SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

For the Month of March 2008

SCAILEX CORPORATION LTD.
(Translation of Registrant’s Name into English)

16 Shenkar St, Entrance B,
Herzliya Pituach,
P.O.B. 12423
Israel, 46733

(Address of Principal Corporate Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of
Form 20-F or Form 40-F:

Form 20-F x Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form
is also furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities and
Exchange Act of 1934:

Yes o No x



On March 16, 2008, Scailex Corporation Ltd. (the “Company”) filed a report with the Israel Securities Authority (the “ISA”) and The Tel Aviv Stock Exchange (the “TASE”), translations from Hebrew of which are attached hereto as Exhibit 99.1-99.4 and incorporated herein by reference.

Exhibit 99.1 Periodic reports, December 31, 2007.

Exhibit 99.2 Directors’ Report, December 31, 2007.

Exhibit 99.3 Financial Statements, December 31, 2007.

Exhibit 99.4 Part D – additional information, December 31, 2007.

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SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.








March 18, 2008
SCAILEX CORPORATION LTD.


By: /s/ Shachar Rachim
——————————————
Shachar Rachim
Chief Financial Officer

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Exhibit 99.1

Scailex Corporation Ltd.

Periodic Report

Part A

Business Description

As of 31 December 2007



Contents

Chapter 1: General 4
 
     1.1. Description of Business 4
 
     1.2. Legend 5
 
Chapter 2: General Development of the Corporation's Business 6
 
     2.1. Corporation Operations and Business Development Description 6
 
     2.2. Segments of Operation 8
 
     2.3. Investments in the Corporation's Capital 8
 
     2.4. Distribution of Dividends 9
 
Chapter 3: Other Information 10
 
     3.1. Financial information on the corporation's segments of activity 10
 
     3.2. Developments in the financial data of the Company 10
 
     3.3. General environment and the effect of external concerns on the Company 11
 
Chapter 4: Description of the Corporation's Business by segments of Activity 12
 
     4.1. Description of discontinued segments of activity 12
 
     4.2. Fast digital printing segment 12
 
     4.3. Wide-format digital printing segment 13
 
     4.4. Continuous digital ink jet printing for industrial applications 15
 
     4.5. Additional Transactions of sales of Scailex holdings 16
 
     4.6. The Company's assets management sector and the spotting of investments and business
          opportunities 17
 
     4.7. Acquisition of Holding in ORL 17
 
     4.8. Regulatories approvals for Holding in ORL 29
 
     4.9. Fixed assets and facilities 32
 
     4.10. Human capital 33
 
     4.11. Investments 40
 

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     4.12. Financing 40
 
     4.13. Taxation 42
 
     4.14. Restrictions on and supervision of corporate business 43
 
     4.15. Material contracts 43
 
     4.16. Legal proceedings 43
 
     4.17. Business objectives and strategy 43
 
     4.18. Anticipated development over the next year 44
 
     4.19. Discussion of risk factors 44

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Chapter 1: General

1.1. Description of Business

  The Board of Directors of Scailex Corporation Ltd., is pleased to submit the business description of the Corporation as at December 31st, 2007, which reviews the Corporation and the development of its business in 2007 (hereinafter the "Report Period"). The Report has been prepared in compliance with the Securities Regulations (Periodic and Immediate Statements), -1970. Financial data included in the Report are stated in NIS at the exchange rate of the US Dollar as at December 31st, 2007 since the functional currency of the Company is the US dollar and the presentation currency is the NIS according to the guidelines of the Israeli Securities Authority. Unless otherwise indicated, claims in NIS are described in the financial statements at their nominal amount as at the date of submission of the claim.

  The holding percentages in companies fully owned by the holding company are attributed to the holding company. Unless otherwise indicated, the holding percentages are rounded up to the next full percent value.

  Unless otherwise indicated, the details that appear in this Report as updated to the date of the Report are updated to the date of its publication.

  The significance of the information included in this periodic Report, including the description of substantial transactions, has been evaluated from the perspective of the Company. In some cases, the description has been expanded to provide a more comprehensive overview of the subject described.

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1.2. Legend:

  For convenience purposes, the acronyms and abbreviations included in this Report shall have the meaning indicated next to them:

HP Hewlett Packard Company
PCH Petroleum Capital Holdings Ltd.
SDP Scailex Digital Printing Inc
Xerox Xerox Corporation
Object Object Geometrics Ltd.
ORA Oil Refineries Ashdod Ltd.
Bazan or ORL Oil Refineries Ltd.
Jemtex Jemtex Ink Jet Printing Ltd.
Financial Statements Audited financial statements of the Company as at December 31st, 2007
 
Dollar United States dollars
Discount Discounts Investment Ltd.
Stock Exchange The Tel Aviv Stock Exchange Ltd.
Israel Corp. Israeli Company Ltd.
The Commissioner The Commissioner of the antitrust authority.
The Authority Israeli securities Authority.
The Corporation or the Company Scailex Corporation Ltd.
 
The Antitrust Law Restrictive Trade Practice - 1988
Companies Law Companies Law -1999
Securities Law Securities Law -1968
Caol Carmel Olefines Ltd.
Clal Clal Industries and Investments Ltd.
Linura Linura Holding AG
Nasdaq The Nasdaq Global Market Burse in the US.
Scailex Scailex Corporation Ltd.
Scailex Vision Scailex Vision (Tel Aviv) Ltd
Paz Paz Oil Company Ltd.
Petrochemical Israel Petrochemical Enterprises Ltd.
Income Tax Ordinance Income Tax Ordinance (New Version) -1961
Vital Interests Order The Vital Interests Order (Declaration of Essential Interests in Oil Refineries Ltd.) -2007
 
ORL Group ORL and its subsidiaries
ICL group Israel Chemicals Ltd. and its subsidiaries.
Kodak Eastman Kodak Company
Real Time Real Time Image Ltd
NIS New Israeli Shekel

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Chapter 2: General Development of the Corporation’s Business

2.1. Corporation Operations and Business Development Description

  2.1.1. Description of the corporation’s business

  The Company incorporated in 1971 as a private Company which was engaged in development, manufacturing and marketing of colorful electronic printing systems. In the years 2004-2006 the Company sold all its operations in that field. Since the year 2006 the Company operates as a holding Company and most of its activities are the management of the Company’s assets, spotting of business opportunities and holding shares of ORL.

  In March 1980, the Company became a public company, and its shares began to be traded on the NASDAQ. In 2006, the Company was delisted from the NASDAQ, and its shares are now quoted on the OTC Bulletin Board. Since 2001, the Company’s shares have also been traded on the Tel-Aviv Stock Exchange.

  2.1.2. Holdings Diagram

  The following diagram describes the Company’s significant holdings as at the date of the report.

Dor Ventures Israel Ltd.

Jemtex Ink Jet Printing Ltd.

Real Time Image Ltd.

Petroleum Capital Holdings Ltd.

Scailex Vision (Tel Aviv) Ltd.

Oil Refineries Ltd.

77.04%

80.1%

SVA  disbursement

C Shell 201 * (formerly Tech Ink, SA)

Kovacs 183* SA

Kovacs 319* SA

Scailex Vision International Ltd.

15.76%

100%

100%

100%

100%

100%

Scailex Corporation Ltd.

15%

14.9%

13.2%

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  2.1.3. Year and Method of Incorporation

  The Company is a public company incorporated on November 2nd, 1971 pursuant to the laws of the State of Israel as a company limited by shares under the name Sci-Tex Corporation Ltd.. In January 1981, the Company changed its name to Scitex Corporation Ltd. In December 2005, the Company changed its name to its current name, Scailex Corporation Ltd.

  2.1.4. Structural Changes, Acquisition, Sale and Transfer of Significant Assets

2.1.4.1. From 1980 until October 23rd, 2006, the Company’s shares were traded at the NASDAQ Global Market (NASDAQ). On September 18th, 2006, the trade of the Company’s shares at NASDAQ was suspended and on October 23rd, 2006, the Company’s shares were delisted following the NASDAQ determination that the Company was a “Public Shell” (a non-operating business) due to the sale of its operations and assets. As at the date of the Report, the Company’s shares are traded on the Over the Counter (OTC) Bulletin Board in the United States.

  The Company’s shares are registered at the Tel Aviv Stock Exchange as of the year 2001.

2.1.4.2. In July 2006, the main shareholders of the Company, Discounts Investment Ltd. (Discount) and Clal Industries and Investments Ltd. (Clal) sold their entire holdings in the Company to Israel Petrochemical Enterprises Ltd. (Petrochemical) which turn to be the controlled company of the Company. For details, see clause 2.3.1.1.

2.1.4.3. In recent years, the Company sold the core of its operations and assets in the field of digital printing (for details on the discontinued operations – see clauses 4.1-4.4 below)

2.1.4.4. During 2007, the Company acquired, through PCH – a subsidiary under the Company’s control, 15.76% of the share capital of ORL. For additional details, see clauses 4.7.2, 4.7.3 below.

  2.1.5. Liquidation, Receivership, Settlements

  The Company is engaged in the liquidation of subsidiaries whose operations have ceased and/or which have been sold and hove no creditors. For additional details, see Note 1c to the Financial Statements.

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  As of the date of the publication of this report, the Company operates in one business sector – the management of the Company’s assets, spotting of business opportunities and holding shares of ORL as – see clauses 4.6, 4.7 below..

2.2. Spheres of Activity

  As of the date of the publication of this report, the Company operates in one business sector – the management of the Company’s assets, spotting of business opportunities and holding shares of ORL, see clauses 4.6, 4.7 below.

2.3. Investments in the Corporation’s Capital and other Transactions in its shares

  The following is a list of the investment and other substantial transactions executed by the interested parties in the Corporation:

2.3.1.1. In May 2006, the main shareholders of the Company, Discount and Clal, entered into an agreement for the sale of the entire stake of Clal (24.85%) and Discount (24.54%) in the Company to Petrochemical, in exchange for a total amount of approximately NIS 741.3 million (approximately NIS 39.4 per share), subject, among others, to the payment adjustment mechanism for distribution of dividends by Scailex Vision and for the return of taxes received by certain Company subsidiaries. Pursuant to the provisions of the agreement, Petrochemical undertook to cause Scailex Vision to make a distribution to its shareholders at a reasonable early date until distribution of all the cash in the possession of Scailex Vision, and to cause the voluntary liquidation of Scailex Vision upon completion of said distribution.

  The sale transaction was completed in July 2006 and, in accordance with the payment adjustment mechanism, the total payment paid by Petrochemical to Discount and Clal for the aforementioned shares amounted to approximately NIS 752.7 million (approximately NIS 40.0 per share).

2.3.1.2. In February 2007, two Company officials exercised, cumulatively, 112,000 share options (for additional details, see clause 4.10.8.4 to the Report) and sold them to Petrochemical. As a result, the Company’s issued share capital increased by 112,000 shares. Furthermore, in February 2007, Petrochemical purchased, through Petrochemical Holdings Ltd. (a fully owned subsidiary of Petrochemical), 200,000 additional ordinary shares of the Company on the stock exchange, at an average price of NIS 36.4 per share.

8



  Consequently, the stake of Petrochemical in the Company increased to 50.06% of the issued share capital (49.95% fully diluted).

2.3.1.3. Undertakings in Respect of Additional Investments in the Corporation

  As at the date of the Report, the Company is not aware of any undertakings to make additional investments in the Company.

2.4. Distribution of Dividends

  Dividends Announced and Distributed Within the Last Two Years

  During 2006 and 2007, the Company did not distribute dividends.

  For additional details about dividends distributed by Scailex Vision, see clauses 4.3.3 and 4.3.4 to the Report.

  2.4.1. External Restrictions in Respect of the Corporation’s Ability to Distribute Dividends

  As at the date of the Report, there are no external restrictions in respect of the Corporation’s ability to distribute dividends.

  2.4.2. Policy for Distribution of Dividends

  As at the date of the Report, the Company has not made a decision in respect of a policy for the distribution of dividends.

9



Chapter 3: Other Information

3.1 Financial information on the corporation’s segments of activity

The following table contains information about the corporations segments of activities:

NIS in millions Year ended December 31
2007 2006 2005
Income From externals (financing and other) 82.9  79.0 38.1
From other segments of activity -.-  -.- -.-
Total 82.9  79.0 38.1
Total attributed costs Costs not constituting income in another segments of activity (administrative and general, financing and other) 42.8  16.5 15.2
Costs constituting income of other fields of activity -.-  -.- -.-
Total 42.8  16.5 15.2
Profit from ordinary activity 40.1  62.5 22.9
Total assets 1,717.9  1,352.6 1,624.2
Minority share in income from externals (16.3) 1.9 -.-

The above data are identical with the income statement figures appearing in the consolidated financial statements as of December 31st, 2007.

3.2 Developments in the financial data of the Company

  For developments in the financial data of the Company see explanation in the directors report in clauses 2, 3 and 4.

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3.3 General environment and the effect of external concerns on the Company

  Correct to the publication date of this report, the Company, through its subsidiary PCH (80.1%), holds approximately 15.76% of ORL’s issued share capital, which were purchased within the framework of a public offer for sale proceeding during February 2007 (9.2%), as well as in subsequent purchases on the stock market. The Company’s business results are likely to be materially affected by its ability to obtain the requisite regulatory approvals for the control and holding of ORL as specified below, which, correct to the publication date of this report, have not yet been obtained. These approvals are conditions to the signing of the control agreement with Israel Corp. which lead to a joint control with Israel Corp. in ORL.

  For details about the regulatory approvals that are needed in order to hold and control ORL, as well as the current status of same, see clause 4.8 below. For details about the possible ramifications of a failure to receive the regulatory approvals as stated on the Company’s business results, see clause 4.19.1.4 below.

  Besides the holding of ORL shares, the majority of the Company’s assets are cash or similar liquid investments. Therefore, the financial data and the business results of the Company as on December 31, 2007 are mainly affected by changing trends in the capital markets in Israel and internationally (including in the U.S. bond market), as well as by changes in interest rates (mainly in the United States), inflation and exchange rates.

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Chapter 4: Description of the Corporation’s Business by
Segments of Activity

4.1 Description of discontinued segments of activity

  Until January 2004, November 2005 and August 2006, the Company engaged through SDP, Scailex Vision and Jemtex, in a number of activities that have meanwhile been discontinued. Subsequent to those dates, and as of the reporting date, the Company no longer engages in the discontinued activities. In its financial statements, the Company presented the results of activity of the three abovementioned segments as discontinued activities, and also reclassified its operating results of the precedent reporting periods. For details on the operating results of the discontinued activities, see Note 1c of the financial statements.

  Correct to the publication date of this report, the undertakings of the parties to the agreements for the sale of the operations and/or holdings of the Company in subsidiaries (the agreements are specified below in clauses 4.1 – 4.4) have been completed and fulfilled. Regarding agreements stipulating an escrow period, the said escrow period has expired in all such agreements, and no further claims may be filed to the trustee (with the exception of the agreement specified below in clause 4.5.3, which prescribes that the escrow period shall expire in 2008).

  Notwithstanding that stated above, as is customary in agreements of this type, the prescription period in respect of certain representations that the Company gave is longer than the escrow period and has not yet expired. Nonetheless, in light of the time that has elapsed since the engagement in the above-mentioned agreements, and in light of the expiry of the escrow period in respect thereof, the Company assesses that the chances that it will be sued in the future in respect of these causes are slim. Therefore, the Company assesses that the sums that it allocated are adequate in respect of future claims and in respect of claims already filed in relation to the agreements (for additional details, see clause 4.3.1 below).

  The information contained in this clause, about the chances of future claims in respect of agreements for the sale of operations, is “forward-looking information,” as this term is defined in the Securities Act; these chances depend upon factors external to the Company. There is no certainty that additional claims will not be filed against the Company in respect of the above agreements for the sale of the operations, and that the provisions allocated will actually cover all liabilities.

Details on discontinued segments of activity as follows:

4.2 Fast digital printing segment

  4.2.1 In January 2004, the Company completed a transaction of the sale of most of the assets, liabilities and activities of SDP, relating to SDP’s fast digital printing activities, including most of the distribution channels that had served SDP for Eastman Kodak Company (“Kodak”) in consideration of a sum of approximately NIS 1,102 million (250 million dollars) in cash.

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  4.2.2 In addition, a sum of approximately NIS 52.9 million (12 million dollars) remained in possession of SDP following the execution of the transaction. Under the terms of the agreement, approximately NIS 110.1 million (25 million dollars) of the consideration was deposited in the hands of a trustee; of that amount, the following amounts were transferred to the subsidiary: (1) a sum of approximately NIS 66.6 million (15 million dollars) in February, 2004 (2) a sum of approximately NIS 21.9 million (5 million dollars) in January 2005; and (3) a sum of approximately NIS 22.9 million (5 million dollars) in January 2006. Following the aforesaid transaction, the Company recorded a profit of approximately NIS 264.6 million. Prior to the sale of the activity of SDP in January 2004, the Company engaged, through the subsidiary company SDP, in the development, design and marketing of fast digital printers.

  4.2.3 In December 2004, following completion of the audit performed by the US Internal Revenue Service on the American subsidiaries SDP and SDC for the years 1992 – 1996, the Company filed an application for Federal tax refunds in respect of amended tax reports for the years 1994, 1995 and 1997. In July 2006, the Company received such tax refunds amounting to approximately NIS 56.6 million (approximately 12.6 million dollars).

  4.2.4 For details on the current liabilities of SDP and the profit from the discontinued activity of SDP, see Note 1c of the financial statements.

4.3 Wide-format digital printing segment

  4.3.1 In November 2005, Scailex Vision completed a transaction for the sale of the majority of its assets and business activity to Hewlett Packard Company (“HP”) in consideration of a sum of approximately NIS 1,067.2 million (230 million dollar) in cash (subject to certain adjustments in accordance with the agreement). Out of this sum, the sum of approximately NIS 95.6 million (USD 23 million) was held in escrow by a trustee until December 2007 to secure representations and undertakings in the sale agreement.

  Up until the said date, claims totaling approximately USD 15.8 million were filed with the trustee, as specified below, and therefore, upon the expiry of the escrow period, the balance, which exceeds the total claims by the inclusive sum of USD 8.8 million (principal and interest, net of withholding tax) was released to Scailex Vision. The causes of claim, which relate to various localities around the world, are varied, and include breach of representations and undertakings of the Company, which pertain to the tax liability of a subsidiary of Scailex Vision in Mexico, causes relating to environmental quality, safety, health and other associated matters. The claims are being clarified opposite HP according to the mechanism prescribed in the said sale agreement.

13



  The Company has allocated provisions totaling approximately USD 11 million (NIS 42.3 million) in respect of claims relating to the escrow sum. For details, see note 6.b.2 of the financial statements.

  The Company has examined the gamut of causes of HP’s claims specified above and, at this stage, particularly taking into account their multiplicity and geographical dispersion, the Company Management assesses that the provisions are adequate to cover these claims, and that all that stated above is not expected to adversely affect Scailex Vision’s equity, its operating results, or the Company.

  It is emphasized that that stated above includes, inter alia, “forward-looking information,” as this term is defined in the Securities Act. At this stage, there is no certainty that the Company’s provisions will be sufficient, and that the claims will not have additional consequences on the Company’s equity and financial results.

  4.3.2 Subsequent to the said transaction, Scailex Vision recorded profit at the sum of approximately NIS 426.9 million. In April 2006, a transaction price adjustment was made, pursuant whereto, Scailex Vision received an additional sum of approximately NIS 30 million (USD 6.6 million). Up until the sale of the operations of Scailex Vision to HP as stated, the Company engaged, through the subsidiary Scailex Vision, in the development, design and marketing of wide-format digital printers using inkjet technology via drop on demand to the industrial segment.

  4.3.3 On February 9th, 2006, Scailex Vision distributed cash dividend of approximating the amount available for distribution, following completion of a transaction for the sale of the assets to HP. The net aggregate dividend amounted to approximately NIS 624 million (of which the Company received NIS 467 million), by way of payment of approximately NIS 3.7 per share to each of the shareholders and NIS 1.8 to whoever held an option prior to the payment and waived the option.

  4.3.4 In December 2006, Scailex vision filed an application with the Tel-Aviv District Court for the approval of a distribution not meeting the profit criterion in accordance with clause 303 of the Companies Law -1999 (“The Companies Law”) in a sum of up to 20 million dollars, to its shareholders. The application of Scailex Vision for a reduction of capital by 20 million dollars was approved by the court on January 29th, 2007, and the said amount was distributed to the shareholders on February 5th, 2007 (of which, the Company received NIS 60 million).

  4.3.5 For details on the assets and liabilities of Scailex Vision and the operating results in respect of the discontinued activity of Scailex Vision, see Note 1c to the financial statements.

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4.4 Continuous digital ink jet printing for industrial applications

  4.4.1 In August 2006, the Company contracted under a reorganization agreement with the senior management of Jemtex whereby the Company transferred most of its holdings in Jemtex to the Company’s two senior managers – Messrs Avraham Raby and Dr. Yehoshua Sheinman.

  As a result of this transaction, the Company’s holdings in Jemtex declined from approximately 75% to approximately 15% (on a fully diluted basis). Under the terms of the reorganization agreement, the Company converted a sum of approximately NIS 29.7 million out of an aggregate amount of approximately NIS 42.7 million, provided by the Company to Jemtex by way of loans, into shares of Jemtex. As to the remaining amount of approximately NIS 12.9 million, it was determined that the amount would be paid to the Company over a period of 5 to 7 years, unless Jemtex pays the Company the sum of 1 million dollars by January 4, 2007, whereupon the debt will be deemed to have been fully repaid. It was moreover determined that the Company would be protected against dilution (for the preservation of the Company’s holdings at a rate of 15% of the Company’s fully diluted capital) which shall remain in effect until repayment of the outstanding loan amount,. In addition, it was determined that as long as the outstanding loan amount stands at 3 million dollars, and has not been fully repaid, the Company shall be enabled to invest in Jemtex a sum of up to 5 million dollars at a company value of 20 million dollars.

  Among the additional matters agreed and included in the reorganization agreement were a covenant on the part of the senior managers to continue their employment with the Company for a certain period of time, and also an agreement whereby the managers’ shares would be transferred 50% to Jemtex and 50% to the Company in case of termination of their employment under certain circumstances.

  4.4.2 On January 4th, 2007, Jemtex contracted under an investment agreement with a third party, whereby there was paid to the Company the sum of 1 million dollars (plus interest), and accordingly, the Company viewed the loan that stood to its credit, in the sum of 3 million dollars, as having been fully repaid in accordance with the reorganization agreement. Also amended in order to facilitate the advent of the investors were, inter alia, a number of conditions in the reorganization agreement as follows: the Company waived most of the veto rights vesting in it in accordance with the Articles of Association of Jemtex; a condition was added whereby there would be partly preserved, after the month of August 2009, the Company’s right to receive at least 3 million dollars from the assets available for distribution in case of liquidation or events deemed to be the liquidation of Jemtex, (such as the sale of all or the great majority of the shares or assets of Jemtex, etc.) by means of an agreement whereby the senior managers of Jemtex would share with the Company in part of the assets available for distribution; the Company continues to be entitled to receive 50% of the shares of the senior managers in case of the transaction being concluded in circumstances agreed under the reorganization agreement, and the new investor will receive 50% of such shares (and in a certain instance, part will be transferred also to Mr Raby); the Company was also granted an option to invest in the shares of Jemtex a sum of three million dollars at a company value (before money) of 20 million dollars through August 3rd, 2009.

