board. The financial statements for the year ended in December
    31, 2003 are presented in values adjusted until then, based on the changes
   in the general purchasing power of the Israeli currency and in accordance
     with the pronouncements of the Institute of Certified Public Accountants in
Israel.                                                               

   As discussed in Note 17B, claims have been filed against Group companies.
 For some of those claims petitions have been filed for certification as
class actions.                                                        

     As discussed in Note 2L, the Company has adopted effective January 1, 2005,
   Standard No. 19 of the Israel Accounting Standards Board, "income taxes".

    Our audits also comprehended the translation of New Israeli Shekel amounts
 into U.S. dollar amounts and, in our opinion, such translation has been
  made in conformity with the basis stated in Note 2A(1). Such U.S. dollar
   amounts are presented solely for the convenience of readers in the United
States of America.                                                    

BRIGHTMAN ALMAGOR & CO.                                               
CERTIFIED PUBLIC ACCOUNTANTS                                          
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU                             

Tel-Aviv (Israel), April 9, 2006                                      

 The accompanying notes to the financial statements constitute an integral
 part thereof.

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ELBIT MEDICAL IMAGING LTD.
 CONSOLIDATED BALANCE SHEETS

                                                        [Enlarge/Download Table]

                                                                DECEMBER 31            
                                                    -----------------------------------
                                                                                2005   
                                                                              REPORTED 
                                                       2005        2004     CONVENIENCE
                                              NOTE   REPORTED    REPORTED   TRANSLATION
                                              ----  ---------   ---------   -----------
                                                      (IN THOUSAND NIS)       US$'000  
                                                                                       
CURRENT ASSETS                                                                         
Cash and cash equivalents                      (3)    489,344     345,745     106,310  
Short-term deposits and investments            (4)    240,072     278,021      52,155  
Trade accounts receivable                      (5)     35,404      39,102       7,691  
Receivables and other debit balances           (6)     76,680      66,140      16,659  
Inventories                                    (7)     24,132       7,331       5,243  
                                                    ---------   ---------     -------  
                                                      865,632     736,339     188,058  
                                                    ---------   ---------     -------  
LONG-TERM INVESTMENTS AND RECEIVABLES                                                  
Long-term deposits, debentures, loans                                                  
   and other long-term balances                (8)     62,139     113,785      13,500  
Investments in investees and other companies   (9)     56,798      71,608      12,339  
                                                    ---------   ---------     -------  
                                                      118,937     185,393      25,839  
                                                    ---------   ---------     -------  
REAL ESTATE AND OTHER FIXED ASSETS            (10)  2,758,465   3,527,988     599,275  
                                                    ---------   ---------     -------  
OTHER ASSETS AND DEFERRED EXPENSES            (11)     30,476      55,859       6,621  
                                                    ---------   ---------     -------  
ASSETS RELATED TO DISCONTINUING OPERATION     (22)     12,607      14,700       2,739  
                                                    ---------   ---------     -------  
                                                    3,786,117   4,520,279     822,532  
                                                    =========   =========     =======  

 The accompanying notes to the financial statements constitute an integral
 part thereof.

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ELBIT MEDICAL IMAGING LTD.
 CONSOLIDATED BALANCE SHEETS

                                                        [Enlarge/Download Table]

                                                                     DECEMBER 31            
                                                         -----------------------------------
                                                                                     2005   
                                                                                   REPORTED 
                                                            2005        2004     CONVENIENCE
                                                   NOTE   REPORTED    REPORTED   TRANSLATION
                                                   ----  ---------   ---------   -----------
                                                           (IN THOUSAND NIS)       US$'000  
                                                                                            
CURRENT LIABILITIES                                                                         
Short-term credits                                 (12)    460,270     536,937      99,994  
Suppliers and service providers                             82,013      74,358      17,817  
Payables and other credit balances                 (13)    149,995     183,446      32,586  
                                                         ---------   ---------     -------  
                                                           692,278     794,741     150,397  
                                                         ---------   ---------     -------  
LONG-TERM LIABILITIES                              (14)  1,902,391   2,418,897     413,294  
                                                         ---------   ---------     -------  
LIABILITIES RELATED TO DISCONTINUING OPERATION     (22)     62,430      71,986      13,563  
                                                         ---------   ---------     -------  
CONVERTIBLE DEBENTURES                                      62,159          --      13,504  
                                                         ---------   ---------     -------  
MINORITY INTEREST                                           11,449     430,687       2,487  
                                                         ---------   ---------     -------  
COMMITMENTS, CONTINGENCIES, LIENS AND COLLATERALS  (17)                                     
SHAREHOLDERS' EQUITY                               (18)  1,055,410     803,968     229,287  
                                                         ---------   ---------     -------  
                                                         3,786,117   4,520,279     822,532  
                                                         =========   =========     =======  

-------------------------------------   ----------------------------------------
MORDECHAI ZISSER                         SHIMON YITZHAKI  
  CHAIRMAN OF THE BOARD OF DIRECTORS     CEO, A MEMBER OF THE BOARD OF DIRECTORS
                                         AND THE SENIOR FINANCIAL OFFICER OF
                                       THE COMPANY

APPROVED BY THE BOARD OF DIRECTORS ON APRIL 9, 2006.                            

 The accompanying notes to the financial statements constitute an integral
 part thereof.

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ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF OPERATIONS

                                                        [Enlarge/Download Table]

                                                                              YEAR ENDED DECEMBER 31           
                                                                   --------------------------------------------
                                                                                                        2005   
                                                                                                      REPORTED 
                                                                     2005     2004 (*)   2003 (*)   CONVENIENCE
                                                            NOTE   REPORTED   REPORTED   ADJUSTED   TRANSLATION
                                                            ----   --------   --------   --------   -----------
                                                                          (IN THOUSAND NIS)           US$'000  
                                                                     (EXCEPT FOR PER-SHARE DATA)               
                                                                                                               