15



  4.4.3 Consequent on the above-mentioned selling agreement and the decrease in the rate of holding in Jemtex, the Company ceased to consolidate the financial results of Jemtex in its financial statements and classified the activity of Jemtex as discontinued activity. For additional details see Note 1c to the financial statements.

4.5 Additional Transactions of sales of Scailex holdings

  4.5.1 On June 28th, 2005, the Company sold its entire holdings in Objet Geometries Ltd. (22.9% of its issued and paid-up share capital), a private company incorporated in Israel that engaged in the manufacture of three-dimensional models, photo polymers and consumable products, for the consideration of a total of approximately USD 3 million. The Company recorded a capital gain at the sum of approximately NIS 13.2 million in respect of this transaction.

  4.5.2 In July 2005, IDX Information Corporation Systems acquired the activity of Real Time Image Ltd (“Real Time”). Real Time was incorporated in Israel in 1997, and engaged at the date of the sale in the development of products enabling transfer of medical documents to the Internet without compression. The Company, which at that time held approximately 14.9% of the issued and paid up share capital of Real Time, has received, as of the reporting date, a sum of approximately NIS 14.2 million out of the sale.

  4.5.3 On November 9th, 2006, Xerox Corporation acquired XMPie Inc., a private company incorporated in the state of Delaware, United States, which the Company had held as a small minority holding (2.3%), at a sum of approximately NIS 230.7 million. as of the reporting date, the Company has received in respect of the transaction, a sum of approximately NIS 5.6 million out of approximately NIS 6.4 million while the balance is held in trust in accordance with the sale agreement1. The Company recorded in the fourth quarter of 2006 a capital gain of approx. NIS 5.6 million in respect of that transaction.


1 Out of the sum held in escrow as stated: (1) the sum of approximately USD 111,600 is to be transferred to the Company by no later than April 2008 – this sum serves to secure all of the Company’s representations and undertakings pertaining to the transaction and (2) the sum of approximately USD 79,700, which serves to secure the Company’s obligation pertaining to tax implications of the transaction; this sum is to be transferred to the Company after the last date on which the relevant tax authorities can charge the Company taxes in relation to the transaction.

16



4.6 The Company’s assets management sector and the spotting of investments and business opportunities

  As of the reporting date, the Company’s sole sector of operations is that of the management of its assets described above, and the spotting of investments and business opportunities.

  As of the reporting date, the Company’s assets consist primarily of the investment in ORL, cash, and similar liquid investments such as daily dollar deposits, US Government bonds and debentures of companies carrying a low risk rating.

  As of December 31, 2007, a sum of approximately NIS 1,229.2 million was invested in financial assets being available for sale (1,182.3 in ORL shares) and held to maturity for short and long term redemption, and a sum of approximately NIS 453.9 million in daily dollar deposits that during 2007 bore average dollar interest at a rate of 5.1% and in NIS deposits that during 2007 bore average NIS interest at a rate of some 3.8%.

4.7 Acquisition of Holdings in ORL

  4.7.1 ORL – General

  ORL was incorporated and registered in Israel in August 1959 under the name of Oil Refineries Haifa Ltd. On June 6, 1972, its name was changed to Oil Refineries Ltd. The founding of ORL was the outcome of the Government decision to acquire and obtain the rights of an English oil company pursuant to a concession granted to it, as well as the ownership of the Haifa oil refinery which previously had been under the control of foreign shareholders.

  In 1971, the Israel Corporation purchased shares in ORL, which vested it with 26% of the equity and voting rights in ORL. The sums of the Israel Corporation’s investment were earmarked and used, inter alia, to construct an oil refinery in Ashdod, which began operating in 1973. On February 12, 2002, the Israel Corporation sold all of its shares in ORL to the State of Israel for the consideration of the sum of approximately NIS 677.5 million, and ceased to be a shareholder, so that, subsequent to that date, the State of Israel held all of ORL’s issued and paid-up share capital.

  Until September 28, 2006 (hereinafter: “the Determinant Date”), ORL operated a refinery in Haifa and a refinery in Ashdod. Within the scope of the privatization of ORL, ORL’s operations were split on the Determinant Date, whereby the oil refinery in Ashdod was sold to an ORL subsidiary, ORA, which was sold on the Determinant Date to Paz. Correct to the publication date of this report, ORL operates solely the refinery in Haifa.

  Within the scope of a private sale offer of ORL shares that the State of Israel issued on February 12, 2007, and a public sale offer of ORL shares pursuant to the prospectus of February 13, 2007, and as part of the privatization of ORL, the State of Israel sold all of ORL’s issued and paid-up share capital, in such manner that, subsequent to the sale as stated, ORL ceased to be a government company.

17



  4.7.2 Cooperation for the purchase of ORL shares with the Israel Corporation

4.7.2.1 On February 18, 2007, the Company and its subsidiary, PCH (hereinafter jointly: “Scailex Group”), engaged with the Israel Corporation in a binding memorandum of agreements (hereinafter: “the Memorandum of Agreements”), pursuant whereto, the Israel Corporation and Scailex Group would submit a joint offer to purchase ORL shares within the scope of the public offer of ORL shares.

4.7.2.2 The Memorandum of Agreements specified that the Israel Corporation and Scailex Group would submit joint offers for the purchase of ORL shares on the dates stipulated in the prospectus, in such manner that the Israel Corporation would hold 80% of the ORL shares to be purchased, while Scailex Group would hold the remaining 20% of these shares (hereinafter: “the Initial Holding Ratio”).

4.7.2.3 The parties further agreed that the quantity of shares and the price to be offered would be determined by the mutual consent of both parties and that, in the event of a disagreement, each of the parties would be allowed to act according to its own discretion and the Memorandum of Agreements would be terminated.

4.7.2.4 Within the scope of the public sale offer as stated, the Israel Corporation purchased (36.8%) and PCH (9.2%) and together, approximately 46% of ORL’s issued share capital, for the inclusive consideration of approximately NIS 2.43 billion.

4.7.2.5 Following are additional provisions of the Memorandum of Agreements:

  (a) Additional shares or securities of ORL that shall be purchased by one of the parties after the offering, jointly or severally, shall be part of the holding of ORL shares to which the provisions of the Memorandum of Agreements shall apply. Decisions to purchase ORL shares in the secondary market subsequent to the conclusion of the offering, whether on or off the stock exchange, including a public offering, shall be reached by mutual consent.

  (b) Each of the parties shall be allowed to exploit opportunities and purchase ORL shares, provided that it shall offer the other party, within three business days of the purchase date, an opportunity to purchase a proportionate share of the shares that it purchased as if the call option was exercised on that date; i.e., 55% to the Israel Corporation and 45% to PCH, this at cost price plus market interest until the actual payment date.

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  (c) Scailex Group was granted a call option to increase the rate of its holdings from the Initial Holding Ratio to 45% of the shares to be purchased by the parties within the scope of the offering, this within 120 days of the date that the ministers’ approval pursuant to the Government Companies Order is obtained, or nine months after the signing date of the Memorandum of Agreements, whichever is earlier. Scailex Group will not be allowed to exercise the call option in relation to that portion of the shares that is the subject of the call option, but rather, only in relation to all of them. For details regarding the approval required pursuant to the Government Companies Order, see clause 4.8.1 below.

  (d) The parties determined their policy in the Memorandum of Agreements in relation to various issues, including the manner of appointing directors, voting during general assemblies, the dividend distribution policy, right of first refusal, tag-along right, the rights of the parties in the event that the call option is exercised, minority interests, as well as a BMBY mechanism.

  4.7.3 Termination of the Memorandum of Agreements, which was entered into by Scailex Group and the Israel Corporation, and Scailex Group’s receipt of a letter of undertaking from the Israel Corporation

  Pursuant to the Vital Interests Order, the control and operation of a means of control in ORL are subject to the approval of the Prime Minister and the Minister of Finance (hereinafter: “Ministers’ Approval” or “Control Permit”), and the consent of the Commissioner. Accordingly, Scailex Group and the Israel Corporation submitted an application to receive the Control Permit, during which Scailex Group was required to provide additional details in relation thereto by the relevant authorities, inter alia, in relation to Linura, which held 19.9% of PCH’s share capital (for additional details about the PCH shareholder agreement, see clause 4.7.4 below).

  Whereas the Scailex Group and the Israel Corporation were of the opinion that the best interests of ORL require control thereof as soon as possible, and that the Israel Corporation, which had been a material shareholder in ORL until February 2006, could obtain the Control Permit pursuant to the Government Companies Order faster than PCH could obtain it, and in light of the demands for additional particulars, on May 10, 2007, the Israel Corporation and the Scailex Group agreed to terminate the Memorandum of Agreements, and in lieu thereof, the Israel Corporation issued a letter of undertaking (hereinafter –“the Letter of Undertaking”) to the Scailex Group, that the Scailex Group agreed to act according therewith, and whose main points are as specified below:

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4.7.3.1 Receipt of the Requisite Approvals by the Scailex Group by and no later than May 15, 2009 (hereinafter in this clause: “the Determinant Date”), shall lead to the engagement in and signing of a joint ORL control agreement by the Israel Corporation and Scailex Group (hereinafter: “the Control Agreement”), according to the version agreed upon between the parties, whose main points are specified below.

4.7.3.2 Exercise of the call option (hereinafter: “the Call Option”), which shall be granted to PCH pursuant to the Control Agreement, shall be exercisable until the Determinant Date (i.e., May 15, 2009) or until 120 days after receipt of the Requisite Approvals, whichever is earlier. Exercise of the Call Option would enable PCH to purchase and receive by way of transfer from the Israel Corporation 230 million shares of ORL (hereinafter: “the Exercised Shares”) in such manner that, subsequent to the exercise of the Call Option, the internal holding ratio in the control core in ORL (which includes 50.25% of ORL’s share capital) shall be: the Israel Corporation – 55%; PCH – 45%. The price of the Exercised Shares is cost price of the purchase of the control core shares that were purchased in the sale offer; i.e., the sum of NIS 3.3 per share, and a total of NIS 759 million, plus index linkage differentials and linked interest at the rate of 5% per annum, calculated and charged six months after the purchase date, after deducting dividends distributed (if any), plus index linkage differentials and interest as stated. It should be noted that, according to the Memorandum of Agreements, the Call Option will be valid for a shorter period – up to nine months after the signing of the Memorandum of Agreements or 120 days after receiving the Requisite Approvals, whichever is earlier.

4.7.3.3 The sale and transfer of ORL shares owned by PCH to a third party or a sale of the control in PCH (subject to certain conditions), in Scailex or in the corporation controlling Scailex (directly or indirectly), with the exception of IPE and the corporations controlling it, to a third party, shall confer upon the Israel Corporation (subject to certain conditions) a right of first refusal to purchase or a right to purchase (as the case may be) all control core shares in ORL, the relevant securities according to provisions prescribed in the Control Agreement, as specified in clause 4.7.3.8 below.

4.7.3.4 Scailex’s rights to engage in the Control Agreement are transferable to a third party, in such manner that if PCH shall sell all of its ORL shares to a third party (and the Israel Corporation shall not exercise the right of first refusal conferred upon it), or if Scailex shall sell the control in PCH to a third party, and if the third party shall receive by and no later than by the Determinant Date, all of the Requisite Approvals, then, in such instance, the Israel Corporation shall engage with the third party in the Control Agreement, and the third party shall subrogate Scailex Group for all intents and purposes.

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4.7.3.5 Until engagement in the Control Agreement, the Israel Corporation shall be entitled to operate its control power in ORL (subject to its receiving the Control Permit pursuant to the Government Companies Act) at its discretion, without any restriction.

4.7.3.6 On the signing date of the Letter of Undertaking, PCH signed an irrevocable letter of authorization, pursuant whereto it empowers the Israel Corporation to vote under its name and on its behalf during general assemblies of ORL shareholders in respect of one hundred million shares of ORL that it owns, which constitute 5% of ORL’s issued share capital (hereinafter: “Letter of Authorization”). The Letter of Authorization expired six months after the date of the Letter of Undertaking, on November 10, 2007.

4.7.3.7 Main points in the Control Agreement

  Following are the main points of the Control Agreement, which shall be signed by the Israel Corporation on the one hand, and Scailex Group on the other hand, upon receipt of the Requisite Approvals by the parties, and it shall take effect on the date it is signed.

  (a) Definition of the controlling shares in ORL – the control core shares shall constitute 50.25% of ORL’s issued and paid-up share capital (hereinafter: “the Control Core Shares”).

  (b) The granting of a Call Option to PCH, as specified above in clause 4.7.3.2.

  (c) Restrictions on a transfer of Control Core Shares –

  1. Freeze period – the agreement prescribes a freeze period of six months, to be counted from the signing date of the Control Agreement, whereby none of the parties shall be permitted to transfer the Control Core Shares.

  2. Right of first refusal – Scailex Group shall grant a right of first refusal to the Israel Corporation to purchase and to receive by way of transfer all Control Core Shares that shall be offered for sale by it to a third party as of the signing date of the Control Agreement, while the Israel Corporation shall grant a right as stated to Scailex Group as of the exercise date of the Call Option. The right of first refusal shall also apply, mutatis mutandis, in the event that a lien that shall apply (if any shall apply) on the Control Core Shares shall be exercised by the holder of the lien on these shares.

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  A direct transfer of control in PCH or an authorized transferee (holding the Control Core Shares) to a third party (hereinafter: “Transfer of the Control”) shall constitute an event entitling the Israel Corporation to a right to purchase all of the securities (but not a portion thereof) constituting a subject of the transaction for Transfer of the Control, according to the conditions prescribed with the third party, and all according to the provisions prescribed in the Control Agreement.

  A transfer of control in Scailex or in the corporation controlling Scailex (directly or indirectly), with the exception of IPE and the corporations controlling it, to a third party, whereby the Control Core Shares to be held at that time by PCH and/or by one of its authorized transferees constitute the majority of the assets of the relevant corporation wherein a Transfer of Control shall be effected, shall confer to the Israel Corporation (subject to certain conditions) a right to purchase all (but not a portion) of the Control Core Shares in ORL or the relevant securities, according to the provisions specified in the Control Agreement.

  In this clause, “majority of the assets” means: that the relevant corporation has no other assets (save the Control Core Shares), the value of which, pursuant to its last audited consolidated annual financial statements or pursuant to its last reviewed consolidated quarterly financial statements, exceeds the sum of USD two hundred (200) million. In the context of the provisions of this clause, “assets” – do not include cash and cash equivalents.

  3. In the instance whereby a right shall arise to the Israel Corporation to purchase from PCH the Control Core Shares in ORL as stated above, the consideration shall be determined on the basis of the average closing prices of ORL shares during the 60 trading days that preceded the date of the notice of a transfer of control, multiplied by the number of Control Core Shares being sold, plus a premium of 15%.

  4. It is clarified that a party to the Control Agreement shall be allowed to sell and/or to transfer all of the Control Core Shares held by it at that time – but not a portion thereof.

  5. Tag-along right – each of the parties shall have a right to join in on the sale of the Control Core Shares of the other party, provided that the right of first refusal has not been exercised. The Israel Corporation’s tag-along right shall come into effect only as of the date on which PCH duly exercises its Call Option.

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  (d) BMBY (Buy Me Buy You) – each of the parties to the agreement shall have the right to activate a BMBY mechanism in relation to the Control Core Shares (after the expiration of the six-month freeze period), whereby it can offer to the other party to purchase all of the Control Core Shares that shall be held by the other party at the price quoted in the offer, or to sell to the other party all of the Control Core Shares to be held by it at the said price.

  (e) Appointment of directors – the parties to the Control Agreement shall undertake within the scope thereof to operate all voting power available to them during ORL’s general assemblies for the election or appointment of members of ORL’s board of directors, in the following manner:

  a. As long as the Call Option has not been exercised, ORL’s board of directors shall appoint 9 members (including 2 external directors), whereby the Israel Corporation shall recommend the appointment of 5 directors, PCH shall recommend the appointment of 2 directors, and the recommendation regarding the identities of the 2 external directors shall be made by mutual consent.

  b. Once the Call Option is exercised, ORL’s board of directors shall appoint 11 members (including 2 external directors), whereby the Israel Corporation shall recommend the appointment of five directors and the appointment of one external director, and PCH shall recommend the appointment of 4 directors, and the appointment of one external director.

  Inter alia, it was prescribed that the right of representation of the Israel Corporation and PCH on ORL’s board of directors, as stated above, shall also relate to all of ORL’s board committees, with the exception of the audit committee, and, to the extent possible, also to the boards of directors of ORL’s subsidiaries and affiliates, this on the basis of the principles specified in the above clauses a. and b.

  (f) The Control Agreement prescribes that, once the Call Option is exercised, and subject to all statutory provisions, the parties, in their capacities as ORL shareholders, shall act so that the appointment of the CEO of ORL, the auditors and attorneys of ORL, the subsidiaries of ORL, and, to the extent possible, of ORL’s affiliates – shall be done by mutual consent. Furthermore, subject to all statutory provisions, ORL’s chairman of the board shall be appointed according to the recommendation of the Israel Corporation.

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  (g) Voting on certain issues – the Control Agreement prescribes a number of issues that, should they be placed on the agenda and for resolution by ORL’s general assemblies of shareholders, the parties will agree in advance about how they will vote in relation to these issues, and, in the absence of agreement between them, an agreed arbitrator shall decide how they shall vote. It was further prescribed that the parties would act to amend ORL’s Articles of Association in order that the resolution in relation to those same agreed issues, being submitted for resolution by ORL’s board of directors, would be transferred for decision-making to ORL’s general assembly of shareholders, or that the resolution in relation thereto shall require a supermajority of 75% of all directors present. That stated shall take effect only after the Call Option is exercised. Following is a list of the agreed issues: (a) entry by ORL or by any of its subsidiaries into new spheres of activity; (b) the offering of shares or of other securities by ORL and/or by any subsidiary and/or affiliate; (c) amendment of ORL’s Articles of Association and/or of any subsidiary and/or affiliate; merger or split or reorganization of ORL or of any subsidiary; (e) transactions other than during the ordinary course of business of ORL or of any subsidiary or affiliate with interested parties (f) appointment of ORL’s accountants; (g) liquidation or stay of proceedings of ORL and/or of any subsidiary and/or affiliate thereof; (h) a material purchase or sale transaction of ORL. “Material” means: that the transaction may have a material affect on its assets or liabilities or profits.

  (h) Dividend policy – the parties to the Control Agreement shall act, subject to any statute, so that ORL and its subsidiaries shall adopt a dividend policy whereby at least 75% of the annual profit suitable for distribution shall be distributed each year.

  (i) Period of the agreement – the Control Agreement shall take effect on the date of the signing thereof and shall terminate (a) pursuant to the provisions thereof, or (b) as of the date on which a party shall cease to hold at least 10% of ORL’s share capital.

  (j) Additional provisions – the agreement includes additional provisions, which are customary in agreements of this type, including clauses addressing confidentiality, remedy, nonwaiver of rights, arbitration, jurisdiction, and the like.

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  (k) Scailex guarantee – Scailex is guaranteeing all of PCH’s liabilities pursuant to the Control Agreement.

4.7.3.8. On June 27, 2007, the Israel Corporation received a Control Permit for ORL. Correct to the publication date of this report, PCH has not yet received the Control Permit for ORL. For additional details about the Control Permit, see clause 4.8.1 below.

  4.7.4 Shareholder agreement between Linura and the Company in relation to their holdings in PCH

  On December 21st, 2006, the Company engaged with Linura in a shareholder agreement, which regulates the rights and obligations of the shareholders of PCH (hereinafter: “PCH Shareholder Agreement”), whose main points are specified below (the Company and Linura shall be called hereinafter in this clause: “the Parties”). It should be noted that, following the difficulties in receiving the Control Permit, as stated in clause 4.8.1 below, the Parties reached an agreement in principle, whereby, the Company would purchase Linura’s holdings in PCH, so that PCH shall become a company wholly owned by Scailex.

  Further to the said consent, on March 13th, 2008, Scailex and Linura reached an agreement whereby the Company shall purchase Linura’s entire holdings in PCH for the consideration of a total of USD 57.2 million, and shall receive, by way of assignment, the capital note that PCH had issued to Linura. The consideration shall be paid in a single payment by March 28th, 2008. Upon completion of the acquisition of Linura’s shares in PCH, the PCH Shareholders’ Agreement shall expire, whose main points are as follows:

4.7.4.1 The Parties shall purchase shares of ORL through PCH.

4.7.4.2 The Shareholder Agreement prescribes that the Company shall hold 80.1% of PCH’s share capital and Linura shall hold 19.9% of PCH’s share capital. It was further prescribed that the Company shall provide management and administrative services to PCH for no charge, with the exception of the payment of expenses in kind that it shall incur in respect of these services.

4.7.4.3 PCH's board of directors and the passing of resolutions

  The Shareholder Agreement prescribes that PCH’s board of directors shall appoint at least three and no more than seven members, and, as long as Linura holds 19.9% of PCH’s share capital, it shall be entitled to appoint one director.

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  Correct to the publication date of this report, three directors are serving on PCH’s board of directors on behalf of Scailex and one on behalf of Linura. The Company is entitled to appoint the chairman of the board. The chairman of the board does not have an additional vote.

4.7.4.4 PCH's general assembly of shareholders and the passing of resolutions

  As long as Linura holds 15% of PCH’s share capital, the following resolutions shall require the approval of all shareholders of PCH: amendment to PCH’s incorporation documents; merger, split, reorganization; purchase, sale or a granting of a special license in relation to all or a material portion of the assets within the scope of a single transaction or a series of transactions; as well as winding up, liquidation; a settlement agreement or any other arrangement with creditors; an application for liquidation or a stay of proceedings; as well as an application to register shares or bonds for trading on the stock exchange.

4.7.4.5 Financing of PCH

(a)        Scailex and Linura agreed that their share in the financing of the purchase of ORL shares would be through PCH and effected by way of a shareholder loan against capital notes (hereinafter: “the Capital Notes”), pari passu to the Parties’ holdings of PCH, up to the sum to be decided between them in accordance with agreed frameworks.

(b)        The Parties also agreed that no dividend would be distributed until the Capital Notes are repaid to the shareholders.

  On August 9, 2007, the board of directors and general assembly of shareholders of PCH approved an amendment to the Shareholders’ Agreement with Linura of December 21, 2006 (hereinafter: the Amendment to the Shareholders’Agreement”). The Amendment to the Shareholders’ Agreement prescribed the terms and conditions of the loans provided by PCH’s shareholders.

  It was prescribed, inter alia, that the loan sums quoted in USD would bear dollar interest as of the investment date until August 9, 2007. On August 9, 2007, these loans were converted into shekel loans and Capital Notes were issued in respect thereof. The payment for the Capital Notes is to be rendered in NIS, will not bear interest, linkage differentials or revaluation and, in any case, shall not be paid before January 1, 2009.

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4.7.4.6 Restrictions on transfers of PCH shares

  Up until the expiration date of the first Put Option and the first Call Option (as defined below), the Parties shall not be allowed to effect any transfer of any right deriving from this agreement, with the exception of a transfer permitted pursuant to the Shareholders’ Agreement, such as a transfer to subsidiaries. Subsequent to the restriction period, the Parties shall be allowed to transfer only the ordinary shares, pursuant to the PCH Shareholders’ Agreement and the incorporation documents, subject to that stated below.

4.7.4.7 Rights of refusal and tag-along

  The Company has a right of refusal in the event that Linura shall desire to sell its holdings to a third party, in accordance with an offer received from that third party (“First Refusal”). Linura has a right of First Offer, whereby, in the event that the Company shall desire to sell all of its holdings to a third party, it shall enable Linura to purchase them; should Linura refuse the offer, the Company shall be allowed to force Linura to sell its shares in PCH under the same conditions (“Bring-Along”).

  Linura has a right to join in on sales of the Company to a third party, pari passuto its holdings in PCH (“Tag-along”).

  The Parties have a right to a First Offer, in the event that PCH shall sell all of its holdings in ORL to third parties, pari passu to their holdings in PCH.

4.7.4.8 Expiration of the PCH Shareholders' Agreement after the Control Permit was not received

  In the event that, after exhausting all efforts to obtain the Control Permit, PCH shall not receive the Control Permit for ORL, the Parties have determined the following mechanism:

  In the event that the nonreceipt of the Permit derives from Linura’s holding of PCH shares, Scailex shall be able to terminate the agreement, and shall have the right to purchase Linura’s PCH shares, at the price equivalent to the price of the capital that Linura had invested in PCH, after deducting dividend payments and repayments of Linura’s investments in PCH.

  In the event that the nonreceipt of the Permit derives from Scailex’s holding of PCH shares, Scailex shall be able to choose between selling ORL shares that shall be held by PCH to a third party and liquidating PCH, or, alternatively, to jointly sell the PCH shares held by Scailex and Linura to a third party.

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4.7.4.9 First Put Option

  If within twelve (12) months from the date of the Offer for Sale PCH shall not acquire control of ORL, Linura shall be entitled to force Scailex to sell its shares in PCH (hereinafter, the “First Put Option”). The price of the purchase shall be equal to the price of the capital investment made by Linura in PCH, plus interest, less all dividends or payment of investments in capital made by Linura pursuant to the mechanism stipulated in the Agreement.

4.7.4.10 First Call Option

  If Linura fails to exercise the First Put Option within thirty days from the date it became entitled to exercise said option, Scailex shall be entitled to purchase all the shares of Linura in PCH (hereinafter, the “First Call Option”) at a price to be determined pursuant to the mechanism stipulated in the Agreement.

4.7.4.11 Second Put Option

  At the end of one year from the date of acquisition of the control of ORL, Linura shall be entitled to force Scailex to purchase all its shares in PCH (hereinafter, the “Second Put Option”) in exchange for the investments in capital made by Linura in PCH less dividends and proportional payment of investments in capital paid to Linura, pursuant to the mechanism stipulated in the agreement.

4.7.4.12 Second Call Option

  If Linura fails to exercise the Second Put Option within thirty (30) days from the date of the option can be exercised, Scailex shall be entitled to purchase all the shares of Linura in PCH at the price that shall be determined pursuant to the mechanism stipulated in the agreement.

4.7.4.13 General

  (a) The Parties agree that neither Party shall transfer its shares to a third party if said transfer violates the Control Permit or prevents PCH from receiving the Control Permit.

  (b) Linura shall appoint a company, an international supplier of raw oil and refined products, that shall make utmost efforts to offer ORL competitive conditions, for ORL’s good. For as long as Linura holds 19.9% of the share capital of PCH and subject to the legal and regulatory restrictions, the Company and Linura agree to make utmost efforts through PCH to substantially increase the share of the aforementioned company in the supply of raw oil and/or refined products sold to ORL.

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4.8 Regulatory Approvals for Holdings in ORL Holdings

  4.8.1 Control Permit and holding of controlling stakes in ORL

  Pursuant to the provisions of the Government Companies Order, if an individual held control or control means in ORL in rates that are subject of approval by virtue of the Interests Order (24% and higher), said individual must submit a request to the Ministers (Minister of Finance and Prime Minister) for approval of said individual’s holdings within 48 hours (hereinafter the “Request”).

  As long as no approval is granted for control or holding of control means at the rates subject to approval (24% and higher), as the case may be, the rights in ORL by virtue of the shares acquired, including dividends, appointment of directors and officials, and in respect of voting rights in the Annual General Meeting of ORL shareholders shall not enter into effective. This is for an individual who holds more than 24% in ORL.

  Pursuant to the notification of the Prime Minister and the Minister of Finance, on October 26th, 2007, the 60-day period elapsed since the last date on which PCH submitted additional particulars in relation to the control permit. Pursuant to the Vital Interests Order, the answer of the Prime Minister and the Minister of Finance in relation to PCH’s application for a control permit was supposed to have been issued by that date. A temporary arrangement was proposed to the competent authority during the contacts between PCH and the State authorities, pursuant whereto, shares of two foreign entities, who are directly and indirectly holding PCH, Linura and the Alder Group (shareholders of the indirect controlling shareholder – see details about the holdings of interested parties below in regulation 24 of clause D. of the report), in relation to whom questions were raised by the competent authority, would be deposited in escrow until the final decision on the matter of the permit.

  On November 22nd, 2007, the authority’s answer was received, pursuant whereto, the proposed arrangement, whether temporary or permanent, does not provide a solution to the State’s difficulty to agree to PCH’s application for a Control Permit.

  Taking heed of the authority’s answer as stated, consent was achieved between the Company and Linura, whereby Linura would completely exit PCH, so that all share capital and controlling shares of PCH would be held solely by the Company. Also achieved was Alder Group’s consent to cancel the lien that it has on a portion of the shares of the control group.

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  On February 21st, 2008, the response of the Government Companies Authority was received, pursuant whereto, it would be possible to consider PCH’s application for control of ORL jointly with the Israel Corporation, only if the influence of the Alder Group, directly or indirectly, on the control in PCH, both as a material shareholder in Modgal Industries Ltd. (which is the controlling shareholder in PCH, through corporations under its control), and as a creditor, would be completely removed.

  Following the response, it was advised that, in light of that stated, the apparent position, that of recommending to the Prime Minister and the Minister of Finance that PCH’s application for the control permit should be rejected, was presented to the State Attorney General.

  The Company referred to its controlling shareholder and updated it about the said response. In its response to the Company, Modgal Industries Ltd. (“Modgal”), an indirect controlling shareholder in the Company, stated that, in its opinion, the position of the competent authority is extremely unreasonable. It was further stated that Modgal and its controlling shareholders are examining possible alternatives to resolve the problem, but that there is no certainty that they will succeed in formulating a solution that meets the excessive requirements of the competent authority.

  In light of receiving the response as stated, PCH, together with its advisors, is examining the various channels available to it in relation to all matters pertaining to its holding of ORL shares and the control permit.

  4.8.2 Approval of the Antitrust Authority

  Within the framework of the resolution to privatize ORL, it was decided that, within the framework of the privatization of ORL, expression would be given to conditions stipulated in the Commissioner’s position in his notifications, as attached to the privatization resolution.

  On February 6th, 2007, the Antitrust Authority published a notification pursuant to which, would it become apparent upon publication of the results of the Public Offering of ORL’s shares, that an entity, jointly with others or severally, acquired holdings in excess of one quarter of any of the rights in ORL, the Antitrust Authority would then refrain from enforcing any measures against said entity even though it failed to receive prior approval pursuant to the provisions of the Antitrust Law -1988, provided the following cumulative conditions were met:

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  4.8.2.1. The purchaser and ORL provide a merge notification not later than thirty business days from the date of publication of the results of the public tender.

  4.8.2.2. Until receipt of the approval by the General Director, the purchaser refrains from exercising any of the rights attached to the shares (higher than one quarter), including the right to appoint directors, to vote in the Annual General Meeting, and to participate in the profits of the corporation.

  4.8.2.3. Until receipt of the approval from the General Director, the purchaser refrains from exercising any influence on the business of ORL, including appointment of ORL officials and the taking of business decisions or making recommendations for decisions as aforementioned.

  4.8.2.4. These limitations supplement the provisions of the Essential Interests Order and shall be valid even if approval is granted pursuant to the Essential Interests Order, for as long as there is no approval by the General Director of the Israel Antitrust Authority.

  On March 27, 2007, PCH received the Antitrust Commissioner’s decision to approve the merger between ORL, the Israel Corporation and PCH, conditionally. The main points of the conditions stipulated by the Antitrust Commissioner are as follows:

  (a) Rotem Amfert Negev Ltd. (hereinafter: “Rotem”), a company of the Israel Chemical group, shall not unreasonably refuse to purchase sulfur originating from ORA, and shall not make a purchase thereof conditional upon conditions which, by nature or according to customary trade terms, do not concern the subject of the engagement; and that Rotem shall not discriminate against ORA vis-à-vis ORL, in the purchase of sulfur; and that Rotem shall document in writing and in detail every sulfur purchase from ORA or from ORL, and shall save such documentation in its offices for three years after effecting any transaction, which shall be furnished to the Commissioner upon request.

  (b) COL, a company of the ORL group, shall not unreasonably refuse to purchase a stream of C4 and a stream of propylene (hereinafter in this clause: “the Products”) being conveyed from ORA, and shall not make a purchase thereof conditional upon conditions which, by nature or according to customary trade terms, do not concern the subject of the engagement; and that COL shall not discriminate against ORA vis-à-vis ORL in the purchase of the Products; and that COL shall document in writing and in detail all purchases of the Products, and shall save such documentation for three years after effecting any transaction, which shall be furnished to the Commissioner for perusal upon request.

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  (c) ORL shall not unreasonably refuse to sell a propylene stream to ORA that it received from COL within the scope of its obligations included in the agreement between ORL, IPE and COL, including partial assignment thereof to ORA, and shall not make the sale thereof conditional upon conditions which, by nature or according to customary trade terms, do not concern the subject of the engagement; and that ORL shall not discriminate against ORA in the conveyance of a propylene stream that was conveyed to it from COL as stated; and that ORL shall not discriminate against ORA in relation to the propylene flow conveyance terms from COL to ORL itself; and that COL shall document in writing and in detail every conveyance of propylene stream to ORL, and ORL shall document in writing and in detail every conveyance of propylene stream to ORA, and shall save such documentation for three years after effecting any transaction, which shall be furnished to the Commissioner for perusal upon request.

  (d) Pursuant to the conditions, ORL, COL and Rotem are required to furnish a confirmation to the Commissioner every year that, in the preceding year, each of them has fulfilled the conditions applicable to it according to the Commissioner’s decision, in their entirety.

  According to ORL’s assessment, the implementation of the above conditions is not expected to have any material effect (if any whatsoever) on its operations or business results.

  4.8.2.5. It should be noted that, in light of the termination of the Memorandum of Agreements, as stated above in clause 4.7.3, it is possible that, formally, a new approval from the Commissioner will be required in order to validate the agreement for the joint control of ORL by the Israel Corporation and Scailex Group. Nonetheless, correct to the publication date of this report, the Company is not aware of any change in circumstances, which might prevent PCH from receiving a renewed approval from the Antitrust Commissioner, if and to the extent that an approval of this type is required at all.

4.9 Fixed assets and facilities

  In January 2007, the Company contracted under an agreement with a third party for the leasing of offices in an aggregate area of approximately 387 sq.m in an office building in Herzliya, in consideration of rent and monthly management fees aggregating approximately NIS 33,000. The agreement is in force for a period of five years and may be extended for a further up to ten year period (with an option of extension for five leasehold terms of two years each).

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4.10 Human capital

  4.10.1 Payrolled employees by fields of activity

  As of the reporting date, the Company payrolls five employees in Israel (including the CEO and the CFO).

  4.10.2 Material changes in the personnel establishment.

  In July 2006, Mr. Yahel Shachar, who until that time had served as the Company’s CFO, was appointed CEO of the Company. Mr. Shachar Rachim, who until then had served as the Company’s controller, was appointed as the Company’s CFO.

  4.10.3 Material dependency on a particular employee

  As of the reporting date, the Company has no material dependency on any employee.

  4.10.4 Corporate Investment in Training and Courses

  Company employees participate in seminars, conferences and courses in business, legal, accounting and taxation areas relevant to the Company’s business in order to enrich their knowledge and to keep them current with developments and changes in such areas. The Company also obtains current updates from professional entities on these issues.

  4.10.5 Benefits and nature of employment contracts

  Employment terms of company employees are set forth in individual employment contracts on a monthly basis. These employment terms typically include payments to Managers’ Insurance policies or to a Pension Fund, annual vacation, sick pay and vacation pay. The employment contracts are for an undetermined term, and each party may terminate the contract by prior written notice, as set forth in the contract.

  4.10.6 Group of officeholders and senior management staff in the corporation

  The employment conditions of the Company’s CFO are regulated in a personal employment agreement that took effect on August 18, 2006 and is for indefinite period not predetermined, whereby each party may terminate the agreement by three months’ prior notice to the other party.

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  4.10.6.1 CEO employment agreement

  The employment conditions of the Company’s CEO. are regulated in a personal employment agreement that took effect on August 18, 2006 and is for indefinite period not predetermined, whereby each party may terminate the agreement by three months’ prior notice to the other party.

  4.10.6.2 Employment agreement of the Company’s CFO

  The employment conditions of the Company’s CFO. are regulated in a personal employment agreement that took effect on August 18, 2006 and is for indefinite period not predetermined, whereby each party may terminate the agreement by three months’ prior notice to the other party.

  4.10.7 Management services agreement - the Company's chairman of the board

  On April 30, 2007, after the audit committee and board of directors of the Company had given its approval thereto, an extraordinary general assembly of the Company approved the Company’s engagement in a management services agreement (hereinafter: “the Management Agreement”) with Globecom Investments Ltd. (hereinafter: “Globecom”), a private company controlled by Mr. Eran Schwartz, pursuant whereto, the services of Mr. Eran Schwartz, as the active chairman of the board of the Company would be provided by it, in accordance with the conditions specified hereunder

  4.10.7.1 The agreement will be valid for approximately 18 months, commencing July 18th, 2006, the date on which Mr. Eran Schwartz took office as the chairman of the board of Scailex, and until December 31st, 2007. Nonetheless, each of the parties would be able to terminate it by prior notice of six months. On December 31st, 2007, the annual general assembly of the Company approved the extension of the validity of the Management Agreement with Globecom, so that the Management Agreement shall be valid until six (6) months after a termination notice is given by either of the parties to the other, as the case may be.

  4.10.7.2 Globecom is a private company controlled by Mr. Eran Schwartz, and shall retain this status for the duration of the agreement.

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  4.10.7.3 Globecom shall provide services to Scailex of an active chairman of the board solely through Mr. Eran Schwartz (hereinafter: “the Services”). The nature of Scailex’s operations, by virtue of it being a holding company, is dynamic, and the scope of the management Services required vary according to the various ventures and investments in which Scailex is involved. Consequently, no minimum scope was stipulated for the Services and the actual scope of the Services shall be according to Scailex’s needs. Accordingly, it is possible that during certain periods, during which the Management Services shall focus on new investments and ventures, or on material decisions relating to existing investments, the scope of the Services shall be extensive, while during other periods, when the Management Services shall focus on current issues, it is possible that the Services shall be of lesser scope.

  4.10.7.4 The inclusive monthly cost that Scailex shall pay to Globecom in respect of the provision of the Services shall be the sum of NIS 100,900 (hereinafter: “the Monthly Consideration”). This sum is based on a monthly wage at the sum of NIS 75,000, plus sums, including an estimated cost of benefit components.

  4.10.7.5 The Monthly Consideration shall be linked to the Consumer Price Index as shall be published from time to time, whereby the base index is the index that was known on the date that the Agreement took effect; i.e., the index of June 2006, and, in any case, the Monthly Consideration shall not diminish from the sum of NIS 100,900. In addition, Globecom shall be entitled to reasonable reimbursement of expenses from Scailex in respect of board and lodging expenses and other expenses, which Globecom incurred within the scope of providing the Services to Scailex.

  4.10.7.6 Scailex shall insure Mr. Schwartz and Globecom (to the extent possible) under directors’ and officeholders’ liability insurance, and shall grant them indemnification and exemption to the extent customary in Scailex.

  4.10.7.7 Employer-employee relations shall not exist between Scailex and Mr. Eran Schwartz. Scailex shall be entitled to indemnify Globecom in respect of any damage or expense that shall be caused to it in respect of any allegation that Mr. Eran Schwartz was an employee of Scailex.

  4.10.7.8 The Monthly Consideration and all other sums to be paid pursuant to the Agreement as stated, shall be paid on the first day of each month for the following month, plus V.A.T. as required by law, and against a tax invoice.

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  4.10.7.9 In relation to monetary bonuses and/or the granting of option warrants within the framework of the employee and officeholder incentive plan, in the event that Scailex shall pass a resolution regarding such a granting, while the chairman of the board shall be a beneficiary pursuant thereto, the matter shall be submitted for the receipt of all approvals required by law in relation thereto. In consideration for his work as the CEO of IPE, Mr. Schwartz is entitled to wage at the employer cost of approximately NIS 73,000.

  The payments that Globecom received within the scope of the said Agreement for the year 2006, totaled the sum of approximately NIS 0.5 million, and for 2007, the sum of approximately NIS 1.2 million.

  Mr. Schwartz holds the office of CEO and is a director of IPE, the controlling shareholder in the Company, by virtue of its holding of 50.06% of the Company’s issued and paid-up share capital and of the voting rights therein (without dilution). The scope of Mr. Schwartz’s office as the CEO of IPE is a 75% position. The period of Mr. Schwartz’s employment as the CEO of IPE is indefinite and the agreement may be terminated by either of the parties by prior notice of six months. In consideration for his work as the CEO of IPE, Mr. Schwartz is entitled to a monthly wage, plus social benefits and associated benefits. In addition, in March 2008, Mr. Schwartz was granted options to purchase shares of IPE, which shall confer to Mr. Schwartz about 1% of the voting rights and of the issued and paid-up share capital of IPE.

  Furthermore, Mr. Schwartz holds 3% of the issued share capital of Modgal Ltd., the indirect controlling shareholder of IPE, without his being a party to an agreement, whether written or oral, by virtue of which he holds shares jointly with others. Mr. Schwartz holds the office of CEO of I.D. Federman Holdings Ltd. (hereinafter: “Federman”), which holds Modgal Ltd., and is an indirect controlling shareholder, jointly with others, in IPE. In addition, Mr. Schwartz serves as a director in additional companies in the group controlling the controlling shareholders in IPE.

  For details about additional roles that Mr. Schwartz fills in companies affiliated with the Company, see pages 5 – 6 of clause D of this report.

  4.10.8 Option plan (non-listed) for company officers

  4.10.8.1 In 2003 the Company board of directors approved a plan for allocation of options to purchase company ordinary shares of NIS 0.12 par value each (“ordinary shares”) to employees and officers of the Company (“the option plan”). Under the plan, the options would be allocated as per clause 102 and 3(9) of the Income Tax Ordinance and regulations thereof.

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  4.10.8.2 Under the said plan, the Company board of directors approved in 2004 the allocation, at no charge, of 168,000 options (non-listed), exercisable for 168,000 ordinary shares, which are 0.4% of the issued share capital of the Company, fully diluted. Of these 120,000 options were granted to the Company’s then CFO, who is the Company’s CEO as of the report date, exercisable for 120,000 ordinary shares, and 48,000 options were granted to the Company’s then Controller, who is the Company’s CFO as of the report date, exercisable for 48,000 ordinary shares.

  4.10.8.3 The said options were allocated under terms of the option plan in September 2004, at an exercise price of $3.70 per share, and were exercisable in 3 equal parts, starting in January 2005 (until January 2007) for the Company CEO and in March 2005 (until March 2007) for the Company CFO.

  4.10.8.4 The Company’s current CEO, Yahel Shachar, has exercised 80,000 options for company shares, and the CFO has exercised 32,000 options for company shares at an exercise price of NIS 15.5 per option. Immediately after exercising them for company ordinary shares, they sold the shares to Petrochemical at a per share price of NIS 38.29.

  4.10.8.5 In addition to the 56,000 options still held by the Company CEO and CFO (held until September 20, 2014), as of the financial statement date, there are an additional 15,500 options exercisable (see note 7b to financial statements).

  4.10.9 Indemnification of officeholders

  The Company’s Articles of Association prescribe, subject to the provisions of the Companies Act, that the Company may indemnify officeholders therein in relation to the liabilities and expenses specified below, which might be imposed on the officeholder following an action that he performed by virtue of his position as an officeholder:

  4.10.9.1 Any monetary liability that might be imposed on the officeholder by virtue of a court decision, including according to a settlement arrangement, or arbitration approved by the court.

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  4.10.9.2 Reasonable litigation expenses, including lawyers’ fees, in respect of any investigation or proceeding that ended without the filing of an indictment, and without any monetary charge being imposed as an alternative to a criminal proceeding, or which ended without the filing of an indictment, while imposing a monetary charge on the officeholder in respect of criminal offenses not requiring the proof of criminal intent.

  4.10.9.3 Reasonable litigation expenses, including lawyers’ fees, in respect of any civil proceeding filed against the officeholder, or a criminal proceeding for which the officeholder was acquitted or which does not require proving mental grounds.

  The Company Articles of Association also prescribe that the Company may issue an undertaking in advance to indemnify officeholders therein, provided that the advance indemnity undertaking, in respect of the events specified above in subclause 4.10.9.1, shall be limited to events that the board of directors is expected to know about, in light of the Company’s actual activities at the time that the indemnity undertaken was given, and shall be limited to a sum or by criteria that the board of directors determined to be reasonable under the circumstances. These limitations shall be stipulated in the indemnity undertaking to be issued to the officeholders by the Company.

  The Company’s Articles of Association further prescribes that the Company may indemnify an officeholder therein pursuant to that stated above retroactively as well, after an event has occurred, after a suitable resolution of the Company has been passed.

  4.10.9.4 Letters of Indemnity

  For details about the issuance of letters of indemnity to officeholders in the Company, see the reference to regulation 29A in clause D, page D-16 below.

  4.10.10 Officeholders’ insurance

  4.10.10.1 Pursuant to the Company’s Articles of Association, which is subject to the provisions of the Companies Act, the Company may engage in a contract to insure the liability of officeholders in the Company, due to a liability that might be imposed on an officeholder due to an action that he performed by virtue of his being an officeholder therein, in each of the following instances:

  (a) Breach of a duty of care vis-à-vis the Company or other person;

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  (b) Breach of a fiduciary duty vis-à-vis the Company, provided that the officeholder acted with bona fides and provided that he had reasonable grounds to assume that the action would not be detrimental to the Company;

  (c) A pecuniary liability imposed on him in favor of another person.

  4.10.10.2 Notwithstanding that stated above, and pursuant to that prescribed in the Companies Act, the Company did not engage in a contract to insure the liability of officeholders therein in respect of any of the following:

  (a) Breach of a fiduciary duty vis-à-vis the Company, with the exception of that stated above in clause 4.10.10.1 (b);

  (b) Breach of a duty of care committed intentionally or recklessly;

  (c) Action intended to unlawfully reap personal profit;

  (d) Penalty or forfeit imposed on him.