REVENUES                                                                                                       
Sale of real estate assets and investments, net             (19A)  281,661     131,921         --      61,191  
Commercial centers operations                                      142,957     311,893    347,056      31,057  
Hotels operations and management                            (19B)  270,057     218,365    189,205      58,670  
Sale of medical systems                                             75,713      44,049         --      16,449  
Realization of investments                                  (19C)    1,958      16,415     45,129         425  
Other operational income                                    (19D)   44,409      13,238     13,495       9,648  
                                                                   -------     -------    -------     -------  
                                                                   816,755     735,881    594,885     177,440  
                                                                   -------     -------    -------     -------  
COSTS AND EXPENSES                                                                                             
Commercial centers operations                               (19E)  157,640     271,392    257,913      34,248  
Hotels operations and management                            (19F)  259,293     207,152    188,672      56,331  
Cost and expenses of medical systems operation              (19G)   49,577      26,039      8,720      10,771  
Other operational expenses                                  (19H)   46,793       3,655      3,510      10,166  
Research and development expenses, net                      (19I)   58,899      38,158     43,719      12,796  
General and administrative expenses                         (19J)   36,939      43,627     42,144       8,025  
Share in losses of associated companies, net                        12,028      15,968     20,951       2,613  
Financial expenses, net                                     (19K)  122,321      53,569    211,821      26,574  
Other expenses, net                                         (19L)   57,106      51,428     10,477      12,406  
                                                                   -------     -------    -------     -------  
                                                                   800,596     710,988    787,927     173,930  
                                                                   -------     -------    -------     -------  
PROFIT (LOSS) BEFORE INCOME TAXES                                   16,159      24,893   (193,042)      3,510  
Income taxes (tax benefits)                                  (16)    7,798      15,804    (20,217)      1,694  
                                                                   -------     -------    -------     -------  
PROFIT (LOSS) AFTER INCOME TAXES                                     8,361       9,089   (172,825)      1,816  
Minority interest in results of subsidiaries, net                   73,287      27,448     48,671      15,922  
                                                                   -------     -------    -------     -------  
PROFIT (LOSS) FROM CONTINUING OPERATION                             81,648      36,537   (124,154)     17,738  
Profit from discontinuing operation, net                     (22)    5,917       6,810     12,073       1,285  
cumulative effect of accounting change at the                                                                  
   beginning of the year                                     (2L)     (622)         --         --        (135) 
                                                                   -------     -------    -------     -------  
NET INCOME (LOSS)                                                   86,943      43,347   (112,081)     18,888  
                                                                   =======     =======    =======     =======  
EARNINGS (LOSS) PER SHARE - (IN NIS)                        (19M)                                              
Basic earnings (loss) per share:                                                                               
   From continuing operation                                          3.66        1.59      (5.56)       0.80  
   From discontinuing operation                                       0.27        0.30       0.54        0.06  
   Cumulative effect for the  beginning of the year due to                                                     
      a change in accounting method                                  (0.03)         --         --       (0.01) 
                                                                   -------     -------    -------     -------  
   Basic earnings (loss) per share                                    3.90        1.89      (5.02)       0.85  
                                                                   =======     =======    =======     =======  

(*)  Reclassified - see Note 2C. below.                                         

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                                        [Enlarge/Download Table]

                                                                                                                DIVIDEND            
                                                       CUMULATIVE                                   LOANS TO    DECLARED            
                                                        FOREIGN                                   EMPLOYEES TO    AFTER             
                                    SHARE               CURRENCY                                     ACQUIRE     BALANCE            
                                   CAPITAL   CAPITAL  TRANSLATION  RETAINED    GROSS    TREASURY     COMPANY      SHEET             
                                     (1)    RESERVES  ADJUSTMENTS  EARNINGS    AMOUNT     STOCK      SHARES       DATE      TOTAL   
                                   -------  --------  -----------  --------  ---------  --------  ------------  --------  --------- 
                                                                           (IN THOUSAND NIS)                                        
                                                                                                                                    
BALANCE - JANUARY 1, 2003                                                                                                           
   (ADJUSTED AMOUNTS)               33,028   465,766    135,748     481,728  1,116,270   (40,291)   (14,443)          --  1,061,536 
Loss for the year                       --        --         --    (112,081)  (112,081)       --         --           --   (112,081)
Differences from                                                                                                                    
   translation of autonomous                                                                                                        
   foreign entities' financial                                                                                                      
   statements (2)                       --        --      4,191          --      4,191        --         --           --      4,191 
Employee shares premium                 --     1,073         --          --      1,073        --     (1,073)          --         -- 
                                    ------   -------     ------     -------  ---------  --------    -------      -------  --------- 
BALANCE - DECEMBER 31, 2003                                                                                                         
   (ADJUSTED AMOUNTS)               33,028   466,839    139,939     369,647  1,009,453   (40,291)   (15,516)          --    953,646 
Net income for the year                 --        --         --      43,347     43,347        --         --           --     43,347 
Issuance of shares (Note 18B(ii))      623    18,283         --          --     18,906        --         --           --     18,906 
Differences from                                                                                                                    
   translation of autonomous                                                                                                        
   foreign entities' financial                                                                                                      
   statements (2)                       --        --    (89,321)         --    (89,321)       --         --           --    (89,321)
Self-purchase of Company's shares                                                                                                   
   (Note 18B(iv))                       --        --         --          --         --  (138,519)        --           --   (138,519)
Sale of treasury stock                                                                                                              
   (Note 18B(iii))                      --    (2,725)        --          --     (2,725)   16,427         --           --     13,702 
Employee shares premium                 --     1,821         --          --      1,821        --        386           --      2,207 
Declared dividend in respect of                                                                                                     
   shareholders outside the                                                                                                         
   group, other than employees                                                                                                      
   (Note 18D(i))                        --        --         --    (153,938)  (153,938)       --         --      153,938         -- 
                                    ------   -------     ------     -------  ---------  --------    -------      -------  --------- 
BALANCE - DECEMBER 31, 2004                                                                                                         
   (REPORTED AMOUNTS)               33,651   484,218     50,618     259,056    827,543  (162,383)   (15,130)     153,938    803,968 
Net income for the year                 --        --         --      86,943     86,943        --         --           --     86,943 
Issue of shares to the minority                                                                                                     
   shareholders of Elscint (Note                                                                                                    
   9B(1))                            3,479   288,728         --          --    292,207        --         --           --    292,207 
Exercise of warrants                                                                                                                
   (Note 20A(4))                       350    15,645         --          --     15,995        --         --           --     15,995 
Differences from translation of                                                                                                     
   autonomous foreign entities'                                                                                                     
   financial statements (2)             --        --     23,806          --     23,806        --         --           --     23,806 
Dividend paid (Note 18D(i))             --        --         --          --         --        --         --     (153,938)  (153,938)
Repayment of loans as a result of                                                                                                   
   the realization by employees                                                                                                     
   of rights to shares                  --        --         --          --         --        --      6,781           --      6,781 
Loans to employees of Elscint in                                                                                                    
   relation to shares  issued as                                                                                                    
   part of the merger                   --        --         --          --         --        --    (10,112)          --    (10,112)
Employee shares premium                 --       573         --          --        573        --       (573)          --         -- 
Declared dividend in respect of                                                                                                     
   shareholders outside the                                                                                                         
   group, other than employees                                                                                                      
   (Note 18D(ii))                       --        --         --    (126,839)  (126,839)       --         --      126,839         -- 
                                    ------   -------     ------     -------  ---------  --------    -------      -------  --------- 
                                    37,480   789,164     74,424     219,160  1,120,228  (162,383)   (19,034)     126,839  1,065,650 
Cumulative effect of accounting                                                                                                     
   change at the beginning of the                                                                                                   
   year                                 --        --     (6,552)     (3,688)   (10,240)       --         --           --    (10,240)
                                    ------   -------     ------     -------  ---------  --------    -------      -------  --------- 
BALANCE - DECEMBER 31, 2005                                                                                                         
   (REPORTED AMOUNTS)               37,480   789,164     67,872     215,472  1,109,988  (162,383)   (19,034)     126,839  1,055,410 
                                    ======   =======     ======     =======  =========  ========    =======      =======  ========= 