  4.10.10.3 The officeholders' insurance policy of the Company

  For details regarding the liability insurance policy for officeholders in the Company, see reference to regulation 29A, in clause D, page d-18 below.

  4.10.11 Exemption of officeholders

  Pursuant to the Companies Act and the Company’s Articles of Association, the Company may exempt in advance and retroactively an officeholder therein from his liability, in whole or in part, for damages, due to a breach of a duty of care vis-à-vis the Company, by the maximum extent permitted by law.

  Notwithstanding that stated above, the Company shall not be allowed to exempt an officeholder therein from his liability, due to the events specified above in clause 4.10.10.2.

  For details regarding the resolution of the general assembly regarding the issuance of an exemption in advance to officeholders in the Company, see reference to regulation 29A in clause D, page D-18.

  4.10.12 Exemption, indemnification and general insurance

  It is clarified that the provisions above regarding exemption, indemnification and insurance do not and shall not in any way restrict the Company in any manner whatsoever in its engagement in a contract concerning exemption, insurance or indemnification in relation to the matters specified hereunder:

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  4.10.12.1 Persons other than officeholders in the Company, including employees, contractors or consultants of the Company, who are not officeholders therein;

  4.10.12.2 Officeholders in the Company, this, to the extent that the insurance, the exemption or the indemnification are not expressly prohibited by law.

4.11 Investments

  As of the report date, the Company has a material investment conducted by a controlled subsidiary in ORL shares. As of the report date, this investment is presented as an asset available for sale pending receipt of regulatory confirmations required for obtaining control of ORL and subject to terms set forth in the memorandum of understandings. For details of this investment, see note 6a(2) to the financial statements. Also, for details of acquisition of ORL shares, see clause 4.7 above.

4.12 Financing

  As of December 31st, 2007 the Company’s cash, cash equivalents, ORL shares and marketable securities (classified in the financial statements as financial assets available for sale and held to maturity for short-term and long-term) of the Company and its subsidiaries amounted to NIS 1,683.1 million and as of the report date, the set above instruments balance is approximately NIS 1,505.3 million.

  The decrease in the balance occurred due to the continuation of the NIS strengthening vis-à-vis US dollar and due to the decrease in the ORL share price comparing to the share price in the end of 2007.

  4.12.1 Average interest rate for short term / long term bank loans

  As of the report date the Company has no bank loans.

  4.12.2 Average interest rate for short term / long term non-bank loans

  As of the report date the Company has no non-bank loans.

  PCH has capital notes that issued to its shareholders as set forth in clause 4.7.4.5(b).

  4.12.3 Liens and guarantees

  As of the report date, the Company has pledged to a banking corporation by providing a first-ranking lien of a non-material amount for bank guarantee provided by the said banking corporation for the Company’s offices in Herzlia, see clause 4.9 above.

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  4.12.4 Corporate restrictions on obtaining credit

  Upon acquiring the controlling nucleus of ORL in cooperation with Israel Corp. and in view of this being a material investment for the Company, the Company may be deemed part of borrower group together with its controlling shareholders, Israel Corp and companies under their control, subsequent to Bank of Israel guidelines with regard to limitation of liabilities of a borrower or a group of borrowers2. Should the Company apply to an Israeli bank for credit, the Company may face difficulties if the debt ration of the borrower group to which it belongs, compared to the bank’s equity exceeds the rates set forth in the above guidelines. This may limit the Company’s ability to obtain credit from certain Israeli banks as may limit the credit it may obtain.

  Nevertheless, the Company estimates that in such case it may obtain credit from foreign banks or non-banking credit, such as raising capital by issuing bonds.

  This clause includes forward-looking information, as defined in the Securities Law. As stated above, there is no certainty that the Company will obtain the control permit in ORL and that the control agreement will be in force. In addition, estimation about alternative capital raising capabilities are based solely on the Company’s estimation as to the limitations it may face in obtaining credit from Israeli banks and of alternative financing options as to the date of the publication of this report. In actual fact, the Company may face difficulties when trying to raise financing from Israeli banks and difficulties may also arise in obtaining foreign bank financing or non-bank financing.

  4.12.5 Corporate lines of credit, terms and balance of credit used as of the report date

  The Company has no lines of credit.

  4.12.6 Credit rating of the Company, the rating company and changes to rating

  As of the report date, the Company has no credit rating.

  4.12.7 Company estimates of need to raise funds

  Generally, in the frame of checking, from time to time, additional investments, the Company aspires to finance them from equity combined with other financing sources. Additionally, Subject to the Company obtaining the required regulatory confirmations to control and own ORL (for details see clause 4.8 above), and should the Company decide to exercise the Call option granted by the Memorandum of Understanding with Israel Corp. (for details see clause 4.7.3 above), the Company will require external financing in order to acquire the additional ORL shares, in order to allow use of cash balance for future investments. As of the report date, no such decision has been made.


2 Bank of Israel guidelines – Proper Banking Management, Guideline No. 313 “Limitations on liability of a borrower and group of borrowers” (“Guideline 313”).

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4.13 Taxation

  The American shareholders of the Company are likely to be affected in terms of taxation, by the Company’s status as a foreign company traded in the United States, inter alia, in relation to taxation of a dividend distribution, and in relation to taxation of a sale or conversion of Company shares held by them. This, in light of the fact that, since 2006, the Company has been defined, for tax purposes, as a company whose income, for the most part, originates from passive income (PFIC).

  4.13.1 Tax laws applicable to the Company

  The Company and most of its subsidiaries are Israeli companies, and are therefore taxed in Israel and are subject to Israeli tax laws. The Company have several foreign companies being in a liquidation process which are subject to tax laws in their country of incorporation.

  4.13.2 Status of company’s tax assessments

  The Company has final tax assessments through 2002 (including).

  Scailex Vision and its fully-owned subsidiary have final tax assessments through 2005 (including). Scailex Vision is in advanced stages of a tax audit for the year 2006.

  Another consolidated subsidiary was founded only in 2007.

  The effective tax rate of the Company is lower than the statutory tax rate, mainly due to the existence of accumulated losses for tax purposes

  4.13.3 Accumulated tax losses

  The Company has accumulated tax losses amounting to NIS 1,793.3 million.

  Estimated tax losses, deduction for inflation and capital losses to carry forward to future years (NIS in millions):

The Company 1,793.3 
Consolidated companies 116.2 

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4.14 Restrictions on and supervision of corporate business

  US laws restrict a foreign company, which is not a US company, whose securities are listed for trading in the USA, such as the Company, from being an “investment company”, as defined under US laws. During 2006-2007 the Company continued to manage its cash balance, among others, as required in order to avoid being classified as an “investment company”, and therefore most of the Company’s current investments are in daily deposits in the USA and in government securities (as defined in the applicable US law). Based on legal opinion obtained by the Company, the Company believes it will not be categorized as an “investment company” as long as it does not offer company securities in the USA and/or to US citizens.

  By virtue of its holdings in ORL shares, the Company is subject to the Vital Interests Order and to terms set forth in the control permit (if and when such a permit is obtained). Furthermore, the Company is subject to terms specified by the Anti-trust Supervisor with regard to control and holding of ORL (if and when obtained). For further details of said regulatory approvals, see clause 4.8 above.

4.15 Material contracts

  4.15.1 For details of the shareholder contract between the Company, PCH and Linura dated December 21st, 2006 including the agreement which terminate this contract. – see clause 4.7.4 above.

  4.15.2 For details of the Memorandum of Understanding signed between the Company, PCH and Israel Corp. dated February 18th, 2007 and the addendum thereto dated February 19th, 2007 – see clause 4.7.2 above.

  4.15.3 For details regarding the termination of the Memorandum of Agreements, which was signed between Scailex Group and the Israel Corporation, and the receipt of a letter of undertaking by Scailex from the Israel Corporation, see clause 4.7.3. above.

4.16 Legal proceedings

  For details of legal proceedings involving the Company, see note 6b of the financial statements.

4.17 Business objectives and strategy

  The Company wishes to establish its position as a strategic investor and part of the controlling nucleus of ORL. Subject to the Company obtaining the required regulatory approvals to control and hold ORL, the Company may decide to exercise the Call option granted to it subsequent to the contract with Israel Corp., thereby increasing its holding of ORL to 45% of the joint holding (for details see clause 4.7.3 above). Note that if the required regulatory approval required to control and hold ORL is not obtained, this may materially impact the Company’s business objectives and strategy.

  Furthermore, the Company intends to continue and act to identify additional investment opportunities. In the recent months the Company examines varied new investments paths.

  This clause includes forward-looking statements, as defined in the Securities Law. Thus far the Company made no decision to exercise the Call option and there is no certainty that it will be exercised. Furthermore, there is no certainty that regulatory approvals to allow the Company to realize the full rights associated with ORL shares would be obtained. In addition, the Company has not yet established definite decisions related to the investments which it examines. The company examines from time to time new investments and it can examine other investments in the future. Anyhow, there is no certainties that the Company will identify or implement appropriate investments.

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4.18 Anticipated development over the next year

  Correct to the date of this report, and in light of the response received recently from the State (see clause 4.8.1 above), the Company is considering its possible future steps in relation to all matters pertaining to the Control Permit for ORL, and the repercussions, in the event that it shall not receive a permit as stated. In addition, the Company is continuing to examine additional investment opportunities, as shall be resolved from time to time by the board of directors (for details, see clause 4.16 above).

  This clause includes forward-looking information. Thus far the Company made no decision to exercise the Call option and there is no certainty that it will be exercised. In addition, the Company has not yet established definite decisions related to the investments which it examines. The company examines from time to time new investments and it can examine other investments in the future. Anyhow, there is no certainties that the Company will identify or implement appropriate investments.

4.19 Discussion of risk factors

  The following factors may materially impact company operations:

  4.19.1 Macro risk factors and special risks related to the Company

  4.19.1.1 Changes of interest rates and in the bond markets

  As set forth above, the Company invests, among others, in daily deposits and in US government bonds. Subsequently, changes in the US monetary interest rates (FED interest rate) and/or in the value of bonds held by the Company would impact the Company’s business results.

  4.19.1.2 Changes in the USD/NIS exchange rate

  Should the Company be required to assume an investment quoted in shekels, it is liable to be affected by changes in the USD/NIS exchange rate, this since the majority of the Company’s assets are cash and liquid investments quoted in dollars.

  Changes in the USD/NIS exchange rate could also affect the value of the Company’s shekel assets and liabilities in the Company’s financial statements prepared in U.S. dollars

  4.19.1.3 Devaluation of ORL shares

  Changes in global markets and in the Israeli capital market are liable to have a material adverse effect on ORL’s business operations, and accordingly, on ORL’s share price on the stock exchange, thus, directly effecting the Company’s financial statements. Such an effect could be caused by a general slowdown in the global market and/or in the Israeli market, as well as by deterioration in the political-security situation in Israel (such as an escalation of incidents with Israel’s neighbors, mainly on the northern border). Such an effect could also be caused, inter alia, by a change in the prices of crude oil and products thereof, by exposure to fluctuations in the exchange and interest rates, by exposure to inflation and to various types of credit risks.

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  4.19.1.4 Sale of ORL shares at a loss

  As of the report date, the Company (through PCH) holds ORL shares which it purchased in 2007. As of December 31st, 2007, the market value of ORL shares held by PCH is higher by about approximately $ 64.8 million than the total amount paid by the Company for these shares. Should the Company fail to obtain the required regulatory approvals to control and hold ORL, it may sell the shares it holds at a loss, yet the Company is not forced to do so, or in a price which does not reflect the control premium. Consequently the Company’s business results may be impacted. For details of restrictions applicable to the Company in selling ORL shares by virtue of the Memorandum of Understanding, see clause 4.7.3 above.

  4.19.1.5 Restrictions arising from Bank of Israel regulations on group of borrowers

  Upon acquiring the controlling nucleus of ORL in cooperation with Israel Corp. and in view of this being a material investment for the Company, the Company may be deemed part of borrower group together with its controlling shareholders, Israel Corp and companies under their control, subsequent to Bank of Israel guidelines with regard to limitation of liabilities of a borrower or a group of borrowers.3 Should the Company apply to an Israeli bank for credit, the Company may face difficulties if the debt ration of the borrower group to which it belongs, compared to the bank’s equity exceeds the rates set forth in the above guidelines This may limit the Company’s ability to obtain credit from certain Israeli banks as may limit the credit it may obtain.

  Nevertheless, the Company estimates that in such case it may obtain credit from foreign banks or non-banking credit, such as raising capital by issuing bonds.

  4.19.1.6 Identifying investments

  The Company strives to identify business investment opportunities. There is no certainty that the Company would succeed in identifying appropriate business investment opportunities, and/or that those business operations identified by the Company shall yield profits for the Company. Furthermore, the Company may invest in companies with no proven business history.

  Furthermore, macro-economic factors such as economic slowdown in Israel or overseas, or deterioration of Israel’s security may negatively impact the Company’s ability to identify business opportunities in Israel or overseas, as the case may be, and/or the business activities the Company invested in.


3 Bank of Israel guidelines – Proper Banking Management, Guideline No. 313 “Limitations on liability of a borrower and group of borrowers” (“Guideline 313”).

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  4.19.1.7 “Investment company”

  The Company is restricted in raising capital from the general public in the USA, in order to avoid being classified as an “investment company” as set forth in clause 4.14 of the report. As of the date of this report, the Company continues to manage its cash under limitations of US legislation on investment types as stipulated by the relevant legislation, in order to avoid being classified as an “investment company”, and it also continues to constantly review operational investments.

  4.19.1.8 Taxation of US shareholders

  The US shareholders of the Company may be impacted by the Company’s tax status as a foreign company traded in the USA, on the matter of taxation of dividend payments and on the matter of taxation on sale or conversion of company shares held by them. This would occur, for example, in case the Company is considered, for US tax purposes, as a PFIC. For details, see clause 4.13.1 in the report.

  4.19.1.9 Tax Assessments

  The Company operates globally (including in Israel) and the majority of its operations were conducted in various countries during the 90s and through the first half of the current decade. Therefore not all tax assessments issued for these years are final, and some of the tax assessments are still subject to reservations by the tax authorities in such countries.

  Accordingly, the Company and its subsidiaries are subject to tax audits for past years. Should the Company be required to pay additional taxes due to these tax assessments and audits, its financial results would be impacted.

  4.19.1.10 Indemnification for Scailex Vision transaction

  The Company is exposed, since claims of HP that might be entertained shall be at sums exceeding the sums of the provisions (for details, see clause 4.3.1 above).

  Following are company estimates of the type and level of said influence of risk factors on the Company:

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Risk factors Impact degree
Major Impact Medium Impact Minor Impact
Macro risks         Changes to interest and bond market  
Company- specific risks       Decrease of ORL
        value

      Sale of ORL
        shares at a loss
      Identification of new investments

      Tax Assessments

      Indemnification for SV transaction

      Restrictions arising from Bank of Israel
        regulations on group of borrowers
      Taxation of US
        shareholders

      Classification as an
         “investment company”
        under US laws

      Changes in the USD-NIS
        exchange different rate

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Exhibit 99.2

Part B – Directors report for the year 2007 and the three months ended
December 31, 2007

1. Concise of Description of the Company and its environment

  Scailex Corporation Ltd. (“the Company”) is a public Company whose shares are traded in the Tel-Aviv Stock Exchange and are quoted in the OTC Bulletin Board in the US.

  As of December 31, 2007, the ,majority of the Companies assets are shares of Oil refineries Ltd. (“ORL”), cash, cash equivalent, available-for-sale financial assets and securities held-to-maturity.

2. Results of operations

  The Attached Financial Statements have been prepared in accordance with the Israeli Securities Regulations and the International Financial Reporting Standards (IFRS).

  The Company’s currency of operations us the US Dollar and the presentation currency is New Israeli Shekels (NIS), pursuant the provision of the Securities Regulations.

  Income from continuing operations

  The financial income in 2007 amounted to NIS 39.1 million compared to NIS 61.8 millions in 2006. The significant decrease is due to decrease in income from interest as a result of the decrease in cash invested in daily deposits and decrease in the balance of marketable securities due to the investment in the shares of ORL.

  Other income in 2007 amounted to NIS 43.8 millions, most of them derived from dividend received from ORL in the amount of NIS 43.1 million. The other income in 2006 amounted to NIS 17.2 million and was mostly due to dividend received from RTI of NIS 12.6 million, which led to a profit of NIS 8.7 million, as well as a gain from sale of XMPIE shares in consideration of NIS 5.5 million, fully recorded as income.



  Expenses related to continuing operations

  2.2.1 The general and administrative expenses of the Company include mainly expenses in respect of the Company’s financial management, payment to various consultants pursuant to various regulatory requirements which the Company is obligated to meet as a public company in Israel and in the US, expenses related to the examination on new investments and expenses in respect of the ongoing management and handling of the companies that remain in the Company’s ownership after the sale of their assets and operations. In the year 2007 those expenses amounted to NIS 14.6 million compared to NIS 12.7 million in 2006. The increase was mostly due to an increase of NIS 2.3 million in the professional fees item which amounted to NIS 6.3 million due to payments to various consultants in respect of examining new investments.

  2.2.2. Financial expenses in 2007 amounted to NIS 28.2 compared to NIS 1.1 million in 2006. The significant increase stem mainly from exchange rate differences in respect of unlinked capital note issued by PCH to its minority shareholders. PCH received Dollar loans from its shareholders and on August 9, 2007 these loans were converted to nominal capital notes denominated in NIS using the exchange rate of that day (see section 5.5 to this report). Following the appreciation of the NIS from the date of the conversion until the year end, the Company recorded currency translation expense of $5.7 million in the consolidated financial statements drawn in Dollar which is the functional currency of the Company. Accordingly, those rate differences, totaling NIS 21.9 million, have also found expression in the financial statements that are translated from the Dollar statements and presented in Shekels. In addition the amortization of the compensation component related to the capital note which is unlinked and doesn’t carry interest caused additional financial expenses of NIS 3.5 million. Other financial expenses stem from recognition of losses from marketable securities which were classified as comprehensive income in the shareholders equity and bank commissions, similar to 2006.

- 2 -



  2.2.3 In 2007 the Company did not record any other expenses. The other expenses in 2006 amounted to NIS 2.8 million arising from write-off of investment in Dor following the company’s decision to discontinue its investments in this fund.

  Taxes on Income

  In the Year 2007 the Company recorded no taxes on income. The tax expenses in 2006 amounted to approximately NIS 6.7 million, stem mainly from the write down of a tax asset of a foreign subsidiary that entered into liquidation process in July 2006.

  Net income from continuing operations

  The net income from continuing operations amounted to NIS 40.1 million stem mainly from the dividend from ORL of NIS 43.1 million while the difference between financial income and financial expenses was set-off by the general and administrative expenses.

  Income from discontinued operations

  The income from discontinued operations in 2007 amounted to NIS 5.5 million. This income stem mostly from an amount of 1 million dollar received in the beginning of the year from Jemtex and was fully recoded as profit (see section 5.2 to this report) and from net profit of NIS 0.9 million from the discontinued operations of Vision.

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  In 2006 the income from discontinued operations amounted to NIS 59.0 million and was due to price adjustment to the sale of Vision assets and operations, amounting to approximately NIS 17 million (net of tax), proceeds of NIS 3 million released from the trust not recognized as income as of the Vision transaction date and income from reduced tax expense on the same transaction amounting to NIS 20 million. In addition, the Company recorded an income of NIS 21 million from linkage and interest differentials received at SDP from US tax authorities for tax returns of which the income was recognized in 2005 and an income of NIS 13 million from reduced tax expense for discontinued operations of previous years. These incomes were offset by Jemtex operational losses amounting to NIS 16 million until the date it was sold and its operations were discontinued.

  Net income

  The net income in 2007 amounted to NIS 45.6 million compared to NIS 114.8 in 2006. The decrease stem mainly from (1) decrease of NIS 22.7 million in financial income as a result of the decrease in cash and securities due to the investment in ORL; (2) Increase in financial expenses of NIS 27.1 million mainly due to exchange rate differences on capital note issued to the minority shareholders in a subsidiary and (3) Decrease of NIS 53.5 million in income from discontinued operations. On the other hand, the dividend of NIS 43.1 million received from ORL and the fact that there were no other expenses and no tax expenses offset part of the decrease in the net income.

  The results of the forth quarter ended on December 31, 2007

  The net income from continued operations in the forth quarter of 2007 amounted to NIS 32.2 million compared to NIS 15.8 in the forth quarter of 2006. The income from continued operations in the forth quarter of 2007 included dividend received from ORL in the amount of NIS 43.1 million and financial income of NIS 9.7.while the expenses included financial expenses of NIS 14.2 and general and administrative expenses of NIS 6.2 million. The net income in the forth quarter of 2007 included mainly financial income of 17.1 million and revenue from the sale of XMPIE shares in return for NIS 5.5 million, which was all recorded as income, while the general and administrative expenses amounted to NIS 4.8 million and other expenses of NIS 2.8 million was recorded due to write-of of investment in Dor.

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  The income from discontinued operations amounted to NIS 6.4 in the forth quarter of 2007 stem mainly from decrease in the tax expenses related to the sale of the assets and operations of Scailex Vision to HP, which are calculated in NIS, in respect of the amount received from the Escrew account – see section 5.6 to this report. The income from discontinued operations in the forth quarter of 2006 amounted to NIS 32.1 million mainly from reducing the tax expenses from that transaction.

3. Financial condition

  The company’s assets and liabilities include the assets and liabilities of the Company its subsidiary PCH as well as the assets and liabilities of companies whose operations were discontinued or sold and were classified as assets and liabilities from discontinued operations.

  3.1 Total balance sheet

  As of the financial statement date, the total balance sheet amounted to NIS 1,717.9 million, compared to NIS 1,352.2 million as of the end of 2006. The increase is explained mainly by loans received from the minority shareholders in PCH which were converted to capital note presented as long term liability in the amount of NIS 222.8 million and the increase in value of ORL’s shares in the amount of NIS 168.8 million (in NIS terms).

  3.2 Current assets

  As at the date of the financial statements, current assets amounted to NIS 1,680.2 million, compared to NIS 1,253.3 million as at the end of 2005. The main asset of the Company presented under current assets is the investment in ORL shares in the amount of NIS 1,182.3 million. The increase in the current assets stem mainly from the loans received in PCH and the increase in value of ORL’s shares as described above.

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  3.3 Investments and other none current assets

  3.3.1. The balance of the Investments and other none current assets at the balance sheet date amounted to NIS 35.0 million compared to NIS 98.8 million at the end of 2006. The decrease was due to selling and redemption of marketable securities traded in the US for the purpose of investing in ORL.

  3.3.2 The fixed assets at December 31, 2007 totaled NIS 2.7 million compared to NIS 0.1 million at December 31, 2006. The increase stem mainly from leasehold improvements made following the move to the new offices in September 2007.

  3.4 Current Liabilities

  As of December 31, 2007 the current liabilities amounted to NIS 66.6 million stem mainly from liabilities related to discontinued operations in the amount of NIS 56.5 million. The liabilities to suppliers, service providers, current taxes and others totaled to NIS 10.0 million. The current liabilities as of December 31, 2006 amounted to NIS 95.1 million and included liabilities related to discontinued operations in the amount of NIS 86.1 million and liabilities to suppliers, service providers, current taxes and others totaled to NIS 9.0 million. The decrease in current liabilities related to discontinued operations in attributed mainly do decrease in tax liabilities in respect of the sale of Scailex vision assets and operations to HP.

  3.5 Long-term liabilities

  Long-term liabilities at December 31, 2007 amounted to NIS 257.3 million and included capital note issued to the minority shareholders in PCH in the amount of NIS 222.8, provision for deferred taxes related to the profit from the increase in value of ORL shares which was recorded as comprehensive income within the shareholders equity and liabilities for severance pay in the amount of NIS 0.2 million. The long-term liabilities at December 2006 included only liability for severance pay in the amount of NIS 0.1 million.

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  3.6 Shareholders Equity

  The shareholders equity as of December 2007 total to 1,394.0 compared to NIS 1,257.1 at the end of 2006. The increase stem mainly from the net income of 2007 of NIS 45.6 million, increase in value of ORL shares of NIS 218.8 (in Dollar term, net of taxes) and capital surplus arise from the compensation component related to capital note issued to the minority shareholders in PCH in the amount of NIS 12.7 million. Distribution of dividend to the minority shareholders of Vision in the amount of NIS 24.2 and the erosion of the equity as a result of the devaluation of the Dollar in the amount of NIS 118.5 million caused decrease in the shareholders equity.

4. Liquidity and financial sources

  Cash flows from operations

  The positive cash flows from operations in 2007 amounted to NIS 75.0 million stem mainly from dividend received from ORL in the amount of NIS 43.1 and financial income of NIS 33.6 million. The positive cash flows from operation in 2006 amounted to NIS 305.4 million stem mainly from decrease in cash allocated to discontinued operations due to repayment of part of the liabilities of the discontinued operations of Vision after the sale of its assets and operations (including distribution of dividend which decreased the liabilities toward the minority) and from tax refund in respect of previous years in SDP and other proceeds related to price adjustment to the transaction of the sale of vision to HP.

  Cash flow from investing activities

  In 2007 the Company recorded negative cash flows from investing activities of NIS 822.0 million from investing activity. The said amount include mainly the purchase of shares of ORL In the amount of NIS 1,013.6 million and on the other end realization of American bonds in a total amount of NIS 195.6 million. The positive cash flows from investing activities in 2006 amounted to NIS 28.3 million stem mainly from receiving the Escrew account from the sale of SDP in the amount of NIS 22.6 million and net realization (sales and redemption less purchases) of financial assets in the amount of NIS 7.3 million.

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  Cash flows from financing activities

  The cash flows from financing activities in 2007 amounted to NIS 205.8 million stem mainly from receiving of loans (which later converted to capital note) from the minority shareholders of PCH in the amount NIS 230.3 million, net. This amount was partly offset by distribution of dividend to the minority shareholders of Vision in a total amount of NIS 24.4 million. The negative cash flow from financing activity in 2006 amounted to NIS 159.8 mainly due to dividend distributed by Vision to its shareholders of which the share of the minority shareholders was NIS 161.0 million.

  The cash, cash equivalents and marketable securities balance as of December 31, 2007 was NIS 1,683.1 million (of which NIS 25.6 million presented under current assets from discontinued operations) compared to a balance of NIS 1,285.1 million as of December 31, 2005 (of which NIS 13.4 million presented under current assets from discontinued operations).

  The Company has no bank liabilities but there is a liability in respect of capital note issued to the minority shareholders in PCH in the amount of NIS 222.8 million. As to the terms of this capital note – see section 5.5 to this report.

  During February 2007, two officeholders of the Company exercised 112,000 options to ordinary shares at an exercise price of $3.70 (NIS 15.5) per option. On the day of exercise, Petrochemical Enterprise Holdings Ltd. – the mother company of the Company, purchased the said shares from the officeholders for NIS 38.29 per share.

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5. Commitments and substantial events during the report’s period

  As to the purchase of shares of ORL in the offer and the privatization, the understandings with IC and the regulatory difficulties in obtaining the control permit – see section 4.7 and 4.8 to the description of the Company.

  After the initial purchase of ORL shares in the offer from February 20, 2007 and until the end of 2007, PCH purchased additional 131.3 millions shares of ORL in the TASE for a total of NIS 406.4 millions at an average price of NIS 3.10 per share. As a result, at the end of 2007 PCH holds 15.76% of the outstanding shares of ORL.

  Until the receiving of the control permit, the holding in ORL is presented as financial assets available-for-sale and it revaluates to comprehensive income within the shareholders equity according to the market value at the balance sheet date.

  On January 4, 2007, Jemtex entered into an investment agreement with a third party investor, and consequently an amount of approximately $1 million (plus interest) was paid to the Company as a repayment of a loan in return of writing-off the remaining of the loans according to the agreement for the transfer of the control of the Company – see section 4.4.2 in the description of the Company (as to the agreement with the third party).

  In December 2006 Scailex Vision filed with the court a request to reduce its capital by $20 million. On January 29, 2007 Vision obtained court approval and on February 5, 2007 Vision distributed $20 million in cash to its shareholders. The company received its share of $14.3 million from this distribution.

  On March 20, 2007, the Audit Committee and the Board approved the engagement of the Company in a management agreement with Globecom Investments Ltd, (hereinafter – Globecom), a private company under the control of Mr. Eran Schwartz, according to which Globecom will render services by Mr. Eran Schwartz, as active chairman of the Company. For further details on the management agreement – see section 4.10.7 to the description of the Company.

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  On August 9, 2007, PCH’s board of directors and the general meeting approved an amendment to the shareholders agreement with Linura from December 21st 2006 (“the amendment to the shareholders agreement”). This amendment laid down the conditions of the loans provided to PCH by the shareholders. The amendment determines, inter alia, that the loans, which were transferred in US dollars, would bear dollar interest from the date of the providing each loan until August 9th 2007. At that date (August 9th 2007) the loans will be converted into NIS. The repayment of the loans will be made in NIS and will not bear interest, linkage or exchange rate differences and in any event will not be made before January 1st, 2009 (For further details related to the termination of the agreement with Linura after the balance sheet date, see section 13.2 in this report).

  According to the agreement from 2005 for the sale of the majority of the assets and operations of Scailex Vision, a subsidiary of the company (78.6%) to HP, the sum of $23 million (“the trust amount”) was deposited with a trustee (“trustee”) to secure HP’s rights to indemnification.

  During 2007, HP submitted claims to the trustee at the inclusive sum of USD 15.8 million, which were entirely rejected by Scailex Vision. In accordance with the proceedings prescribed in the agreement, an attempt was made to resolve the dispute between the parties, and, since it was unsuccessful, the parties then referred to mediation before an agreed mediator. Correct to the publication date of this Report, the parties are at the outset of a mediation proceeding.

  During November 2007, Scailex Vision received the balance of the trust deposit in respect whereof no claims were filed, including the accrued interest, at the inclusive sum of approximately $8.8 million.

  Scailex Vision has allocated provisions totaling $11 million in respect of claims pertaining to the sum of the trust. For additional details, see note 6.b.(2) of the Financial Statements.

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  In August 14, 2007 the Company renewed the Directors and Officers insurance for another one year. The coverage remain on $30 million, and the premium that was paid to the insurer was NIS 1.3 million ($0.3 million).

  The Company’s board of directors has appointed Mr Yossi Arad, who has accounting and financial expertise, as an additional (10th) member of the board of directors.

  The Company’s board of directors has approved, in a general meeting on December 31st, 2007, increasing its authorized share capital by 12 million ordinary shares of NIS 0.12 n.v. each, so that the Company’s authorized capital stands at NIS 7,200,000, divided into 60 million ordinary shares of NIS 0.12 n.v. each, and to alter the Company’s memorandum and articles of association in accordance with the resolution.

6. Qualitative report on the exposure to market risks and their management

  The person responsible for management of market risk for the company

  The person responsible for management of market risk for the company is Mr. Shachar Rachim – company CFO.

  Market risk to which the company is exposed

  Most of the company’s assets are shares of ORL, cash and cash equivalents invested in dollar-denominated deposits with Israeli and US banks and in US government bonds and highly-rated corporate bonds.

  The principal risk to which the Company is exposed is an impairment of these assets, and particularly an impairment of the ORL share, which is mainly affected by ORL’s performance and by macro effects of the Israeli and global markets on the share rate. The Company has classified its investment in ORL shares as an “asset available for sale” and revaluates the investment according to its market value to comprehensive income within the shareholders equity; therefore, fluctuations in ORL’s share rate will have an impact on the Company’s equity.

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  The company’s investments in US Bonds are mostly dependent on the US monetary interest rate. Consequently, changes of the US monetary interest rate (FED interest rate) and/or the value of bonds held by the company would impact the company’s business results.

  In addition, the Company is exposed to exchange rate differences and particularly to NIS/US Dollar rate since the Company’s main activities is in the US dollar, however the financial reports presented in NIS as required by the Israeli Security regulations. Hence, the Company is exposed in its reports to the US dollar-NIS fluctuation rates, which presented in the reports as currency translation amount in the shareholders equity.

  An unlinked NIS capital note that a subsidiary issued to its minority shareholders is included under the Company’s consolidated liabilities. This note is exposed to fluctuations of the dollar-NIS exchange rate, and any strengthening of the NIS vis-à-vis the dollar (similarly to the change in 2007) causes expenses from exchange rate differentials to be recorded in the Financial Statements drawn up in Dollar. These exchange rate differentials are also expressed in NIS in the translated Financial Statements prepared in Israeli currency.

  Disclosure of the Financial Statement Approval Proceedings in the Corporation Reported

  In accordance with the audit committee’s regulations, which have been adopted by the company’s board of directors, the company’s audit committee is the organ responsible for the overall control of the company (within the meaning of Opinion No. 76 of the Israeli Institute of Certified Public Accountants). Every quarter, including this quarter, the financial statements and board of directors’ reports are furnished to the members of the audit committee for scrutiny a few days before the date of the meeting fixed for discussing the statements and reports and for formulating a recommendation to the company’s board of directors to approve the statements and reports.

- 12 -



  The audit committee consists of five members, including the company’s two outside directors, Mr Yoav Biran and Mr Dror Barzilay, and another three directors – Mr Shalom Singer, Ms Irit Ben Ami and Mr Mordechai Peled. Four of the audit committee’s members have been defined as having accounting and financial expertise.

  During the audit committee’s meetings to approve these financial statements, the financial results, financial position and every main act or change occurring during the period reported were reviewed and a discussion was held in the presence of the Company’s management, during which questions were raised and answers were given to the committee members’ questions. In addition, the Company’s risks factors and the risks management were discussed and the committee also discussed the internal auditor report related to employees’ compensation. The company’s outside auditor was also present at the meeting and he gave his professional opinion on accounting issues in connection with the company’s financial statements.

  After the deliberation, the audit committee recommended to the board of directors that the Financial Statements be approved. The financial results, the financial position and every activity or significant change that occurred during the period under report were reviewed and deliberated during the board of directors’ meeting, at which time, questions were raised and answers given to the questions of the members of the board.

  Company policy on market risk management

  The Company’s assets and liabilities are in nominal NIS, index-linked NIS and dollars. The assets are comprised mainly of cash and U.S. government bonds (which, for the most part, are held in dollars in well-known banks in the United States, and bear dollar interest), as well as ORL shares, which are quoted in NIS and traded on the Tel-Aviv Stock Exchange. The Company has no liabilities to banks; the majority of its liabilities are vis-à-vis suppliers and institutions in Israel and the United States. Additionally, a subsidiary has a liability in respect of nominal NIS capital notes that it issued to its shareholders.

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  Accordingly, the Company faces economic and accounting exposures in respect of a change in the NIS-dollar exchange rate, exposure to the CPI in Israel, to interest in the United States and to fluctuations in the ORL share rate, which is presented as a financial asset available for sale. Since, as a rule, the Company does not purchase means of protection for its investments, mainly due to the statutory restrictions on the purchase of various derivatives by virtue of the provisions of the Investment Company Act, 1940, in the United States, the Company performs periodic evaluations with regard to existing economic and accounting exposures and with regard to strategies for minimizing them.

  The person responsible of risk management in the company uses an external consultant from a reputable investment firm to control exposure with regard to the Marketable securities of the company. The person in charge of risk management reports and consults with the company’s management and Financial Investment Committee which composed of board members, which convened quarterly or upon any external event requiring an immediate decision in response to a situation requiting a decision to be made.

  Supervision of market risk management policy and its implementation

  The company routinely reviews the return on its dollar-denominated deposits and fluctuations in the US monetary interest, which directly impacts the price of marketable bonds it holds. To this end the company used a consulting company specializing in this field. Company investments are managed and controlled according to the guidance of the Investment Committee, comprised of board members, which convenes at least 4 times a year to set the investment strategy and policy on this matter, together with management.

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  The following table summarizes the Company’s linkage bases as at December 31, 2007 (in NIS thousands):

December 31, 2007
In or
linked to
USD

In or
linked to
other
currencies

Linked to
CPI

Unlinked
Marketable
securities

Non-monetary
assets

Total
NIS thousands
 
Cash and cash equivalent      423,536    -    -    4,755    -    -    428,291  
Available-for-sale assets    3,849    -    -    -    1,182,299    -    1,186,148  
Short-term investments held  
to maturity    8,043    -    -    -    -    -    8,043  
Other receivables    -    -    -    2,530    -    9,643    12,173  
Current assets in respect of  
discontinued operations    44,133    1,418    -    -    -    -    45,551  
Long-term investments held  
until maturity    35,032    -    -    -    -    -    35,032  
Fixed assets    -    -    -    -    -    2,679    2,679  







      Total assets    514,593    1,418    -    7,285    1,182,299    12,322    1,717,917  







   
Trade accounts payables    481    -    -    1,003    -    -    1,484  
Other payables    2,514    -    -    1,613    -    -    4,127  
Taxes payables    406    -    4,036    -    -    -    4,442  
Deferred taxes liabilities    -    -    -    -    -    34,345    34,345  
Current liabilities in  
respect of discontinued  
operations    17,098    217    37,642    1,577    -    -    56,534  
Liabilities in respect of  
retirement, net    -    -    -    200    -    -    200  
Capital note to minority  
shareholders in a subsidiary    -    -    -    222,798    -    -    222,798  







      Total liabilities    20,499    217    41,678    227,191    -    34,345    333,930  







Total net balance sheet    494,094    1,201    (41,678 )  (219,906 )  1,182,299    (22,023 )  1,393,987  








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The following table summarizes the Company’s linkage bases as at December 31, 2006 (in NIS thousands):

December 31, 2006
In or
linked to
USD

In or
linked to
other
currencies

Linked to
CPI

Unlinked
Non-monetary
assets

Total
NIS thousands
 
Cash and cash equivalent      1,019,200              279         1,019,479  
Available for sale assets    61,765                        61,765  
Short-term investments held  
to maturity    93,343                        93,343  
Other accounts receivable              790    317    1,906    3,013  
Current assets in respect of  
discontinued operations    66,920    8,661         165         75,746  
Long-term available for sale  
assets    1,707                        1,707  
Long-term investments held  
to maturity    97,103                        97,103  
Fixed assets                        51    51  






      Total assets    1,340,038    8,661    790    761    1,957    1,352,207  






   
Trade accounts payables    30              295         325  
Other payables    938              3,237         4,175  
Taxes payables              4,457              4,457  
Current liabilities in  
respect of discontinued  
operations    19,484    101    66,466    63         89,114  
Liabilities in respect of  
retirement                   59         59  
      Total liabilities    20,452    101    70,923    3,654    -    95,130  






Total net balance sheet    1,319,586    8,560    (70,133 )  (2,893 )  1,957    1,257,077  







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  Sensitivity tests

  The Company made four sensitivity tests related to changes in the fair value of thefinancial instruments to the balance sheet date.

  The fair value of the financial instruments set up as follow:

  1. The fair value of the US bonds stated according to the burse prices to the balance sheet date.

  2. The fair value of the short term financial assets that are not linked to the CPI stated according to their nominal value in NIS or according to the currency exchange rate to the balance sheet date that the asset is related to.

  3. The fair value of financial instruments that are linked to the CPI stated according to the known CPI to the balance sheet date.

  4. The fair value of the marketable securities which were classified as available for sale assets was determined by their price in the Stock Exchange as of the balance sheet date.

  The four sensitivity tests that we have made were related to the following market changes:

  1. Exchange rate – changes in the foreign currency rates on the assets/liabilities that nominated in foreign currency.

  2. Interest – changes in the US dollar interest and their influence on the US bonds fair value.

  3. CPI – changes of the assets/liabilities linked to the CPI that can occur due to increase/decrease of CPI.

  4. Marketable securities value – the changes in the marketable securities fair value which is influenced by the result of the operations of the Companies that issued these securities and from macro changes influencing the capital market.

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Changes in foreign exchange rate

10%
5%
Fair Value
1$=3.846 NIS

-5%
-10%
 
Current assets                        
Cash and Cash equivalents    (476 )  (238 )  4,755    238    476  
Current assets from discontinued operations    (253 )  (127 )  2,530    127    253  
Non current assets   
Available-for-sale and held-to-maturity long-term    0    0    0    0    0  





Total assets     (729 )  (364 )  7,285    364    729  





   
Current liabilities   
Trade creditors    (100 )  (50 )  1,003    50    100  
Other creditors and accruals    (161 )  (81 )  1,613    81    161  
Current income taxes liabilities    0    0    0    0    0  
Current liabilities related to discontinued operation    (158 )  (79 )  1,577    79    158  
Liability for employee rights upon retirement    (20 )  (10 )  200    10    20  
Capital note from minority shareholders in a subsidiary    (22,280 )  (11,140 )  222,798    11,140    22,280  





Total liabilities     (22,719 )  (11,360 )  227,191    11,360    22,719  





Total balance     21,991    10,995    (219,906 )  (10,995 )  (21,991 )






Changes in US dollar's interest rate

10%
5%
Fair Value
-5%
-10%
 
Current assets                        
Available-for-sale assets and held-to-maturity investments    (28 )  (14 )  11,892    14    28  
Non current assets   
Investments held-to-maturity    (278 )  (138 )  35,031    137    274  





Total assets     (306 )  (152 )  46,923    152    302  





   
Current liabilities   
Trade creditors    0    0    0    0    0  





Total liabilities     0    0    0    0    0  





Total balance     (306 )  (152 )  46,923    152    302  






Changes in the CPI

Increase of 0.2%
Increase of 0.1%
Fair Value
Decrease of 0.1%
Decrease of 0.2%
 
Current assets                        
Other receivables    0    0    0    0    0  
Non current assets   





Total assets     0    0    0    0    0  





   
Current liabilities   
Current income taxes liabilities    83    42    41,678    (42 )  (83 )





Total liabilities     83    42    41,678    (42 )  (83 )





Total balance     (83 )  (42 )  (41,678 )  42    83  






Changes in fair value of Bazan share

10%
5%
Fair Value
-5%
-10%
 
Current assets                        
Available-for-sale financial assets    118,230    59,115    1,182,299    (59,115 )  (118,230 )





Total assets     118,230    59,115    1,182,299    (59,115 )  (118,230 )





Total liabilities     0    0    0    0    0  





Total balance     118,230    59,115    1,182,299    (59,115 )  (118,230 )






- 18 -



  Hedging transactions status

  To the financial statement date, the company has no hedging transactions.

7. Critical accounting estimates

  The Company uses estimates and assumptions regarding the future which are rarely identical to actual results. The estimates and assumptions that reflect the highest exposure to material changes in the amount of its assets and liabilities in the subsequent financial year are presented below:

  Taxes on income and deferred taxes

  The group is a tax-payer in a several number of jurisdictions and therefore the group’s management is required to operate significant judgment in determining the total provision in respect of taxes on income. The group has many transactions for which the determination of the final tax liabilities is uncertain. The group records provisions in its books based on its assessment regarding the potential reasonable additional tax payments in respect of said transactions. When the final tax liability determined by the tax authorities differs from the tax liability recorded in the Company’s books in previous period, the difference is charged to the statement of income in the period in which the final assessment was made by the tax authorities. Furthermore, the group records deferred tax assets and liabilities on the basis of the differences between the book amounts and the amounts of assets and liabilities for tax purposes.

  The group regularly examines the recoverability of its deferred tax assets on the basis of historical taxable income, projected taxable income, anticipated timing of temporary differences, and the implementation of a tax planning strategy.

- 19 -



  If the Company is unable to generate taxable income in a sufficient amount, or in the event of a material change in effective tax rates in the period during which the temporary differences become taxable or deductible, the group may be required to write off part of the deferred tax asset or increase its liability in respect of deferred taxes, which may increase its effective tax rate and adversely affect the results of its operations.

  Severance Pay

  The present value of the liabilities for severance pay depends on several factors that are determined on an actuarial basis pursuant to various assumptions. The assumptions used in calculating net costs (income) in respect of severance pay include the long-term rate of return on the severance fund and the capitalization rate. Changes in these assumptions will affect the book value of the assets and liabilities in respect of severance pay.

  The assumption of the projected return on the severance pay fund is determined in a uniform manner, pursuant to long term historical rates. The Company determined the required rate of capitalization at the end of each year. This rate of capitalization will be used to estimate the present value of the future cash flows that will be required to cover the liability for severance pay. The blue-chip corporate bond market is not sufficiently liquid to be used in determining capitalization rates. Therefore, in determining the required capitalization rate, the group bases its determinations on interest rates applicable to government bonds stated in the currency in which severance benefits are to be paid, and whose period until maturity is similar to the period of said liability. Other key assumptions concerning pension liabilities, such as future salary increases, are based on inflation rates of existing salary levels.

  Provision for contingencies

  The provisions for liabilities pending the outcome of legal complaints are recorded in the books based on the judgment of the group’s management regarding the probability of the need to divert cash flows to discharge said liabilities, and on the basis of an estimate determined by the management in respect of the present value of the projected cash flows required to discharge existing obligations.

- 20 -



8. Policy of charitable donations

  In its annual budget, the Company allocates an amount designated for charitable donations that is distributed in the course of the year to needy organizations. In 2007 the charitable donation budget amounted to $ 100 thousand. Actual charitable donations made amounted to NIS 389 thousand.

9. Directors who have accounting and finance expertise

  Under Company Regulations (Requirements and tests for directors with accounting and financial skills and for directors with professional skills), 2005 the company board of directors decided that, in consideration of the scope of company operations, its operating area and the absence of any special complexity in its operations, the appropriate minimum number of directors having accounting and financial skills would be two directors.

  The board of directors estimated that a director with accounting and financial skills is a director having academic education in an economic/accounting discipline as well as business management experience in an economic and/or financial area which proves his knowledge and understanding in accounting and financial matters relevant to company operations.

  Below is the list of directors the company regards as having accounting and financial expertise, with description of their education and experience (for details of education and experience of these directors, see Part D, section 26)

  Eran Schwartz, Arie Zeif, Shalom Zinger, Mordechai Peled, Dr. Arie Ovadia, Dror Barzilay, Irit Ben-Ami and Yossi Arad.