(1)  As of December 31, 2005 - net of 2,842,400 "dormant" shares and 524,187    
shares held by Elscint Ltd.                                           

The accompanying notes to the financial statements constitute an integral part
thereof.

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(2)  Net, after realization of capital reserves (see Note 19A.(i) below).       

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                                                        [Enlarge/Download Table]

                                                                                                               DIVIDEND          
                                                        CUMULATIVE                                 LOANS TO    DECLARED          
                                                         FOREIGN                                 EMPLOYEES TO    AFTER           
                                     SHARE               CURRENCY                                   ACQUIRE     BALANCE          
                                    CAPITAL   CAPITAL  TRANSLATION  RETAINED   GROSS   TREASURY     COMPANY      SHEET           
                                      (1)    RESERVES  ADJUSTMENTS  EARNINGS   AMOUNT    STOCK      SHARES       DATE     TOTAL  
                                    -------  --------  -----------  --------  -------  --------  ------------  --------  ------- 
                                                                CONVENIENCE TRANSLATION INTO US$'000                             
                                                                                                                                 
BALANCE -                                                                                                                        
   JANUARY 1, 2005                   7,311    105,196     10,997     56,280   179,784  (35,278)     (3,287)     33,443   174,662 
Net income for the year                 --         --         --     18,888    18,888       --          --          --    18,888 
Issue of shares to the minority                                                                                                  
   shareholders of Elscint (Note                                                                                                 
   9B(1))                              756     62,726         --         --    63,482       --          --          --    63,482 
Exercise of warrants                                                                                                             
   (Note 20A(4))                        76      3,399         --         --     3,475       --          --          --     3,475 
Differences from translation of                                                                                                  
   autonomous foreign entities'                                                                                                  
   financial statements (2)             --         --      5,172         --     5,172       --          --          --     5,172 
Dividend paid                                                                                                                    
   (Note 18D(i))                        --         --         --         --        --       --          --     (33,443)  (33,443)
Repayment of loans as a result of                                                                                                
   the realization by employees of                                                                                               
   rights to shares                     --         --         --         --        --       --       1,473          --     1,473 
Loans to employees of Elscint in                                                                                                 
   relation to shares issued as                                                                                                  
   part of the merger                   --         --         --         --        --       --      (2,197)         --    (2,197)
Employee shares premium                 --        124         --         --       124       --        (124)         --        -- 
Declared dividend in respect of                                                                                                  
   shareholders outside the group,                                                                                               
   other than employees                                                                                                          
   (Note 18D(ii))                       --         --         --    (27,556)  (27,556)      --          --      27,556        -- 
                                     -----    -------     ------    -------   -------  -------      ------     -------   ------- 
                                     8,143    171,445     16,169     47,612   243,369  (35,278)     (4,135)     27,556   231,512 
Cumulative effect of accounting                                                                                                  
   change at the beginning of the                                                                                                
   year                                 --         --     (1,424)      (801)   (2,225)      --          --          --    (2,225)
                                     -----    -------     ------    -------   -------  -------      ------     -------   ------- 
BALANCE - DECEMBER 31, 2005          8,143    171,445     14,745     46,811   241,144  (35,278)     (4,135)     27,556   229,287 
                                     =====    =======     ======    =======   =======  =======      ======     =======   ======= 

(1)  As of December 31, 2005 - net of 2,842,400 "dormant" shares and 524,187    
shares held by Elscint Ltd.                                           

(2)  Net, after realization of capital reserves (see Note 19A.(i) below).       

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                              YEAR ENDED DECEMBER 31           
                                                   --------------------------------------------
                                                                                        2005   
                                                                                      REPORTED 
                                                     2005       2004       2003     CONVENIENCE
                                                   REPORTED   REPORTED   ADJUSTED   TRANSLATION
                                                   --------   --------   --------   -----------
                                                          (IN THOUSAND NIS)           US$'000  
                                                                                               