- 21 -



10. Auditor fees and work hours

Auditor fees
(NIS thousands)
Audit Tax Consultant Working Hours
2007 357.2 82.0 210.3 1,881
2006 893.5 588.4 103.9 4,536

  The decrease in the accountants’ fee in 2007 vis-à-vis 2006 derived mainly from the fact that in 2006, the Company made the transition to reporting according to the Securities Regulations and according to international standards, a process that required a great many hours of work together with the auditors. In addition, in 2006 the Company operated in different geographical areas mainly for liquidation of companies and reporting to the authorities in regard.

11. Dicslosure with regard to internal auditor

  Since 2006, the company’s internal auditor is Mr. Moshe Cohen, CPA, partner in the CPA firm of Chaikin, Cohen, Rubin and Gilboa. The internal auditor is not an employee of the company, and renders internal audit services as an external entity.

  The scope of the internal audit is according to work plan determine from time to time. The fee is per actual hours invested by the auditor.

  No risk assessment review was conducted prior to commencement of the internal audit, due to the Company structure and its nature.

  It was decided that the subjects for auditing shall be determined according to the risks and needs to be defined by the audit committee periodically.

  At the beginning of the year, pursuant to the recommendation of the audit committee, an audit was performed on the subject of cash management in the Company and in one of its subsidiaries; this subsidiary, whose principal assets are cash, is managed by the Company, due to the materiality of the matter of cash therein. The results of the audit did not show any material deficiencies, and recommendations presented were adopted by the Company and any indicated deficiencies were rectified accordingly. At the end of 2007, an internal audit was performed on the subject of wages in the Company. The results and recommendations of this audit were presented to the Company board of directors on March 13, 2008. The audit report shall be studied by the Company, the recommendations shall be adopted and deficiencies reported therein shall be rectified. It should be noted that this audit found no material deficiencies.

- 22 -



  In 2007, the fee of the internal auditor totaled approximately NIS 43.6 thousand, while in 2006, the fee of the internal auditor totaled approximately NIS 30 thousand.

  The internal auditor conducts the audit according to generally accepted professional standards in Israel and overseas, and as per Section 4(b) of the Internal Audit Law, 1992. The supervisor for the organization of the internal auditor is Mr. Yahel Shachar.

  The company’s board of directors estimates that the scope, nature and continued operation and work plan of the internal auditor are reasonable under the circumstances, and serve to achieve the objectives of internal audit at the company.

  The internal auditor has free access, as set forth in Section 9 of the Internal Audit Law, 1992 including constant, direct access to company information systems, including its financial data.

  Note that activity of the internal auditor is not subject to any restrictions, and includes constant, direct free access to company information systems and financial data.

  The internal auditor is not working in the Company in any other position as set in clause 146(b) to the Company law, and to clause 8 in the internal auditing law.

12. Colleagues survey

  The Company gave an authorization to disclose data that will be required from the Company in connection to a sampling that colleagues survey that initiate by the Institute of certified accountant in Israel, under conditions that it will implement under a confidentiality and the Company will got the assurance that there are no interests opposition of the surveyors.

- 23 -



13. Subsequent events

  13.1 On February 21, 2008, the response of the Government Companies Authority was received, whereby the apparent position, that of recommending to the Prime Minister and the Minister of Finance that PCH’s application for the control permit in ORL should be rejected, was presented to the State Attorney General. For details, see clause 4.8.1 of the Description of the Corporation’s Businesses.

  13.2 Further to the agreements, on March 13, 2008, the Company and Linura reached an agreement whereby the Company shall purchase Linura's entire holdings in PCH for the consideration of a total of USD 57.2 million, and shall receive, by way of assignment, the capital note that PCH had issued to Linura. The consideration shall be paid in a single payment by March 28, 2008. Upon completion of the acquisition of Linura's shares in PCH, PCH shall become a wholly owned subsidiary of the Company, and the PCH shareholders' agreement shall basically expire.

  Upon and following the completion of the said acquisition, a capital gain of approximately NIS 26 million is likely to be created in the Company during the first quarter of 2008, and the Company's equity is likely to increase by approximately NIS 70 million (including the said capital gain). (The calculations are approximated and are based on the shekel/dollar exchange rate and the closing rate of the ORL share on March 13, 2008. Since the final results depend on the value of the said rates on the actual payment date, the results could change significantly).

/s/ Eran Schwartz
——————————————
Eran Schwartz
Chairman of the Board
/s/ Yahel Shachar
——————————————
Yahel Shachar
CEO

- 24 -





Exhibit 99.3

SCAILEX CORPORATION LTD.

FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007



SCAILEX CORPORATION LTD.

FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007

TABLE OF CONTENTS

Page
CONSOLIDATED FINANCIAL STATEMENTS -
    Balance sheets F-2-F-3
    Statements of operations F-4
    Statements of changes in shareholders' equity F-5
    Statements of cash flows F-6-F-7
    Notes to financial statements F-8-F-46

F - 1



SCAILEX CORPORATION LTD.
CONSOLIDATED BALANCE SHEETS

December 31
Notes
2007
2006
NIS in thousands
 
                          A s s e t s                
CURRENT ASSETS:   
    Cash and cash equivalents    10a    428,291    *1,019,479
    Available-for-sale financial assets    10b    1,186,148    61,765  
    Securities held-to-maturity    10c    8,043    93,343  
    Other receivables    10d    12,173    3,013  
    Current assets of discontinued operations    1c    45,551    *75,746


          1,680,206    1,253,346  


   
INVESTMENTS AND OTHER NON-CURRENT ASSETS:   
    Available-for-sale financial assets    10b    -    1,707  
    Securities held-to-maturity    10c    35,032    97,103  


          35,032    98,810  


   
FIXED ASSETS     4    2,679    51  


   
TOTAL ASSETS          1,717,917    1,352,207  



* Reclassified

——————————————
Shachar Rachim
CFO
——————————————
Yahel Shachar
CEO
————————————————
Eran Schwartz
Chairman of the board of directors

Date of approval for the financial statements by the board of the directors: March 13, 2008

The accompanying notes are an integral part of the financial statements

F - 2



SCAILEX CORPORATION LTD.
CONSOLIDATED BALANCE SHEETS

December 31
Notes
2007
2006
NIS in thousands
 
            Liabilities and shareholders' equity                
CURRENT LIABILITIES:   
Trade payables         1,484    325  
Creditors and accruals    10e    4,127    4,175  
Income taxes payable         4,442    4,457  
Current liabilities related to discontinued operation    1c    56,534    86,114  


               T o t a l  current Liabilities         66,587    95,071  


   
LONG-TERM LIABILITIES   
Liability for employee rights upon retirement    5    200    *59
Deferred income taxes         34,345    -  
Capital note from minority shareholders in a subsidiary         222,798    -  


               T o t a l  long-term Liabilities         257,343    59  


   
SHAREHOLDERS' EQUITY     7    1,393,987    1,257,077  


   
          1,717,917    1,352,207  



* Reclassified

The accompanying notes are an integral part of the financial statements

F - 3



SCAILEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended
December 31

Notes
2007
2006
2005
NIS in Thousands (except for earnings
per share data)

 
INCOME                    
FINANCIAL INCOME    10f    39,115    61,798    19,913  
OTHER INCOME    10h    43,759    17,243    4,504  
GAIN FROM SALE / SHARE IN RESULTS OF ASSOCIATED COMPANY    10j    -    -    13,731  



          82,874    79,041    38,148  



   
EXPENSES   
GENERAL AND ADMINISTRATIVE EXPENSES    10i    (14,552 )  (12,652 )  (13,489 )
FINANCIAL EXPENSES    10g    (28,208 )  (1,105 )  (1,355 )
OTHER EXPENSES         -    (2,793 )  (431 )



          (42,760 )  (16,550 )  (15,275 )



   
INCOME BEFORE TAXES ON INCOME          40,114    62,491    22,873  
TAXES ON INCOME / (TAX BENEFIT)    8f    -    6,694    (1,247 )



NET INCOME FROM CONTINUING OPERATIONS          40,114    55,797    24,120  
NET INCOME FROM DISCONTINUED OPERATIONS     1c    5,503    58,954    497,889  



NET INCOME FOR THE PERIOD          45,617    114,751    522,009  



   
Related net income (loss) for the period:   
 Company shareholders         61,523    102,175    423,116  
 Minority shareholders         (15,906 )  12,576    98,893  



               T o t a l          45,617    114,751    522,009  



   
EARNINGS PER ORDINARY SHARE NIS 0.12 PAR VALUE ("EPS") FOR THE COMPANY   
SHAREHOLDERS   
   
    BASIC:   
    Continuing operations         1.5    1.4    0.6  
    Discontinued operation         0.1    1.3    10.5  



Basic earnings per share         1.6    2.7    11.1  



   
Average number of shares (in thousands)          38,164    38,066    38,066  



   
DILUTED:   
Continuing operations         1.5    1.4    0.6  
Discontinued operation         0.1    1.3    9.9  



Diluted earning per share         1.6    2.7    10.5  



   
Average number of shares (in thousands)          38,207    38,156    38,134  




The accompanying notes are an integral part of these financial statements

F - 4



SCAILEX CORPORATION LTD.
CONDOLIDATED STEATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Share capital
Capital
surplus

Treasury
shares

Currency
translation

Accumulated
other
comprehensive
income (loss)

Retained
earning

Total
Minority
interest

Total
share
Holders
Equity

Shares
Sum
T h o u s a n d s   N I S 
BALANCE AT JANUARY 1, 2006      38,066,363    26,731    1,209,613    (139,148 )  50,518    2,154    *68,701  *1,218,569  *167,178  1,385,747  
Changes during 2006:   
Income for the period    -    -    -    -    -    -    102,175    102,175    12,576    114,751  
Other comprehensive income (loss), net:  
   Available-for-sale securities    -    -    -    -    -    6,863    -    6,863    -    6,863  
   Realized gain from available-for-sale securities    -    -    -    -    -    (11,899 )  -    (11,889 )  -    (11,889 )
   Currency translation    -    -    -    -    (112,604 )  -    -    (112,604 )  5,906    (106,698 )



   Total comprehensive Income (loss)                                              (117,640 )  5,906    (111,734 )
  Payment made by shareholders to senior employees    -    -    1,158    -    -    -    -    1,158    -    1,158  
Amortization of deferred stock compensation related to  
  options granted to employees    -    -    147    -    -    -    -    147    -    147  
Conversion of loans and option to shares by the minority  
  in a subsidiary    -    -         -    -    -    -    -    27,995    27,995  
Dividend distributed to the minority    -    -    -    -    -    -    -    -    (160,987 )  (160,987 )










BALANCE AT DECEMBER 31 2006     38,066,363    26,731    1,210,918    (139,148 )  (62,086 )  (2,882 )  170,876    1,204,409    52,668    1,257,077  
   
Changes during 2007:   
Income (loss) for the period    -    -    -    -    -    -    61,523    61,523    (15,906 )  45,617  
Other comprehensive income (loss), net  
   Available-for-sale securities    -    -    -    -    -    175,227    -    175,227    43,498    218,725  
   Realized losses from available-for-sale securities    -    -    -    -    -    904    -    904    -    904  
   Currency translation    -    -    -    -    (112,724 )  -    -    (112,724 )  (5,817 )  (118,541 )



   Total comprehensive Income                                              63,407    37,681    102,353  
 Compensation component related to capital note    -    -    -    -    -    -    -    -    12,690    12,690  
Deferred stock compensation related to options granted to  
  employees    -    -    18    -    -    -    -    18    -    18  
Exercise of options to ordinary shares    112,000    17    1,724    -    -    -    -    1,741    -    1,741  
Dividend distributed to the minority    -    -    -    -    -    -    -    -    (24,244 )  (24,244 )










BALANCE AT DECEMBER 31, 2007     38,178,363    26,748    1,212,660    (139,148 )  (174,810 )  173,249    232,399    1,331,098    62,889    1,393,987  










* Reclassified

The accompanying notes are an integral part of the financial statements

F - 5



SCAILEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
2007
2006
2005
N I S   i n   t h o u s a n d s
 
CASH FLOWS FROM OPERATING ACTIVITIES:                
    Net income    45,617    114,751    522,009  
    Adjustments to reconcile net income from  
    continuing operations to net cash provided by  
    operating activities (A)    (62,604 )  *(179,409 )  *(535,265 )
    Received interest    33,621    *62,437    *21,628  
    Dividends received from investments in available-for-sale  
        financial assets    45,308    *12,878    *4,631  
    Net cash provided by (used in) discontinued  
    operation    13,043    294,727    (88,055 )



    Net cash provided by (used in) operating activities    74,985    305,384    (75,052 )



CASH FLOWS FROM INVESTING ACTIVITIES:   
    Disposal of investment in a subsidiary (B)    -    (1,405 )  -  
    Acquisition of available-for-sale securities    (1,013,566 )  (2,785 )  (52,227 )
    Acquisition of held-to-maturity securities    -    (84,665 )  (8,958 )
    Proceeds from sale of available-for-sale securities    137,515    27,888    8,972  
    Proceeds from sale of held-to-maturity securities    58,054    66,845    31,271  
    Purchase of fixed assets    (2,840 )  (31 )  (49 )
    Investment in funds in respect of employee rights upon  
        retirement    (206 )  (129 )  (76 )
    Proceeds from sale of operations in a subsidiary    -    -    924,121  
    Proceeds from disposal of associated company    -    -    13,722  
    Restricted deposit    -    22,612    21,274  
    Net cash used in investing activities from  
       discontinued operations    (959 )  (36 )  (132,087 )



    Net cash provided (used in) by investing activities    (822,002 )  28,294    805,963  



CASH FLOWS FROM FINANCING ACTIVITIES:   
    Proceeds from exercise of options to ordinary shares    1,741    -    -  
    Loans/capital note received by a subsidiary    434,375    -    -  
    Repayment of loans by a subsidiary    (204,077 )  -    -  
    Net cash used in discontinued operation    (26,287 )  (159,838 )  (200,235 )



    Net cash provided (used in) financing activities    205,752    (159,838 )  (200,235 )



Currency translation in respect of cash and cash equivalents     (49,923 )  (76,577 )  21,517  



   
Net increase (decrease) in cash and cash equivalents     (591,188 )  97,263    552,193  
   
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR     1,019,479    922,216    370,023  



CASH AND CASH EQUIVALENTS AT END OF YEAR     428,291    1,019,479    922,216  




* Reclassified

F - 6



SCAILEX CORPORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
2007
2006
2005
NIS in thousands
 
(A)   ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY                
            OPERATING ACTIVITIES:   
         Non cash income and expenses:   
         Net income from discontinued operations    (5,503 )  (58,954 )  (497,889 )
         Company portion in equity of affiliate (includes capital  
             gain derived from its sale)    -    -    (13,731 )
         Financial income included in the P&L    (32,592 )  *(62,738 )  *(21,878 )
         Interest and exchange rate differences in respect of  
             shareholders loans/capital note in a subsidiary    26,263    -    -  
         Depreciation    63    18    166  
         Impairment of investments    -    2,946    -  
         Deferred stock compensation related to  
             options granted to employees    18    147    458  
         Payment made by shareholders to senior employees    -    1,158    -  
         Adjustments to reconcile of employee rights upon  
             retirement    338    156    99  
         Deferred income taxes, net    -    5,615    (2,536 )
         Income from dividend received from investment in  
             available-for-sale financial asset    (43,118 )  -    -  
         Income from distribution upon liquidation of investments  
             in available-for-sale financial assets    (548 )  (8,022 )  -  
         Loss (gain) from sale of available-for-sale  
             securities    1,650    (5,228 )  (2,877 )



     (53,429 )  (124,902 )  (538,188 )



   
         Changes in operating asset and liability items:   
             Decrease (increase) in other receivable    (10,085 )  (613 )  428  
             Increase (decrease) in accounts payable and accruals    910    (53,894 )  2,495  



     (9,175 )  (54,507 )  2,923  



     (62,604 )  (179,409 )  (535,265 )



   
(B)   Disposal of investment in a subsidiary   
         Working capital (Excluding cash and cash equivalents)    -    (3,086 )  -  
         Fixed assets, net    -    303    -  
         Prepaid expenses    -    158    -  
         Liability for employee rights upon retirement, net    -    (303 )  -  
         Intangible assets, net    -    1,523    -  



     -    (1,405 )  -  




* Reclassified

F - 7



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General:

  A Continuing activities

  Scailex Corporation Ltd. (hereinafter – The Company) is a public company that is incorporated in Israel and whose shares are registered for trade in the Tel Aviv Stock Exchange and are quoted in the OTC Bulletin Board in the United States, see also Note 2A. The Company’s offices are located in Herzliya Pituach.

  The Company is controlled by “Israel Petrochemicals Enterprise Ltd.”, which holds 50.06% from the company’s outstanding shares.

  As from August 2006, the Company operates in one business sector – the management of the Company’s assets and the identification of investments.

  B Definitions in these financial statements

The Company Scailex Corporation Ltd.
 
Consolidated Companies Companies in which the Company has control on (as noted in IAS 27) directly or indirectly, and whose financial statements are fully consolidated with those of the Company.
 
The Group The Company and its affiliated companies. For the list of the companies of the group - see Part D to Barnea's report.
 
Interested Parties As defined by Israeli Securities regulations (preparation of Annual Financial Statements) 1993.
 
Related Parties As defined in IAS 24.

  C Discontinued activities

  In the past the Company operated, on its own and through its subsidiaries (hereinafter –“The group”), in three business segments, which have been sold over the course of the last three years. In accordance with International Accounting Standard number 5 “Non-current Assets Held for Sale and Discontinued Operations”, the assets and the liabilities of the aforementioned three segments have been classified separately in the consolidated balance sheets, and the results of their operations and their cash flows have also been classified separately within the framework of the statements of operations and the statements of cash flows (including the comparative figures), as those deriving from discontinued activities.

  The three business segments that have been discontinued are as follows:

  1) The High-Speed Digital Printing segment

  On January 5, 2004 the Company completed the transaction for the sale of all of the assets (including the subsidiary companies), the liabilities and the activities of its indirect wholly-owned subsidiary company Scailex Digital Printing Inc. (hereinafter –“SDP”) to Eastman Kodak Company (hereinafter – “Kodak”) for a consideration of 250 million Dollars in cash (in addition an amount of 12 million Dollars were retained at SDP after the transaction was executed).

  In accordance with the agreement, 25 million Dollars of the consideration were held in escrow, of which: (1) an amount of 15 million Dollars were transferred in February 2004 to the account of Scailex Development Corporation (“SDC”), which is SDP’s parent company and a wholly owned subsidiary of the Company, (2) an amount of 5 million Dollars was transferred in January 2005 to the account of SDP and (3) an amount of 5 million Dollars was transferred to the account of SDP in January 2006.

F - 8



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General (continued):

  In December 2004, following the conclusion of tax audit by the Internal Revenue Services (IRS) in the consolidated companies SDP and SDC, for the years 1992 to 1996, the Company filed an application for refunds of federal taxation in respect of amended tax reports for the years 1994, 1995 and 1997.

  In the year 2005 the Company recorded tax income in respect of the tax refunds as aforesaid, in the amount of 7.8 million Dollars (NIS 35,903 thousand). In July 2006 the Company received the tax refunds, as aforesaid, in the amount of 12.6 million Dollars and as a result of this, it recorded further tax income in the amount of 4.8 million Dollars (NIS 21,192 thousand). The tax income has been recorded under “income from discontinued operations”,

  On July 2006, the companies SDC and SDP (which are registered in the State of Massachusetts in the USA) were liquidated.

  In the year 2006, an amount of NIS 11,817 thousands was recorded as tax benefit in respect of updated tax liabilities for previous years.

  The following are details of the activities of the High-Speed Digital Printing segment, which are presented under discontinued operations:

  1) Balance sheet data:

December 31
2007
2006
NIS thousands
Current liabilities related to discontinued operations:            
Other payables (mainly income tax payable)    36,014    40,163  



  2) Data on operational results:

December 31
2007
2006
2005
NIS thousands
 
Other income      364    420    4,447  



Income before taxes on income    364    420    4,447  
Taxes benefit    -    33,009    35,078  



Net income for the year    364    33,429    39,525  




  2) The Wide Format Digital Printing segment

  On November 1, 2005, the Company sold all of the assets and the liabilities of the activities of Scailex Vision (Tel-Aviv) Ltd. (formerly Scitex Vision Ltd., (hereinafter –Scailex vision), a consolidated company that was controlled by the Company, to Hewlett-Packard (hereinafter – HP).

F - 9



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General (continued):

  In accordance with the terms of the agreement, HP paid an amount of 230 million Dollars in cash to Scailex Vision (subject to certain adjustments under the agreement) in consideration for the sale, of which 23 million Dollars were held in Escrow for a period of 24 months as cover for possible indemnification claims and the amount of 1 million Dollars was held for a period of 12 months for possible tax payments in respect of the year 2005. This amount of 1 million Dollars with addition of accumulated interest was transferred to the account of Scailex Vision in November 2006, and additional amount of 8.7 million Dollars (including accumulated interest) from the Escrew account was transferred to Scailex Vision in November 2007.

  As to the remaining amount left in the Escrew account to secture claims submitted by HP in a total amount of 15.8 million Dollars – see note 6b2 to this report. As the result of the transaction, Scailex Vision recorded a net gain of approximately 92 million Dollars in the year 2005. This gain is net of remained liabilities to third parties, expected payments in respect of taxation, the expenses connected to the transaction and additional expenses and payments.

  Within the framework of the sale agreement, the Company agreed to endorse its rights in the commercial name “Scitex” to HP and accordingly, it changed its name to Scailex Corporation Ltd.. Similarly, Scailex Vision undertook, inter alia, not to compete with the business unit that was sold to HP during a period of two years from the day on which the transaction was completed.

  In April 2006, HP paid Scailex Vision an additional amount of approximately 6.6 million Dollars in respect of the adjustment of the purchase price, as determined in accordance with the sale agreement. As a result of this additional consideration, the Company recognized an additional profit in the amount of 3.9 million Dollars (net of related tax payments) in the year ended December 31, 2006.

  On February 9, 2006 Scailex Vision distributed cash dividend equivalent to the amount available for distribution, following the conclusion of the transaction for the sale of the assets to HP. The amount of the net accumulated dividend that was distributed amounted to approximately 135 million Dollars (of which 101 million Dollars were received by the Company), by the way of the payment of 0.80 Dollars per share to each of the shareholders and 0.39 Dollars per option warrant to each of the holders of the option warrants (constituting the net amount less the exercise price).

  On February 5, 2007 Scailex Vision reduced its share capital with the Court’s consent, and distributed an additional dividend of $20 million (out of which $14.3 million were received by the company), to its shareholders.

  The balances of cash and the assets that have been attributed to the discontinued operations are expected to serve for the future payments of the liabilities that have been attributed to the discontinued operations, which represent primarily liabilities for the expenses of the transaction, taxes and liabilities towards the minority shareholders.