CASH FLOWS FROM OPERATING ACTIVITIES                                                           
Net profit (loss) for the year                       86,943     43,347   (112,081)     18,888  
Adjustments required to present cash and                                                       
   cash equivalents from continuing                                                            
   operating activities (Appendix A)               (189,640)   (64,553)   109,794     (41,199) 
                                                   --------   --------   --------     -------  
Net cash used in continuing operating activities   (102,697)   (21,206)    (2,287)    (22,311) 
Net cash provided by (used in) discontinuing                                                   
   operating activities                               3,589       (356)    (6,046)        780  
                                                   --------   --------   --------     -------  
NET CASH USED IN OPERATING ACTIVITIES               (99,108)   (21,562)    (8,333)    (21,531) 
                                                   --------   --------   --------     -------  
CASH FLOWS FROM INVESTING ACTIVITIES                                                           
Investment in initially-consolidated subsidiaries                                              
   (Appendix C)                                    (117,666)   (35,546)   (18,070)    (25,563) 
Purchase of fixed assets and other assets          (435,810)  (373,454)  (540,299)    (94,680) 
Proceeds from realization of fixed assets,                                                     
   investments and loans                              7,811     59,310     14,444       1,697  
Proceeds from realization of investments in                                                    
   subsidiaries (Appendix D)                        524,482    412,005         --     113,945  
Investments (including by loans) in investee and                                               
   other companies                                  (10,815)    (3,090)   (30,027)     (2,350) 
Proceeds from realization of long term deposits      18,579      8,965    252,124       4,036  
Short-term deposits and marketable securities,                                                 
   net                                               18,915     58,147    358,551       4,109  
                                                   --------   --------   --------     -------  
Net cash provided by continuing investing                                                      
   activities                                         5,496    126,337     36,723       1,194  
Net cash provided by (used in) discontinuing                                                   
   investing activities                                  --      2,144     94,720          --  
                                                   --------   --------   --------     -------  
NET CASH PROVIDED BY INVESTING ACTIVITIES             5,496    128,481    131,443       1,194  
                                                   --------   --------   --------     -------  
CASH FLOWS FROM FINANCING ACTIVITIES                                                           
Issuance of shares, by a subsidiary, to its                                                    
   minority shareholders                                 --     13,492     12,469          --  
Excercise of options into shares                     15,995         --         --       3,475  
Dividend Paid                                      (153,938)        --         --     (33,443) 
Self-purchase of Company's shares                        --   (138,519)        --          --  
Issuance of convertible debentures by a                                                        
   subsidiary to its minority shareholders               --     60,234         --          --  
Receipt of long-term loans                          437,407    722,089    521,506      95,027  
Repayment of long-term loans                        (71,669)  (503,706)  (523,715)    (15,570) 
Short-term credit, net                               15,932    (77,718)  (185,255)      3,461  
                                                   --------   --------   --------     -------  
NET CASH PROVIDED BY (USED IN) FINANCING                                                       
   ACTIVITIES                                       243,727     75,872   (174,995)     52,950  
                                                   --------   --------   --------     -------  
NET EFFECT ON CASH DUE TO CURRENCY EXCHANGE RATES                                              
   CHANGES                                           (6,516)      (522)     3,959      (1,416) 
                                                   --------   --------   --------     -------  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    143,599    182,269    (47,926)     31,197  
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE                                              
   YEAR                                             345,745    163,476    211,402      75,113  
                                                   --------   --------   --------     -------  
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR    489,344    345,745    163,476     106,310  
                                                   ========   ========   ========     =======  

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)

                                                        [Enlarge/Download Table]

                                                                   YEAR ENDED DECEMBER 31           
                                                        --------------------------------------------
                                                                                             2005   
                                                                                           REPORTED 
                                                          2005       2004       2003     CONVENIENCE
                                                        REPORTED   REPORTED   ADJUSTED   TRANSLATION
                                                        --------   --------   --------   -----------
                                                              (IN THOUSAND NIS)            US$'000  
                                                                                                    
APPENDIX A -                                                                                        
ADJUSTMENTS REQUIRED TO PRESENT CASH AND                                                            
   CASH EQUIVALENTS FROM CONTINUING OPERATING                                                       
   ACTIVITIES                                                                                       

INCOME AND EXPENSES NOT INVOLVING CASH FLOWS:                                                       
Discontinuing operation                                   (5,917)    (6,810)   (12,073)     (1,285) 
Depreciation and amortization (including                                                            
   impairment of investments and assets)                 129,356    191,752    175,346      28,103  
Share in losses of associated companies                   12,028     15,968     20,951       2,613  
Minority interest in results of subsidiaries             (73,287)   (27,448)   (48,671)    (15,922) 
Loss from realization of assets and liabilities           21,836     12,201      7,808       4,744  
Exchange-rate differences on loans and                                                              
   deposits, net                                          25,677   (104,679)    62,646       5,578  
Profit from realization of investments                  (283,619)  (148,334)   (45,129)    (61,617) 
Profit from realization of monetary balances of a                                                   
   capital-nature in investee companies                       --    (12,378)   (32,253)         --  
Deferred taxes                                             2,682     12,516    (29,580)        583  
Others                                                     3,761       (274)    (1,886)        817  

CHANGES IN ASSETS AND LIABILITIES:                                                                  
Trade accounts receivables                               (24,140)    (6,023)    12,774      (5,244) 
Receivables and other debit balances                     (10,142)    15,102     (9,694)     (2,203) 
Long-term receivables                                     (2,946)    (5,354)    (5,113)       (640) 
Inventories                                              (12,952)    (2,646)    (1,069)     (2,814) 
Suppliers and service providers                           13,502     (1,997)     5,416       2,933  
Payables and other credit balances                        14,521      3,851     10,321       3,155  
                                                        --------   --------    -------     -------  
                                                        (189,640)   (64,553)   109,794     (41,199) 
                                                        ========   ========    =======     =======  
APPENDIX B -                                                                                        
NON-CASH TRANSACTIONS                                                                               

Acquisition of fixed assets and other assets by credit    62,533     18,570     34,064      13,585  
                                                        ========   ========    =======     =======  

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)

                                                        [Enlarge/Download Table]

                                                                YEAR ENDED DECEMBER 31            
                                                  ------------------------------------------------
                                                                                           2005   
                                                                                         REPORTED 
                                                     2005         2004        2003     CONVENIENCE
                                                   REPORTED     REPORTED    ADJUSTED   TRANSLATION
                                                  ----------   ----------   --------   -----------
                                                           (IN THOUSAND NIS)             US$'000  
                                                                                                  
APPENDIX C -                                                                                      
INITIALLY CONSOLIDATED SUBSIDIARIES                                                               
Deficit in working capital (excluding cash), net       1,769           28      3,535         384  
Long-term receivables, investments and deposits         (387)          --         --         (84) 
Fixed assets and other assets                       (226,469)     (35,706)   (32,955)    (49,200) 
Long-term liabilities                                107,421          132     11,350      23,337  
                                                  ----------   ----------    -------    --------  
                                                    (117,666)     (35,546)   (18,070)    (25,563) 
                                                  ==========   ==========    =======    ========  
APPENDIX D -                                                                                      
PROCEEDS FROM REALIZATION OF INVESTMENTS IN                                                       
   SUBSIDIARIES                                                                                   

Working capital (excluding cash), net                 17,775        1,347         --       3,862  
Fixed assets and other assets                      1,167,940    1,585,181         --     253,734  
Long term loans                                   (1,022,113)  (1,091,661)        --    (222,054) 
Other long term receivables                           39,563      (61,452)        --       8,595  
Profit from realization of subsidiaries              281,661      131,921         --      61,191  
Realization of capital reserves from foreign                                                      
   currency translation adjustments                   39,656     (153,331)        --       8,617  
                                                  ----------   ----------    -------    --------  
                                                     524,482      412,005         --     113,945  
                                                  ==========   ==========    =======    ========  

The accompanying notes to the financial statements constitute an integral part
thereof.

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL                                                                

A.   The Company engages, directly and through its investee companies, in Israel
and abroad, mainly in the following areas:                            

     -    Initiation, construction, operation, management and sale of commercial
         and entertainment centers in Israel and in Central and Eastern Europe
(see also Note 2C. below).                                  

-    Hotels ownership, primarily in major European cities, as well as 
operation, management and sale of same.                     

-    Long term leases of real estate property.                        

    -    Investments in the research and development, production and marketing
     of magnetic resonance imaging guided focused ultrasound treatment
          equipment, through Insightec Ltd. (formerly - Insightec - Image Guided
Treatment Ltd.) ("Insightec").                              

    -    Distributing and marketing of woman's fashion and accessories through
   its wholly owned Israeli subsidiary - Mango Israel Clothing and
Footwear Ltd. ("Mango").                                    

-    Venture-capital investments.                                     

B.   The Company's shares are registered for trade on the Tel Aviv Stock        
Exchange and in the United States on NASDAQ.                          

C.   DEFINITIONS:                                                               

The Company -                  Elbit Medical Imaging Ltd. ("EMI").    

Subsidiaries                                                          
  (consolidated companies) -     companies which over 50% of voting rights
                                 thereof or of rights to appoint directors
                            therein are vested with the Company.

Proportionately consolidated                                          
companies -                    companies and joint ventures (including
                              partnerships) which the Company holds,
                                 together with other entities, among which
                                there exists a contractual agreement for
                                 joint control, and the decision making in
                                 areas vital to the joint venture is to be
                                made jointly and with the consent of all
                             interest-holders, and which financial
                                 statements are consolidated with those of
                        the Company by the proportionate
             consolidation method.

    Associated companies -         companies in which the Company's (direct or
                               indirect) rights entitle it to exercise
                                    significant influence on their financial and
                             operational policies, which have been
                                  included on the basis of the equity method
                         in accordance with the principles
                                  established by Opinion No. 68 of Institute
                              of the Certified Public Accountants in
                                   Israel ("ICPAI") and which are not fully or
                     proportionately consolidated.

Investee companies -           consolidated companies, proportionately
                             consolidated companies and associated
                                   companies. For a list of principal investee
                                   companies - see Appendix to these financial
   statements.

Acquisition and/or holding                                            
and/or ownership                                                      
and/or control -               whether directly or indirectly, through
                        Israeli or foreign subsidiaries.

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Group -                        the Company and its investee companies.

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL (CONT.)                                                        

C.   DEFINITIONS (CONT.):                                                       

Parent company -               Europe Israel (M.M.S.) Ltd. ("EIL").   

     Europe Israel Group -          Europe Israel (M.M.S.) Ltd. and its investee
  companies.

Control Centers -              Control Centers Ltd. - the controlling 
                                  shareholder of Europe Israel (M.M.S.) Ltd.

    Control Centers Group -        Control Centers and its investee companies.

     Related parties -              as defined in terms of Opinion No. 29 of the
ICPAI.  

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES                                        

A.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS                                   

(1)  GENERAL                                                          

      Through December 31, 2003, the Company's financial statements were
       prepared in adjusted values (in NIS of constant purchase power), on
     the basis of changes in the consumer price index ("Inflation" and
  "CPI"), in accordance with Opinions No. 36 and 50 of the ICPAI
   ("Opinion 36" and "Opinion 50"). On January 1, 2004, Accounting
          Standard No. 12 of the Israel Accounting Standards Board ("IASB") came
 into force and effect ("Standard 12"). In accordance with the
        provisions of Standard 12, adjustment of financial statements to the
   inflation shall cease 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 periods commencing January 1, 2004 were,
    therefore, included in values to be hereinafter referred to as -
"Reported amounts".                                         

      The Company maintains its accounting records on a current basis in
  nominal NIS. Nominal amounts were adjusted to their respective
          reported amounts herein, based on the principles detailed in section 2
       below, in accordance with the provisions of Standard 12. Therefore,
         commencing January 1, 2004, the financial statements are presented on
         the basis of the historical (original) values convention, in reported
amounts.                                                    

          The term "cost" in the financial statements indicates cost in reported
       amounts (or adjusted, as the case may be), unless otherwise stated.

CONVENIENCE TRANSLATION                                     

          The financial statements as of December 31, 2005 and for the year then
        ended have been translated into U.S. dollar using the representative
          exchange rate as of that date (U.S.$1.0 = NIS 4.603). Such translation
       was made solely for the convenience of the U.S. readers. The dollar
    amounts so presented in these financial statements should not be
         construed as representing amounts receivable or payable in dollars or
         convertible into dollars but rather a translation of reported amounts
into U.S. dollars, unless otherwise indicated.              

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

A.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT.)                           

    (2)  PRINCIPLES OF ADJUSTMENT OF NOMINAL VALUE AMOUNTS TO THEIR RESPECTIVE
REPORTED AMOUNT                                             

BALANCE SHEET                                               

       The balance-sheet items have been included in the following manner:

          Non-monetary items (mainly fixed assets and other assets, depreciation
   thereof, and share capital) have been adjusted according to the
     changes in the CPI from their respective acquisition or formation
          date, as the case may be, through December 2003 and from such date (or
          the acquisition or formation date, whichever be the later) through the
        balance-sheet date - with no further adjustment (in nominal values).