F - 10



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General (continued):

  The following are details of the activities of the Wide Format Digital Printing segment, which are presented under discontinued operations:

  1) Balance sheet data:

December 31
2007
2006
NIS thousands
 
Current assets related to discontinued operations:            
Cash and cash equivalents    25,554    13,449  
Other receivables    19,997    62,297  


     45,551    75,746  


   
Current liabilities related to discontinued operations:   
Short-term loans and current maturities of long-term loans    -    5,112  
Other payables    2,811    5,831  
Income taxes payable    17,709    35,008  


     20,520    49,951  


  2) Data on operational results:

December 31
2007
2006
2005
NIS thousands
 
Revenue      -    -    569,543  
Cost of revenue    -    -    (331,569 )



Gross profit    -    -    237,974  
Research & Development expenses    -    -    (1,055 )
Selling & administrative expenses    -    (218 )  (127,234 )
Amortization of intangible assets    -    -    (37,453 )
Financial income    556    1,993    -  



Net income from continuing operations    556    1,775    72,232  
Financing expenses    -    (1,483 )  (16,359 )



Profit before taxes on income    556    292    55,873  
Taxes on income (tax benefits)    801    (18,566 )  4,320  



Income (loss) after taxes on income    (245 )  18,858    51,553  
Gain on sale of discontinued operations    1,180    17,287    426,787  



Net profit for the period    935    36,145    478,340  




F - 11



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General (continued):

  3) The Continuous Ink-jet Digital Printing for Industrial Applications segment

  On August 4, 2006 an agreement was signed by the company and the senior management of Jemtex InkJet Printing Ltd. (hereinafter – Jemtex), according to which the Company sold the major part of its holdings in Jemtex to two of Jemtex’s senior manager and as a result thereof the Company’s percentage of holding in Jemtex reduced from approximately 75% to approximately 15%.

  Within the framework of the sale agreement the Company converted convertible loans in the amount of approximately 6.7 million Dollars, out of the total amount of the loans that were provided to Jemtex by the Company over the years in the amount of approximately 9.7 million Dollars, into shares in Jemtex. The balance of the loans in an amount of 3 million Dollars is repayable over a period of 5 to 7 years, in accordance with the terms of the sale agreement, unless the company is paid an amount of 1 million Dollars by January 4, 2007. In that case, the said payment will be considered to be a full repayment of all of the loans.

  The amount of 1 million Dollar (with additional interest) was paid to the Company on January 4, 2007 after an investment agreement signed between Jemtex and a third party investor. The said amount was recorded as income in the year 2007.

  Furthermore, the investment agreement also provided, inter alia, the following terms of the sales agreement that was signed with the management of Jemtex: the Company waived the vast majority of its veto rights granted under the Articles of Association of Jemtex, and the Company’s rights to receive information were restricted; it was agreed the protection afforded to the Company to reserve its 15% holding in the company’s equity on the basis of full dilution would remain in effect until August 2009 and thereafter the Company would retain in part its right to receive at least USD 3 million of the assets earmarked for distribution pursuant to terms determined in the agreement. The Company received an option to invest USD 3 million in Jemtex based on a corporate value (before the money) of USD 20 million, and it was also agreed that this option would remain in effect until and including August 3, 2009.

  Subsequent to the aforementioned sale agreement and the decline in the percentage of holding, the Company has discontinued the consolidation of the financial statements of Jemtex within the framework of the consolidated financial statements and Jemtex’s activities have been classified as discontinued operations. The balance of the investment in Jemtex as at the end of 2007 is zero.

F - 12



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – General (continued):

  The following are details of the activities of the Continuous Ink-jet Digital Printing for Industrial Applications segment, which are presented under discontinued operations:

December 31
2007
2006
2005
NIS thousands
 
Research and development expenses      -    (5,581 )  (11,435 )
Marketing expenses    -    (140 )  (247 )
Administrative and general expenses    -    (1,559 )  (2,893 )
Amortization of intangible assets    -    (3,263 )  (5,446 )
Financing (expenses) income    -    (77 )  45  
Income from repayment of loan    4,204    -    -  



Net profit (loss) for the period    4,204    (10,620 )  (19,976 )




Note 2 – Summary of significant accounting policies:

  A. Basis of preparation

  1. Through September 18, 2006, the Company’s shares were traded both in the NASDAQ Global Market (hereafter – NASDAQ) and the Tel Aviv Stock Exchange (hereafter – TASE). Since the Company was dual-listed, it previously reported pursuant to chapter E3 of the Securities Law – 1968 (hereafter – the Securities Law) and the consolidated financial statements of the Company were prepared in accordance with the U.S. general accepted accounting principals (hereafter – US GAAP).

  On September 18, 2006, the SEC suspended the trading of Company shares on NASDAQ, and the Company shares were delisted from NASDAQ to the OTC Bulletin Board on October 23, 2006 since the Company was defined by the Nasdaq as a “Public Shell” (a Company with no bussiness activities) after the sale of all the Company’s operations. As a result, the Company started to report to TASE pursuant to the provisions of chapter F of the Securities Law, and to prepare its financial statements accordingly, and commencing from the interim report of the third quarter of 2006, in accordance with the Securities Regulations (Periodic and Immediate Reports), -1970.

  2. The financial statements were drawen up in accordance with the International Financial Reporting Standarts (IFRS),
These standers include:

  (1) International Financial Reporting Standarts (IFRS)

  (2) International Accounting Standtarts (IAS)

  (3) Clarification published by the commity of interpretations of the International Financial Reporting Standarts (IFRIC) or by the previous commity of interpretations of International Accounting Standarts (SIC)

F - 13



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  B. Consolidating Financial Statements:

  The consolidated financial statements include the financial statements of companies over which the Company has control under full consolidation. Material reciprocal balances and transactions between companies of the Group have been completely eliminated from the consolidated financial statements.

  The dates of the consolidated subsidiaries’ financial statements are identical to the date of the parent company’s financial statements. The accounting policy applied in the financial statements of the consolidated subsidiaries is consistent and conforms to the accounting policy applied in the financial statements of the parent company.

  Companies are fully consolidated as of the date of their acquisition, the date on which the Group obtained control therein, and up until the date that control is transferred.

  Minority interest represents that portion of the profit or loss and of the net assets that is not held by the Group, and is presented as a separate item in the statement of operations and under the equity item in the consolidated balance sheet.

  C. Separate Financial Statements of the Company (stand alone)

  Invetments in subsidiaries and in associated companies are presented in the separate financial statements of the company on the cost basis, net of impairment and dividends received.

  In cases that the dividends received exceed the carrying amount of the investment, the surplus amounts of the dividends are recorded as other income in the statements of operations.

  D. Functional and presentation currency:

  1) Functional currency

  Items included in the financial statements of each of the Group’s entities are measured according to the currency used in the primary economic environment in which the entity operates and is influenced by (hereafter – the Functional Currency). The functional currency of the Group is the US Dollar (hereafter – Dollar).

  2) The translation of transactions and balances

  Transactions in currency other than the functional currency are translated into the functional currency based on the exchange rate in effect on the date of transaction. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

F - 14



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  3) Presentation currency

  The Company draws up and presents its financial statements in New Israeli Shekel (hereafter –NIS) (hereafter – the Presentation Currency) which are difference from the Functional Currency, in accordance with the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993. The financial statements of the Group are translated into the Presentation Currency as follows:

  a) Assets and liabilities at the balance sheet date are translated based on the exchange rate prevailing at that day.

  b) Income and expenses included in the statements of operations are translated based on an actual exchange rate at the date of the transaction.

  c) The shareholders equity and the capital reserves were translated at the date of transition according to the exchange rate that was in effect at that day, and as from that date forward the changes in shareholders equity and capital reserves has being translated based on the actual exchange rate at the date of the change.

  d) The translation differences resulting from the said treatment are carried directly to equity under “Currency translation”.

  The following are details of the exchange rates of the Dollar which is the functional currency of the company.

Exchange rate of the Dollar
Date
NIS
 
31.12.07 3.846
31.12.06 4.225
31.12.05 4.603

Changes in the year
ended on

%
 
31.12.07 (9.0)
31.12.06 (8.2)
31.12.05 6.8

  E. Fixed Assets:

  1) The fixed assets of the Company are mainly consisted of leasehold improvements, computers and equipment.

  The fixed assets are accounted for on historical cost less depreciation. The historical cost of fixed assets includes costs directly attributed to the acquisition of the asset. Other costs associated with the asset, which were generated after its acquisition, are included in the asset’s carrying amount or recognized as a separate asset, only when these can be measured reliably and the asset is expected to provide the company with future economic benefits. The cost of repairs and ongoing maintenance are charged to the statement of operations during the financial period in which they are incurred.

F - 15



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  2) The asset is depreciated to the residual value using the straight line method over its expected useful life.

  The annual depreciation rates are as follows:

%
 
Leasehold Improvements 15
Equipment 15-7
Computers 33

  The residual value and the estimate useful life of the fixed assets are reviewed by the Company and adjusted as appropriate.

  3) Gains and losses on disposals of fixed assets are the difference of proceeds with carrying amount. Such gains and losses are carried to the statement of operations.

  4) The carrying amount of the fixed assets is immediately depreciated if it exceeds its estimated recoverable value.

  F. Cash equivalents

  Highly liquid investments, including short-term deposits in banking corporations where the term of deposit does not exceed 3 months from the date of the deposit, are considered by the Company to be cash equivalent.

  G. Short-term Deposits

  Deposits in banking corporations which an original term exceeding 3 months from the date of the deposit.

  H. Impairment of Non-Financial Assets

  Financial assets not classified as financial assets under the fair value item in the statement of operations are examined on every balance-sheet date in order to ascertain whether there are any indications of impairment. Impairment of a financial asset occurs when there is objective evidence thereof, as a result of one or more events that transpired subsequent to the date that the financial asset was first recognized as affecting the expected cash flows from the investment. In relation to financial assets included according to the amortized cost, the sum of the impairment is the difference between the book value of the asset and the present value of the future cash flows expected from the asset, after deduction of its original effective interest rate.

  Except for the exclusion of capital instruments classified as “available for sale,” if, during a subsequent period, the loss from impairment of a financial asset decreases, and that decrease objectively relates to an event that transpired after the recognition of the impairment, then, in this instance, the previously recognized loss from impairment is eliminated, fully or partially, from the statement of operations. Such an elimination is limited, so that the book value of the investment in the asset on the date that the loss from impairment was eliminated shall not exceed the amortized cost of the asset existing on that date, had an impairment not been previously recognized.

F - 16



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  Regarding investments in capital issues that are classified as “available for sale,” any increase in the fair value during the period subsequent to a loss from impairment is immediately recognized under equity.

  I. Financial Investments and Assets

  Financial assets which are subject to IAS 39 are classified in accordance with the purpose for which they were purchased under the following categories:

  1) Held-to-maturity investments

  Investments held to maturity are non-derivative financial assets with fixed or determinable payments where the Company’s management has the intention and the ability to hold to maturity. The investments held to maturity are presented as non-current assets, except for investments expected to be mature within 12 months of the balance sheet date and presented as current assets.

  2) Available-for-sale financial assets

  Available-for-sale financial assets are non-derivatives that are either designated to this category or not classified as held-to-maturity investments. These assets are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date that are presented as current assets.

  The Group’s management had initially classifies its investments at the date of acquisition and it reviews the adequacy of the said classification in each cut-off period.

  Purchases or sales of financial assets are recorded in Company accounts at the date of the transaction, which is the date in where the Group committed to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs. Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred all substantial risks and rewards of ownership.

  Held-to-maturity investments are presented at the amortized cost using the effective interest method.

  Available-for-sale financial assets are presented at fair value, and gains and losses that were not yet being exercised and that result from temporary-in-nature changes in the fair value are carried to equity under “Other comprehensive income (loss)". Upon the disposal of these assets, the Company carries all the previously-charged changes stated at fair value to equity in the statements of operations.

F - 17



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  Impairment of financial assets

  The group evaluates the need for recording an impairment of financial asset or group of financial assets at each balance sheet date.

  J. Shareholders’equity

  The ordinary shares of the Company are classified in the financial statements as shareholders’ equity.

  The ordinary shares held by the Company are presented at their cost to the Company as a deduction from equity under the “Treasury Shares” section.

  K. Deferred income taxes

  1. Deferred income tax balances are determined using tax rates known at the date of the preparation of the financial statements in respect of temporary differences between the results in the financial statements and the results for tax purpose, as follows:

  a. Differences between the depreciated balances of fixed assets.

  b. Differences in the timing of recognizing of income and expenses in the financial statement and for tax purpose.

  c. Carry forward losses and deductions for next years.

  2. Deferred taxes are recorded in the financial statements when there is probability to realize them.

  L. Employee benefits:

  1) Pension obligations

  In accordance with Israeli labor laws and agreements, the company has the obligation to pay severance payments to terminated employee, and under certain conditions also to pay employees the will resign or retire.

  A liability of the Group for retirement benefits as stated is handled as a defined benefit plan, whereby the cost of the benefit is determined according to the projected unit credit method, based on actuarial assessments carried out on every balance-sheet date. Liabilities in respect of a defined benefit plan are allocated in the balance sheet, comprised of the present value of these liabilities, after deducting the plan’s assets that are presented according to their fair value. Actuarial profits and losses are allocated to the statement of operations.

  2) Option plan

  The Group’s management allots from time to time and at its discretion options to buy shares of the Company and its subsidiaries. Such options are subject to vesting terms based on the years of employment. The Group treats the allotments of options to employees based on the fair value method. The Company reevaluates the fair value of the outstanding options at the date of allotment of each of the options, and carries the calculated benefit to capital reserve in respect of options that were granted to employees over the vesting period of the options in conjunction with recording salary expenses in the statement of income (loss). The realization addition at the date of converting the options by the employees less transaction costs are charged to equity (in respect of their par value) and the premium on shares.

F - 18



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  3) Bonuses

  The Group recognizes a provision when a legal or implied obligation exists to pay a bonus.

  M. Provisions for contingent liabilities

  Provisions for contingent liabilities in respect of lawsuits are recorded in Company’s books when the Group has legal or implied obligations resulting from past events, and it is more likely than not that such cash flows will be diverted to the settlement of liabilities and that the amount can be estimated reliably.

  When the Group has a number of contingent liabilities and it is expected that the cash flows will be diverted to their settlement as a Group, a provision is recorded even if it is expected that the cash flow that will be diverted to the settlement of the obligation in respect of each of the items included in the group are expected to be small.

  Provisions are measured based on the current value of the best management estimation of cash flows expected to be required to settle the existing obligation on balance sheet date (see note 6). The rate of capitalization for the purpose of calculating the current value reflects the market estimation of specific time and cost in respect of the obligation.

  N. Revenue recognition

  1) Interest revenues

  Interest revenues in respect of financial assets are carried over the period using the effective interest method. In the event of impairment of the financial assets and receivables, the Company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument.

  4) Dividend revenues

  Dividend income is recognized when the right to receive payment is established.

  O. Use of estimates when preparing the financial statements

  When preparing the financial statements in conformance with the generally accepted accounting principles, the Management uses estimates and assessments that affect the data being reported on assets and liabilities, on data regarding contingent assets and pending liabilities disclosed in the financial statements, as well as data on income and expenses during the report periods. The actual results might differ from these estimates.

  P. Critical considerations when implementing accounting policy

  The following refers to the Management’s critical considerations when implementing the Group’s accounting policy that have the most significant impact on the sums recognized in the financial statements.

  Deferred tax assets

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

  Provisions for contingent liabilities

  A number of lawsuits are pending against a subsidiary of the Company, Scailex Vision. For the purpose of examining the legal relevance of the aforesaid lawsuits, and in order to ascertain the probability that they shall be realized to the detriment of the Company, the Company Management relies on the opinions of professional legal advisors. Once the Company’s advisors formulate their legal position and the Company’s prospects regarding the subject of the lawsuit (if and to the extent possible, as dependent on the relevant circumstances of each lawsuit), whether the Company will have to bear the consequences or whether it is able to refute it, the Company Management estimates, inter alia, the sum that should be recorded in the financial statements, if any. An interpretation that differs from that of the Company’s legal advisors regarding an existing legal situation, a differing understanding by the Company Management of engagement contracts, as well as changes originating from relevant case law or the addition of new facts, all may affect the value of the overall provision in respect of legal proceedings.

F - 19



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  Q. Operating lease

  The Group classifies leasing agreements, under which a significant proportion of the proprietary risks and yields are retained by the lessor, as operating leases. Payments within the scope of operating leases are allocated to the statement of operations on the basis of the straight-line method over the duration of the lease.

  R. Earnings Per Share

  The company calculates the basic earning per share in respect of the profit or loss attributes to the holders of the ordinary shares of the company by dividing the profit or loss attributes to the holders of the ordinary shares of the company by the average number of ordinary shares outstanding during the reporting period.

  For the calculation of the diluted earning per share, the Company adjusts the profit or loss attributes to the holders of the ordinary shares and the average number of outstanding shares by the influences of all the potential diluted ordinary shares.

  S. Reporting Standards adopted by the Group

  IFRS 7 Financial Instruments: Disclosures

  In the current year, the Group has adopted IFRS 7 Financial Instruments: Disclosures which is effective for annual reporting periods beginning on or after January 1st, 2007

  The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Group’s financial instruments and management of capital. The overriding objective of the Standard is that preparers should provide disclosures that enhance a user’s understanding of the entity’s exposures to financial risks and how the entity manages those risks (see note 3).

  T. New Financial Reporting Standards and Clarifications which haven’t been validated yet

  The following are Financial Reporting Standards issued by the IASB and their interpretations issued by the IFRIC (International Financial Reporting Interpretations Committee) as of the date of the approval of the financial statements which are applicable or might be applicable for the group and yet to be in force. The management of the Company evaluates the expected influences of the applications of these standards and interpretations for the first time.

  IFRS 3 Business Combinations

  The IASB has determined that costs incurred in an acquisition are period costs.

  This means that all acquisition-related costs are to be recognized as period expenses in accordance with the appropriate IFRS.

  Minority interests measure any non-controlling interest (NCI) in the entity acquired either at fair value or at the non-controlling interest’s proportionate share of the net identifiable assets of the entity acquired. The latter treatment corresponds to the measurement basis in the current version of IFRS 3.

  As to Step acquisitions business combination leading to acquisition accounting applies only at the point where control is achieved it must remeasure its previously-held equity interest in the acquiree at acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss.

  The Standard is effective for annual periods beginning on or after January 1st, 2010, with early application permitted.

F - 20



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Summary of significant accounting policies (Continued):

  IAS 27 (revised 2008) Consolidated and Separate Financial Statements

  Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for within shareholders’ equity as transactions with owners acting in their capacity as owners. When control is lost, the parent derecognizes all assets, liabilities and NCI at their carrying amount. Any retained interest in the former subsidiary is recognized at its fair value at the date control is lost. The revised Standard requires an entity to attribute their share of total comprehensive income to the NCI even if this results in the NCI having a deficit balance.

  The revised Standard is effective for annual periods beginning on or after January 1st, 2010, with early application permitted.

  A revised IAS 1 Presentation of Financial Statements.

  The revisions to the Standard represent the first step in the Board’s comprehensive project on reporting financial information.

  The titles of some of the financial statements have been changed.

  The revised Standard introduces a requirement to include a statement of financial position as at the beginning of the earliest comparative period whenever an entity retrospectively applies an accounting policy, or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

  The revised Standard requires that all items of income and expense (including those accounted for directly in equity) be presented either:

  a) in a single statement (a ‘statement of comprehensive income’); or

  b) in two statements (a separate ‘income statement’ and ‘statement of comprehensive income’).

  The revised Standard is effective for annual periods beginning on or after January 1st, 2009, with early application permitted.

  U. As a result of adopting the IFRS standards for the first time in the year 2005, net income of NIS 22,873 thousands which was supposed to be attributed to the minority shareholders of Scailex Vision was attributed to the shareholders of the Company. The change in the attribution of this income has no effect on the equity or on the net income as reported in the financial statements for the year 2006. As a result, the retained earning balance in these financial statements was decreased by NIS 22,873 thousands and the minority interest balance was increased in the same amount, without effecting the total equity of the Company.

F - 21



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – The management of financial risks

  A Risk factors

  The company and its consolidated companies are exposed to various market risks, as follows (see sensitivity test in section 6/7 to the directors report):

  (1) Exchange rate risks

  The majority of the Company assets are financial assets which some of them are denominated in NIS and some in Dollars. Therefore, the results of the Company and its equity are influenced by changes in the exchange rate between the NIS and the Dollar.

  (2) Price risks

  The group has an exposure to risk in respect of the prices of marketable securities in connection with the investments that are held by the Group and which are classified in the consolidated balance sheet as financial assets available for sale. The Group is not exposed to risks in respect of the prices of goods.

  (3) US interest rate risks (FED)

  The Company invests, inter alia, in daily deposits and in US government bonds, and accordingly, the changes in the monetary interest rates (the FED interest) and/or in the US bonds market will affect the value of the bonds that are held by the Company.

  (4) Inflation risks

  The Company has liabilities which are linked to the Consumer Price Index in Israel (“CPI”) and therefore it is exposed to changes in the CPI.

  B The fair value of financial instruments

  The fair value of financial instruments, which are traded in active markets (such as securities available for sale) is based upon the quoted market prices as of the balance sheet date. The quoted market price for financial assets that are held by the Group is the closing price.

F - 22



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Fixed Assets

  The breakdown of the fixed assets, by major classifications, is as follows:

December 31
2007
2006
NIS in thousands
 
Furniture, equipment and electronic equipment      862    -  
 Leasehold improvements    1,776    42  
 Computers and software    374    309  


     3,012    351  
Less - accumulated depreciation    (333 )  (300 )


     2,679    51  


   
Depreciation of fixed assets from continuing  
    operations    65    18  



Note 5 – Liability for Employee Rights upon Retirement

  a. The breakdown of the liability for employee rights upon retirement is as follows:

December 31
2007
2006
NIS in thousands
 
Liability in respect of plan for defined benefit      735    435  
 Assets of the plan    (535 )  376  


 Net liability    200    59  



  b. Liability of the plan:

December 31
2007
2006
N I S   t h o u s a n d s
 
Present value of the liability      669    504  
Actuarial loss (income)    66    (69 )


Liability    735    435  



  c. Changes in the present value of the liability in respect of plan for defined benefit:

2007
2006
N I S   t h o u s a n d s
 
Balance, beginning of year      435    3,140  
Sale of a subsidiary    -    (2,982 )
Expense in the statement of operations    167    469  
Severance pay paid    -    -  
Actuarial (loss) income    66    69  
Currency translation    67    (261 )


Balance, end of year    735    435  



F - 23



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Liability for Employee Rights upon Retirement (continued)

  d. Changes in the fair value of the assets of the plan:

2007
2006
N I S   t h o u s a n d s
 
Balance, beginning of year      376    2,992  
Sale of a subsidiary    -    (2,706 )
Expected return    27    103  
Deposits in insurance policies    126    361  
Severance pay paid    -    -  
Actuarial income (loss)    16    (195 )
Translation currency    (10 )  (179 )


Balance, end of year    535    376  



  e. Employee rights upon retirement – expenses charged:

2007
2006
2005
N I S   t h o u s a n d s
 
Current cost      135    337    2,794  
Interest cost    32    132    567  
Expected return on deposited assets    (27 )  (103 )  (600 )



Employee rights upon retirement -  
expenses charged    140    366    2,761  




  f: Actuarial assumptions used in the calculation:

Year ended December 31
2007
2006
  %
 
Interest for discounting*      3.80 %  3.60 %
Future salary growth    4 %  4 %
Yield on the assets    4.09 %  3.00 %

  * The capitalization rate used to calculate the actuarial liabilities was determined by use of market yields of government bonds, since, in the Company’s opinion, there is no deep market for high-quality concern bonds in Israel. The issue of the capitalization rate is under examination, and it is possible that a decision will finally be reached that the proper capitalization rate in Israel is a rate based on market yields of concern bonds. Should such a decision be reached, the data calculated and included in this note will change, since use of a higher capitalization rate will reduce the actuarial liability on the one hand, and increase the current interest costs in respect of the actuarial undertakings on the other hand.