     Monetary items (representing amounts receivable or payable at par
      value or which are presented in realizable values) are included in
their nominal values.                                       

        The value of investments in investee companies and minority interest
      in subsidiaries have been determined on the basis of the financial
        statements of those companies, in reported values (through 2003 - in
       adjusted values). As to foreign autonomous investee companies - see
section (3) below.                                          

      Reported values (or adjusted, as the case may be), of non-monetary
     assets do not necessarily represent realizable or actual economic
       value, but rather the original values calculated in accordance with
the above stated principles.                                

STATEMENT OF OPERATIONS                                     

      Statement of operations' items have been included in the following
manner:                                                     

     Revenues and expenses, including financial expenses and excluding
        those generated from non-monetary items, have been recorded in their
    nominal values (such revenues and expenses with the exclusion of
         financial expenses were adjusted - during the year ended December 31,
      2003 - to the changes in the CPI from the date of each transaction
     through December 31, 2003; the financing item reflected financial
    expenses net of financial income in real terms (e.g. interest on
       deposits and credits), results of marketable securities, activities
         and inflationary erosion of monetary items deriving from transactions
included in the statements of operations).                  

Income and expenses stemming from non-monetary items (mainly
    depreciation, amortization and changes in inventories) have been
     recorded on the basis of principles used for the inclusion in the
balance sheet, of the items to which they relate.           

      The Company's share as well as minority interest in the results of
    investee companies were determined on the basis of the financial
       statements thereof in reported amounts (in adjusted values - though
     December 2003). As to foreign autonomous investee companies - see
section (3)(i), below.                                      

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

A.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT.)                           

(3)  FOREIGN INVESTEE COMPANIES                                       

         (i)  Investee companies that operate outside the borders of the state
        of residence of their holding entity, and which constitute
              autonomous entities, prepared their financial statements through
             December 31, 2003 in accordance with the principles established
              in Opinion 36 (including Interpretations No. 8 and 9 thereon) in
               the currency of their country of residence adjusted to changes in
     the CPI of such country. Such financial statements were
            translated into the holdings entity's reporting currency using
       the exchange rate prevailing as at the balance sheet date
         ("translation" and "closing rate"). Differences between (i)
       adjusted amount of the holding entity's investment in the
  investee companies (including monetary balances of a
            capital-nature), based on changes in the CPI of the country of
             residence of such holding entity; and (ii) the holding entity's
          share in the adjusted shareholders' equity of these investee
        companies as aforestated, as translated into the reporting
              currency of the holding entity as per closing rates, are charged
       to the "Capital reserve from foreign currency translation
               adjustments of autonomous foreign entities' financial statements"
           within shareholders' equity. Exchange differences relating to
              foreign currency loans used to finance investments in autonomous
          foreign entities in same currency, were also charged to said
             capital reserve. Income taxes relating to such differences have
      also been included in that item of shareholders' equity.

               Upon the realization of an autonomous foreign entity, in whole or
        in part (including realization as a result of a decline in
               holding percentage arising from the issuance of shares to a third
      party or through the repayment of monetary balances of a
            capital-nature), such foreign currency translation adjustments
              relating to the realized investment are charged to the statement
of operations as other income (expense).          

        As from January 1 2004, financial statements of autonomous
            foreign entities were prepared based on principles detailed in
               section (2) above. On January 1, 2004, accounting standard No. 13
             of the IASB came into force and effect, regarding the effect of
            the changes in foreign currency exchange rates, which provides
          for translation of foreign currency transactions and foreign
               operations' financial statements for the inclusion thereof in the
               financial statements of the reporting entity ("Standard 13"). The
             principal provisions of Standard 13 that differ from accounting
               principles used through December 31, 2003 and are relevant to the
group companies' autonomous foreign entities, are:

              -    Translation of revenues and expenses as well as cash flows,
              of foreign operations constituting "autonomous foreign
          entities" based on exchange rate as at the date of
                    transaction or cash flow, as the case may be, or for sake of
                  practicality - using average exchange rate for the period,
                as opposed to principles used prior to December 31, 2003
          which provided for translation of all items of the
                   "autonomous foreign entities" financial statements based on
                 closing rates. Exchange rate differences that result from
                 the difference between translation method of revenues and
              expenses (average) to that of the shareholders' equity
               (closing rate) are charged to the "Capital reserve from
              foreign currency translation adjustments of autonomous
                    foreign entities' financial statements" within shareholders'
equity.                                 

        -    Goodwill generated upon acquisition of an "autonomous
             foreign entity" shall be regarded as an asset of such
                    autonomous foreign entity and be translated based on closing
                  rates, as opposed to principles used prior to December 31,
                2003 whereby said goodwill was considered an independent
 non-monetary item, of the holding entity.

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

A.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT.)                           

(3)  FOREIGN INVESTEE COMPANIES (CONT.)                               

(i)  (Cont.)                                                

              -    Classification of foreign operations as "autonomous foreign
                    entity" or as an "integral foreign operation of the Company"
             based on indicators stipulated in the standard, while
                  exercising management discretion, as opposed to principles
              used prior to December 31, 2003 which provided for the
                  fulfillment of certain cumulative tests in order to define
                 foreign operations as "autonomous foreign entity" with no
management discretion.                  

            -    Adjustment of financial statements of "autonomous foreign
               entities" prior to translation thereof to the reporting
           currency of the reporting entity, which, as per the
                    principles in effect prior to December 31, 2003 was possible
                   in any case, shall only be carried out when the "autonomous
        foreign entity" operates in a hyper-inflationary
                 environment. In such instances, translation of the entire
                  financial statements shall be carried out based on closing
rates.                                  

         (ii) The entering into effect of Standards 12 and 13 have superseded,
           the provisions of Opinion 36 (which determined the CPI of the
              country of residence to be the measurement basis of the adjusted
       financial statements) and Interpretations 8 and 9 thereon
              (pertaining to the principles governing the determination of the
           measurement basis and translation rules of autonomous foreign
      entities). Upon the termination of Opinion 36 (including
        Interpretations 8 and 9) on January 1, 2004, and given the
              absance of any specific standard in Israel as to the "functional
       currency" of autonomous foreign entities, group companies
              constituting autonomous foreign entities, adopted the principles
            set forth by international standards (International Accounting
             Standard No. 21 (as revised) (IAS- 21) and SIC19). Accordingly,
     the functional currency is that of the primary economic
          environment in which the investee company operates (normally
            being the currency in which it primarily generates and expends
               cash) and that, in the judgment of management, exercised based on
           qualitative criteria stipulated in the standard, reflects the
           economic substance of the underlying events and circumstances
               relevant to such investee company, a currency which has been used
              to a significant extent in its operations or alternatively which
             has a significant impact thereon (mainly, the economic currency
        which serve as basis for determination of: (i) selling and
            settlement prices with customers; (ii) transactions prices for
           land acquisition and construction services or settlement with
        suppliers and subcontractors; (iii) currency policy of the
     investee company; (iv) its financing activities, etc.).

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ELBIT MEDICAL IMAGING LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

A.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS (CONT.)                           

(3)  FOREIGN INVESTEE COMPANIES (CONT.)                               

       (iii) On May 1, 2004, several countries, among them Hungary, Poland
            and the Czech Republic (countries in which the majority of the
             operation of Plaza Centers (Europe) B.V. ("PC") in the field of
            commercial and entertainment centers, is concentrated), 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. Prior to
               their joining, those countries took significant action pertaining
              thereto, such as: alterating their monetary and fiscal policies,
         including full liberalization of their currency regimes and
      lifting of foreign currency controls (such as liberty to
         transact, transfer and execute payment in foreign currency,
            allowing free trading in the local currency abroad, lifting of
       the restrictions on transferring foreign currency abroad,
               allowing free unlimited trading in foreign securities, reporting,
              etc.). As a result, the PC Group companies that are incorporated
        and operate in Hungary, Poland and the Czech Republic (the
             "Companies") deemed it necessary to reconsider their settlement
           currency with lessees ("Settlement Currency"), the nature and
            scope of protection of the value of their financial assets and
               liabilities, their currency risk management policy, etc. In light
        of the foregoing and concurrently therewith, the Companies
      reconsidered their operational and measurement currency.
               Following examination of the international standards criteria (as
        hereinabove mentioned), 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 (transactions) of the companies,
              affecting the management policy and decision-making processes as
well as the transactions (revenues and cost of    
       acquisition/construction of assets), the scope and prices
            thereof, the currency risk policy and the financing operations
              thereof. Accordingly, the Euro serves as the functional currency
           of these companies starting from April 1, 2004. Book value of
           non-monetary items included in the balance for March 31, 2004
             have been translated into Euro based on its prevailing exchange
              rate with local currencies at that date, and such amounts served
            as basis for the value of such items (in Euro), as recorded in
             the financial statements for reporting periods commencing April
1, 2004.                                          

B.   CONSOLIDATED FINANCIAL STATEMENTS                                          

   The consolidated financial statements include the financial statements of
     the Company and its subsidiaries. Results of operations of subsidiaries are
 included, as from the date of incorporation or proximate to the date of
acquisition thereof by the Company, as the case may be, through each  
balance-sheet date, or a date proximate to sale thereof (or voluntary 
liquidation), whichever be the earlier.                               

Assets, liabilities and operations of jointly controlled companies and
  ventures have been included in the consolidated financial statements, on
 the basis of the proportionate-consolidation method, in accordance with
principles established by Opinion no. 57 of the ICPAI.                

Data extracted from amounts included in financial statements of       
subsidiaries, have been included within the consolidated financial    
statements following adjustments required for compliance with unified 
accounting principles used by the Group.                              

 Material inter-company balances and transactions (including convertible
  debentures issued by a subsidiary and partially acquired by the Company)
have been eliminated in the consolidated financial statements.        

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

B.   CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                                  

    Profits generated from intercompany transactions, the results of which are
    attributable to assets, which at the respective balance-sheet date had not
been realized to third parties, were eliminated in the consolidated   
financial statements.                                                 

C.   PRESENTATION METHOD OF STATEMENT OF OPERATIONS AND THE CHANGE THEREOF      

     Significant recent global changes, particularly in the real estate business
    in which the Company operates, enable it to utilize its relative advantage
     in same. Such changes include, among others, decrease in commercial assets'
long-term yield rates; low short term interest rates, rapid financial 
   progress in developing markets and transformation thereof to more readily
accessible geographical targets. Concurrently with such changes and   
  consequently thereto, a significant increase was noted in the demand for
real assets, both by private, as well as by institutional investors,  
   pension funds, REIT funds, and others. The above mentioned global changes
  together with the completion of the July 2005 transaction between PC and
  Klepierre, (as elaborated in Note 9B(3)d., below), led the management to
reexamine the Company's nature of activity while attempting to        
   strategically alter its business. The core of such change is expressed in
evolving, the major part of the Company's business activities from the
entrepreneurship, development and operation of various commercial real
 estate assets in the medium to long term, into the entrepreneurship and
     development of such assets supported by short term management and operation
 activities with the principal objective of founding and stabilizing the
assets for the sale thereof, as closely as possible to completion of  
construction, and/or into the construction of assets under pre-sale   
development agreements executed with third parties. The reexamination 
 resulted in redefinition of the Company's operations and business, such
    that sales of its operational assets, are included therein, whereas during
     previous reporting periods such sales and the results thereof were excluded
from the Company's operational results.                               

Following the consummation of the various "exit" transactions which   
commenced during 2004 and continued in 2005, and in consequence of the
  change to the Company's business model as specified above, the Company's
management believes that the historical presentation format of its    
    statement of operations ("Multiple - step form") is no longer a meaningful
measure and presentation of the Company's business activities. 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 obtaining of the
   overall income and profits, and that any attempt to classify only part of
the expenses directly to revenues, would be less representational.    
  Management also believes that splitting such operational costs, directly
relating to identified operations, to separate items such as "cost of 
   sales", "selling and marketing expenses", and "general and administrative
 expenses", is not meaningful to the Company, (which has 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 or not taken
into account in determining the gross profit, requires significant    
discretion, often entailing inconsistent and insufficiently reliable  
accounting classification.                                            

    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 represented in one group
     ("Single - Step Form"), as opposed to the previously practiced presentation
     used ("Multiple - Step Form"). Accordingly, profit and loss items have been
     classified, as part of such change, by differentiating those costs directly
relating to each revenue type, and those which serve the business in  
general.                                                              

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

C.   PRESENTATION METHOD OF STATEMENT OF OPERATIONS AND THE CHANGE THEREOF      
(CONT.)                                                               

In view of the Company's management, 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. Comparative figures for the previous accounting years
have been reclassified accordingly.                                   

D.   CASH AND CASH EQUIVALENTS                                                  

   Cash equivalents include unrestricted liquid deposits, maturity period of
     which, as at the date of investments therein, does not exceed three months.

E.   ALLOWANCE FOR DOUBTFUL DEBTS                                               

  The allowance has been specifically determined in relation to debts, the
collection of which, in the opinion of management of the companies, is
doubtful.                                                             

F.   MARKETABLE SECURITIES                                                      

    Investments in marketable securities, designated by management for sale in
    the short term, are included in current assets at their market value as at
the balance-sheet date. Changes in the value of such securities are   
recorded in the statement of operations as incurred. Investments in   
  marketable securities not designated by management for sale in the short
   term and which are not part of the Group's liquid resources are presented
     at cost excluding events when, in the opinion of management, there exists a
decline in value of other - than -temporary nature.                   

G.   INVENTORIES                                                                

Inventory is stated at the lower of cost or market value, with cost   
determined as follows:                                                

Hotel inventory and merchandise - by the "first-in, first-out" method;

Raw materials - by the weighted average method;                       

Work-in-process and finished goods - by cost of material, labor and   
indirect manufacturing costs.                                         

H.   INVESTMENTS IN INVESTEE AND OTHER COMPANIES                                

 Investments in associated companies are presented by the equity method.

In circumstances where the Company's ownership in an investee company 
(mainly, venture capital investments) is in the form of preferred     
  securities or other senior securities, the Company records equity losses
     based on the ownership level of the particular investee securities or loans
extended by the Company to which the equity method losses are being   
applied.                                                              

 In calculating Company's share equity of investee companies, losses (if
any) deriving from expected realization of convertible securities or  
exercise of vested rights to shares issued by such investee companies 
  (including shares financed by loans, when such securities constitute the
 sole security for repayment of loans), are taken into consideration, if
     such conversion or exercise is probable. As for accounting standard No. 22,
which is effective from January 1, 2006 - see Note 2X.(i).            

  The excess of the investment's cost over the Company's share in the fair
   value of the investee companies' net identified assets at acquisition (or
    upon the change from the cost method to the equity method, as applicable),
   is recorded as goodwill and amortized over its estimated economic benefit
   period, (generally 10 years). As for accounting standard No. 20, which is
effective from January 1, 2006 - see Note 2X.(v).                     

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)                                

H.   INVESTMENTS IN INVESTEE AND OTHER COMPANIES (CONT.)                        

     Financing costs in respect of credit used for investment (shares and loans)
in companies engaged solely in the construction of projects, have been
capitalized to cost of investment.                                    

     Gain from issuance of shares to a third party by a research and development
  stage investee company, has been recorded as deferred income and charged
    to the statements of operations as other income, over three years or up to
     the holding entity's share in the losses of the investee company, whichever
is higher on a cumulative basis for each given year.                  

I.   FIXED ASSETS                                                               

    (1)  Fixed assets are stated at cost. Investment grants have been deducted
from cost of assets for which they have been granted.       

        The cost of the land and building construction includes, among other
things, costs in respect of contractual obligations for the 
        acquisition of land when the group companies' obligations thereunder
          are substantially finalized at the financial statement date (i.e., all
       major conditions required for the conclusion of the transaction and
      its implementation had been fulfilled) and the amounts thereof are
        determined. Amounts not yet paid as at each respective balance-sheet
date are presented, accordingly, as a liability.            

Improvements and renovations are charged to cost of assets. 
Maintenance and repair costs are charged to the statement of
operations as incurred.                                     

          Consideration paid for multiple assets acquired at an aggregate amount
      ("package") is allocated to the cost of the assets on the basis of
        value estimation and relatively to their fair value in that package.

Financing costs in real terms in respect of credit used for 
      acquisition or construction of buildings (including acquisition of
      related land) as well as direct supervision and construction costs
      incurred in the pre-operating period, have been capitalized to the
   cost of the buildings. As to the borrowing costs capitalization
principles - see item U below.                              

          Fixed assets acquired from controlling shareholders of the Company are
      included according to their reported book value in the controlling
       shareholders' financial statements immediately prior to acquisition
thereof.                                                    

     (2)  Depreciation is calculated by the straight-line method at annual rates
          deemed sufficient to depreciate the assets over their estimated useful
         lives. Leasehold improvements are amortized over the estimated useful
         period of use not exceeding the lease period (including the period of
renewal options that the company intends to exercise).      

Annual depreciation rates are as follows:                   

                                                                [Download Table]

                                     %        
                             -----------------
                                              
Freehold land                        0        
Leasehold land               Over lease period
Hotels                       1.1 - 1.5        
Commercial centers           2.0              
Other buildings              2.0 - 2.5        
Building operating systems   7.0 (average)    
Other fixed assets (*)       6.0 - 33.0       

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(*)  Consists of motor vehicles, aircraft, office furniture and equipment,      
 machinery and equipment, electronic equipment, computers and peripheral
equipment, software, leasehold improvements, etc.                     

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NOTE 2 -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)                               

J.   OTHER ASSETS AND DEFERRED EXPENSES                                         

    (1)  ACQUIRED PATENT RIGHTS, TECHNICAL KNOW-HOW, INTELLECTUAL PROPERTY AND
 DISTRIBUTION RIGHTS - are stated at cost and amortized by the
      straight-line method over its estimated benefit period (10 years).

(2)  PRE-OPERATING HOTEL AND/OR COMMERCIAL CENTER PRE-OPENING COSTS - 
         mainly - employee training, testing of systems and preparation of the
         hotel/center for opening, operation and occupancy, are stated at cost
          and amortized over a three-year period from commencement of full-scale
operations.                                                 

(3)  OPERATING COSTS RELATING TO INITIATION ACTIVITIES - (prior to    
         finalization of the investment transaction or land acquisition, etc.)
 are capitalized as incurred, when an investment or a property
         acquisition transaction is reasonably foreseeable, and are charged to
       the cost of the investment or the real estate project cost upon the
          execution of the investment or the acquisition. In circumstances where
          execution of investment or transaction is not probable or the expected
          economic benefit is doubtful, these costs are charged to the statement
of operations.                                              

   (4)  ENTERTAINMENT AND LEISURE FACILITIES OPERATING RIGHTS - are included
          at cost and amortized by the straight line method over their estimated
benefit period.