F - 24



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Commitments and Contingent Liabilities

  a. Commitments:

  1. On December 14th, 2006, the Company signed an agreement with third parties for the rental and management of offices in Herzliya Pituah, from 1.1.2007 for a period of 5 years with an option for extension for an additional 10 years. The option will be granted five times for two years each time and in any case the total additional rental periods will not exceed ten years. The exercise of the option will be in force if the company doesn’t send a written notice of unexercising the option to the lessor no later than 90 days before the end of the rental period.

  Annual rental and management fees will total NIS 400 thousand, linked to the Consumer Price Index. The rental payments will be increased by 1.8% compared to the last month in the previous rental year. The rental payment in case of exercising in the options will be determined by the market price for similar assets but in any case will not be less than the payment for the last month before the beginning of the relevant extended period. To secure said payments, the Company issued a non-recourse bank guarantee of NIS 98 thousand.

  Rental and management payments totaled NIS 280 thousand, during 2005 and 2006 and in 2007, totaled NIS 435 thousand.

  2. ORL Purchase

  On January 8th, 2007, the Company and a foreign company – Linura Holding AG (“Linura”) formed Petroleum Capital Holdings Ltd., (PCH) (80.1% held by the Company and 19.9% held by Linura) for the purchase of Oil Refineries Ltd. (ORL) shares through a sales offer proposed by the State of Israel.

  In the framework of the agreement with Linura – the foreign partner in PCH, reciprocal options to the Company and Linura to purchase the other portion under certain terms as set forth in the agreement between the parties. For further details related to that agreement see section 4.7.4 to the periodic report.

  In light of the difficulties in obtaining the control permit in ORL, the parties reached a principal agreement, on March 3rd, 2008, in which the company will purchase Linura’s share in PCH and PCH will turn to be fully owned subsidiary of Scailex and the previous agreement between the parties will expired (see section 14(2) to this report).

  On February 18th, 2007, the Company and PCH (“Scailex Group”) signed a binding memorandum of agreement with Israel Corporation Ltd. (IC)., whereby PCH and IC would submit a joint offer, under the sales offer, (State of Israel prospectus) for the sale of 56% of ORL’s shares (44% were sold a few days before hand to institutional investors).

  Within the scope of the public sale offer as stated, the Israel Corporation purchased (36.8%) and PCH (9.2%), totaling approximately 46% of the issued share capital of ORL, for the inclusive consideration of approximately NIS 2.43 billion. The share purchase in the sale offer was effected according to a company value of approximately NIS 6.6 billion, and a share value of NIS 3.3.

F - 25



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Commitments and Contingent Liabilities (continued)

  During 2007, PCH and purchased additional shares of ORL on the TASE, totaled NIS 406.4 million (an average price of NIS 3.1 per share).

  As a result of said purchases, PCH holds 15.76% of the issued shares of ORL.

  The rights of the said shares in ORL are restricted until and subject to obtaining all the regulatories approvals as follows:

  In accordance with the provisions of the governmental companies’ decree (declaration on vital interests in the Oil Refineries Ltd.)(2007)(hereinafter: “the Interests Decree”), if a person holds control in ORL or control means in the rates that require approval under the Interests Decree (24% and up), the person should report to ORL and to submit an application to ministers (Treasury Minister and the Prime Minister) to the approval of its holdings within 48 hours (hereinafter: “the Application”).

  As long as approval is not given to control or hold a means of control at rates requiring approval (24% and more), as the case may be, no right in ORL by virtue of the purchased shares may be exercised, including with regard to dividends, the appointment of directors and officeholders, and the right to vote during the general assembly of ORL shareholders, this by holding ORL shares at a rate exceeding 24%.

  Within the scope of the resolution to privatize ORL, it was determined that, during the privatization of ORL, expression would be given to conditions prescribed by the Commissioner in his position papers as attached to the privatization resolution. In accordance with the notification of the Israel Antitrust Authority dated February 6th, 2007, on February 25th, 2007, PCH, together with ICL, submitted a merger notice and an application for approval of the merger to the Israel Antitrust Authority. On March 27th, 2007, PCH received the decision of the Antitrust Commissioner to approve the merger of ORL, ICL and PCH, conditionally (regarding the activities of the companies, Rotem Amfert Negev Ltd., a company of the Israel Chemicals group and Carmel Olefins Ltd., a company of the ORL group).

  The investment in ORL has been financed, by the Company and Linura, through interest-bearing dollar loans repayable at any time with the parties’ consent. On August 9th, 2007 PCH’s board of directors and shareholders’ meeting approved an amendment to the shareholders agreement with Linura of December 21st, 2006 (“the shareholders agreement amendment”). In the shareholders agreement amendment, the conditions of the loans that had been given by PCH’s shareholders were laid down. It was, inter alia, provided that loan amounts that were denominated in US dollars would bear dollar interest from the date of the investment until August 9th, 2007. From that date (August 9th, 2007) those loans would be converted into NIS and capital notes would be issued in respect of them. The repayment of the capital notes will be made in NIS, not subject to interest, linkage or revaluation and not to be made before January 1st, 2009 in any event.

  Further to the revaluation of the shekel, from the date of conversion into shekels until the end of the year, rate differences of approx. $5.7 million have been recorded in the consolidated financial statements that are drawn in dollars, which is the currency of the Company’s activity. Accordingly, those rate differences, totaling approx. NIS 21.9 million, have also found expression in the financial statements that are translated from the dollar statements and presented in shekels. These expenses have also been reflected in the share of the minority shareholders’ in PCH.

  Following the change in the original terms of the loan, the Company implemented the provision of international standard no.39 and recorded the capital notes based on their present value. The difference between the present value and the book value before the change was recorded as an investment in the company. The company records interest expenses in its books according to the effective interest method until the first date of the repayment.

F - 26



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Commitments and Contingent Liabilities (continued)

  Whereas the Scailex Group and ICL were of the opinion that the best interests of ORL require control thereof as soon as possible, and that ICL, which had been a material shareholder in ORL until February 2006, could obtain the control permit pursuant to the Government Companies Order faster than PCH could obtain it, and in light of the demands for additional particulars, on May 10th, 2007, ICL and the Scailex Group agreed to terminate the memorandum of agreements, and in lieu thereof, ICL issued a letter of undertaking (hereinafter – “the Letter of Undertaking”) to the Scailex Group, enabling ICL to submit a separate application to receive the ministers’approval to control and operate a means of control in ORL. Concurrently, the Scailex Group and ICL agreed on the wording of a joint control agreement, which is to be signed between them upon receipt of the requisite regulatory approvals (hereinafter – “the Requisite Approvals”), and which was attached as an appendix to the Letter of Undertaking (hereinafter – “the Control Agreement”).

  For additional particulars about the Letter of Undertaking, the Control Agreement and termination of the memorandum of agreements, see clause 4.7 of the periodic report. The Letter of Undertaking enabled ICL and PCH to submit separate applications to the Government Companies Authority to obtain the ministers’ approval. On June 27th, 2007, ICL received the ministers’ approval.

  Pursuant to the notification of the Prime Minister and the Minister of Finance, on October 26, 2007, the 60-day period elapsed since the last date on which PCH submitted additional particulars in relation to the control permit. Pursuant to the Vital Interests Order, the answer of the Prime Minister and the Minister of Finance in relation to PCH’s application for a control permit was supposed to have been issued by that date. A temporary arrangement was proposed to the competent authority during the contacts between PCH and the State authorities, pursuant whereto, shares of two foreign entities, who are directly and indirectly holding PCH, Linura and the Alder Group (in relation to whom questions had been raised by the competent authority), would be deposited in a trust until the final decision on the matter of the permit.

  On November 22nd, 2007, the authority’s answer was received, pursuant whereto, the proposed arrangement, whether temporary or permanent, does not provide a solution to the State’s difficulty to agree to PCH’s application for a control permit. Taking heed of the authority’s answer as stated, consent was achieved between the Company and Linura, whereby Linura would completely exit PCH, so that all share capital and controlling shares of PCH would be held solely by the Company. It was further proposed that the Alder Group would cancel the lien that it has on a portion of the shares of the control group.

  On February 21st, 2008, the response of the Government Companies Authority was received, pursuant whereto, it would be possible to consider PCH’s application for control of ORL jointly with ICL, only if the influence of the Alder Group, directly or indirectly, on the control in PCH, both as a material shareholder in Modgal Industries Ltd. (which is the controlling shareholder in PCH, through corporations under its control), and as a creditor, would be completely removed.

  Following the response, it was advised that, in light of that stated, the apparent position, that of recommending to the Prime Minister and the Minister of Finance that PCH’s application for the control permit should be rejected, was presented to the State Attorney General.

F - 27



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Commitments and Contingent Liabilities (continued)

  The Company referred to its controlling shareholder and updated it about the said response. In its response to the Company, Modgal Industries Ltd. (“Modgal”), an indirect controlling shareholder in the Company, stated that, in its opinion, the position of the competent authority is extremely unreasonable. It was further stated that Modgal and its controlling shareholders are examining possible alternatives to resolve the problem, but that there is no certainty that they will succeed in formulating a solution that meets the excessive requirements of the competent authority.

  3. On March 20th, 2007, the Audit Committee and the Board approved the engagement of the Company in a management agreement with Globecom Investments Ltd, (“Globecom”), a private company under the control of Mr. Eran Schwartz, according to which Globecom will render services by Mr. Eran Schwartz, as active chairman of the Company beginning on the commencement of his incumbency in July 2006, and approved by the shareholders at an extraordinary general meeting of the Company that took place on April 30, 2007 (“the Management Agreement”).

  According to said agreement, the volume of services will be determined on the basis of the Company’s actual needs, and the overall monthly cost that the Company will pay Globecom for services will total NIS 100,900 linked to the Consumer Price Index. In addition, Globecom and Mr. Eran Schwartz will receive an exemption, indemnification and insurance under terms identical to those of other office holders of the Company.

  In the general meeting of shareholders from December 31st, 2007, it has been decided to extend the period of the management agreement until the end of six months from the date of termination notice received from the Company or from Globecom.

  b. Contingent liabilities:

  1) The Company has few claims at various legal processes, the majority of which are old claims that, to the Company’s estimation, no material liabilities are expected for the settlement/removal of said contingent liabilities.

  2) Within the framework of the agreement for the sale of operational assets of Scailex Vision, the sum of USD 23 million was deposited in a trust to cover possible claims from HP for indemnification. HP filed a number of claims to the trustee during 2006-2007 for the receipt of the sum of approximately USD 15.8 million out of the said total sum of USD 23 million. The claims relate to a number of issues, including: environmental quality, taxes, and complaints by customers, distributors and more, in various countries around the world. HP alleges in the various claims that it is entitled to the said indemnification because Scailex Vision breached certain representations and undertakings in the sale agreement. Scailex Vision rejected these claims and filed its objection with the trustee. Nevertheless, there is no certainty that Scailex Vision shall indeed succeed in defending its position, and, in such instance, the trustee shall be obligated to transfer the aforesaid sum, or a portion thereof, to HP. Scailex Vision allocated the sum of approximately USD 11 million in its books in relation to the said claims, this according to assessments it made based on professional and legal opinions it received from its advisors. The provisions allocated include full provisions for a portion of the claims, provisions of 50% for another portion of the claims, since the preliminary information and the geographical dispersion thereof did not enable the performance of a more accurate assessment of the prospects of these claims; while no provision was allocated at all for another portion of the claims, since, according to opinions that the Management received, the prospects of these claims being entertained are very slim. The Company believes that this provision is adequate to cover the expenses in respect of these claims, should they indeed materialize. At this stage, the parties have agreed to open a mediation proceeding, and have agreed upon the identity of the mediator, whose objective is to attempt to settle the various claims in conformance with the proceeding specified in the sale contract. In the event that the mediation activity is unsuccessful, the claims (or the portion thereof for which agreement is not achieved) shall be clarified in the Tel-Aviv District Court.

F - 28



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Shareholders’ Equity

  a. Share capital:

  1. The Company’s shares are traded on the US Over the Counter Bulletin Board (OTCBB), under the symbol SCIXF, and on The Tel Aviv Stock Exchange (“TASE”).

  On December 31st, 2007, the price of one Company share on the OTCBB and TASE was $9.95 and NIS 38.33, respectively.

  2. The registered number of shares of the Company increased from 48 million shares to 60 million shares, at the recommendation of the Company Board of Directors, and in accordance with the resolution of the Company’s General Assembly of December 31st, 2007. The registered share capital of the Company was increased by 12 million ordinary shares of NIS 0.12 each n.v., so that the Company’s registered share capital is now NIS 7.2 million, divided into 60 million ordinary shares of NIS 0.12 n.v. each. Pursuant to this resolution, the said General Assembly approved an amendment to the Company Articles of Association and Memorandum of Association. The number of issued and paid-up shares as on December 31st, 2006 – 43,467,388 shares, and on December 31st, 2007 – 43,579,388, including, correct to December 31st, 2006 and 2007, 5,401.025 shares, which were purchased by the Company and are held by the Company or were allotted to a trustee. These shares do not confer voting rights or rights to a cash dividend.

  A change that occurred in the issued share capital of the Company during 2007 derived from the exercise of options by senior officeholders in the Company during February 2007, at the aggregate sum of 112,000 options, plus exercise money of USD 3.7 per option, in accordance with the option grant contract. As a result of the exercise, 112,000 shares were added to the Company’s issued share capital. On the exercise date, Israel Petrochemical Enterprises Ltd. (the parent company of the Company) purchased these shares through one of its wholly owned subsidiaries from the officeholders.

  The composition of the shareholders’ equity is as follows:

December 31
2007
2006
NIS thousands
 
Share capital      26,748    26,731  
Capital surplus    1,212,660    1,210,918  
Treasury shares    (139,148 )  (139,148 )
Currency translation    (174,810 )  (62,086 )
Other comprehensive income    173,249    (2,882 )
Retrained earnings    232,399    170,876  
Minority interest    62,889    52,668  


     1,393,987    1,257,077  



F - 29



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Shareholders’ Equity (continued)

  b. Share incentive and stock option plans:

  2001 and 2003 Plans

  During December 2001, the Company’s shareholders approved the adoption of the Company’s 2001 Stock Option Plan (“2001 Plan”), designed primarily for employees and directors of the Company and its subsidiaries. During December 2003, the Company’s shareholders approved the adoption of the Company’s 2003 Share Option Plan (“2003 Plan”), designed for employees, directors and consultants of the Company who are Israeli residents, and also approved an increase in the aggregate number of shares reserved for issuance under the 2001 Plan from an initial 750,000 shares to 1,900,000 shares, with all said shares being available for issuance under either the 2001 Plan or the 2003 Plan. Options may be granted under the 2001 Plan until November 5, 2011 and under the 2003 Plan until November 23rd, 2013. Terms of the options granted under the plans, such as length of term, exercise price, vesting and dates of exercise, are determined by the board of directors. The maximum term of an option until expiry may not exceed 10 years. Each option can be exercised to purchase one share having the same rights as other ordinary shares of the Company.

  The 2003 Plan is subject to terms stipulated by Section 102 of the Income Tax Ordinance. Inter alia, these terms provide that the Company will be allowed to claim, as an expense for tax purposes, the amounts credited to the employees as a benefit in respect of shares or options granted under the plan. The amount allowed as an expense for tax purposes, at the time the employee exercises such benefit, is limited to the amount of the benefit that is liable to tax as employment income, by the employee; all subject to the restrictions specified in Section 102 of the Income Tax Ordinance.

  On September 20th, 2004, the Company’s board of directors decided to grant two senior employees of the Company, options under the 2003 Plan for the purchase of 168,000 Company shares at an exercise price of $3.70 per share. The fair value of one share on the date of grant was $4.11. The options will vest, pro-rata, over a period of three years, and will be available for exercise over a period of 10 years, up to September 20th, 2014. An option that will not be exercised by said date will expire. The benefit on issue of options to employees is amortized over the vesting period, on an accelerated basis. The cost of the benefits totaled $6,000, $34,000 and $83,000 and were charged to general and administrative expenses during 2007, 2006 and 2005, respectively.

  On February 19th, 2007, 112,000 options were exercised for the purchase of ordinary shares. See note 7a2.

F - 30



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Shareholders’ Equity (continued)

  Options that were granted can be exercised for the purpose of purchasing shares as follows:

December 31
2007
2006
Number of Options
 
At balance sheet date      71,500    137,000  
During the first year thereafter    -    56,000  


     71,500    193,000  



  See below additional details related to Options granted to employees:

Year ended December 31
2007
2006
Number of
Options

Weighted
average
exercise price

Number of
Options

Weighted
average
exercise price

$ $
 
Balance of options granted, beginning of year      193,000        346,754    6.91  
   
Changes during the year:  
   
     Exercised    (112,000 )  3.70    -    -  
     Expired    (9,500 )  11.66    (153,754 )  9.71  


Balance of options granted, end of year    71,500    5.28    193,000    4.68  


Options available for exercise, end of year    71,500    5.28    137,000    5.08  


Options available for future granting    1,732,000        1,732,000      



F - 31



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Shareholders’ Equity (continued)

        Information on exercise prices and remaining contractual lives of outstanding options at period end:

Year ended December 31, 2007
Year ended December 31, 2006
Quantity of options
outstanding, at
period end

Range of exercise
prices

Weighted average,
remaining
contractual life

Quantity of options
outstanding, at
period end

Range of exercise
prices

Weighted average,
remaining
contractual life

 
 56,000    3.70    6.72    168,000    3.70    7.72  
 6,500    10.00    1.00    9,000    10.00    2.00  
 9,000    11.69    1.00    11,000    11.00 to 11.99  1.82  
 -    -    -    5,000    12.68    1.0  




 71,500         5.48    193,000         6.94  

Note 8 – Taxes on Income:

  a. The Company and its Israeli subsidiary:

  1. Measurement of results for tax purposes under Income Tax (Inflationary Adjustments) Law, 1985 (“Inflationary Adjustments Law”):

  Under said law, results for tax purposes are measured in real terms, in accordance with changes in the Consumer Price Index, or, in accordance with changes in the exchange rate of the US Dollar for a “foreign investment company,” as defined by Law for the Encouragement of Capital Investments, 1959. The Company and its Israeli subsidiary elected to measure their results on the basis of changes the Consumer Price Index.

  On February 26th, 2008, the Income Tax Act (Adjustments Due to Inflation) (Amendment no. 20) (Limit of the Period of Incidence), 5768 – 2008 (“the Amendment”) passed during the third reading in the Knesset, pursuant whereto, the inception of the Adjustments for Inflation Act shall terminate after the 2007 tax year, and, as of the 2008 tax year, the provisions of that Act will no longer apply, with the exception of the transitional provisions whose purpose is to prevent distortions in the tax calculations.

  Pursuant to the Amendment, as of the 2008 tax year, the adjustment of income for tax purposes to a real measurement basis shall no longer be calculated. Furthermore, depreciation of fixed assets and carry-forward losses for tax purposes will no longer be linked to the index, so that these sums shall be adjusted up until the index of the end of the 2007 tax year, and linkage to the index shall be discontinued thereafter.

F - 32



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Taxes on Income (continued)

  2. Tax rates:

  Income of the Company and its Israeli subsidiary is taxed at the regular “companies tax” rate. During July 2004, Amendment No. 140 to the Income Tax Ordinance was passed. One of its provisions is that the regular companies tax rate is to be gradually reduced to 30%. During August 2005, another amendment (No. 147) was passed, which makes a further revision to the companies tax rates prescribed by Amendment No. 140. As a result of said amendments, the companies tax rates for 2005 and thereafter are as follows: 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%.

  b. Foreign subsidiaries:

  The subsidiaries are taxed under the various tax laws of their home countries.

  c. Carry- forward tax losses and deductions

  Carry-forward tax losses and deductions of the Company and its subsidiaries, including capital losses and losses from the sale of securities, totaled NIS 1,910 million as of December 31st, 2007. Most carry-forward balances are available indefinitely.

  The Company did not record deferred taxes asset in respect of these losses since it does not anticipate that these losses will be used in the foreseeable future.

  d. Deferred income taxes:

2007
2006
NIS thousands
 
Changes in deferred income taxes:            
Opening balance    -    5,800  
Charge to statement of operations    -    (5,637 )
Charge to shareholders' equity    (34,345 )  -  
Currency translation    -    (163 )


Balance at year end    (34,345 )  -,-  



  e. Income before taxes on income from continuing operation:

Year ended December 31
2007
2006
2005
NIS thousands
 
The company and its Israeli subsidiary      40,114    53,801    10,828  
Non-Israeli subsidiaries    -    8,690    12,045  



     40,114    62,491    22,873  




F - 33



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Taxes on Income (continued)

  f. Taxes on income included in the statements of operations – from continuing operation:

  1. As follows:

Year ended December 31
2007
2006
2005
NIS thousands
 
Current      -    1,057    1,289  
Deferred, see d. above    -    5,637    (2,536 )



     -    6,694    (1,247 )




  2. Following is a reconciliation of the “theoretical tax” expense, assuming all income was taxable at the regular tax rate applicable to Israeli company and the actual tax expense charged to the statement of operations in the report year:

Year ended December 31
2007
2006
2005
NIS thousands
 
    Income before taxes on income of the                
Group, as reported in the statement of  
operations      40,114    62,491    22,873  



    Theoretical tax expense (tax benefit) on  
the above amount    11,633    19,372    7,777  
    Differences derived from different tax  
rate of non-Israeli subsidiaries    -    348    120  
    Unused deferred income tax in a subsidiary    -    2,596    -  
    Exempt revenues    (12,504 )  (3,698 )  (1,238 )
    Carry forward losses of which deferred  
taxes have not been recorded    8,050    15,018    (12,971 )
    Undeductible expenses    113    2,918    118  
    Differences derived from different  
currency for tax purpose    (7,292 )  (29,860 )  4,947  



    Taxes on income, as reported in the  
consolidated statement of operations    -    6,694    (1,247 )




F - 34



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 – Taxes on Income (continued):

  g. Tax assessments:

  1. The Company has received final tax assessments up to and including the 2002 tax year. Scailex Vision and Scailex Vision International (fully owned subsidiary of Scailex Vision) have received final tax assessments up to and including the 2005 tax year.

  2. Following the filing of tax returns of the Company’s US subsidiaries (reported under SDP’s discontinued operations) for 1992 through 1996 (and receipt of certain refunds in respect thereof), the US Internal Revenue Service (IRS) started an audit of those years. Up to 2004, and further to an arrangement with the IRS, SDP paid $38 million in Federal taxes and $5.7 million in State taxes.

  With the finalization of the 1992-1996 IRS audits, the Company filed a request for Federal tax refunds for 1994, 1995 and 1997, claiming a refund of $7.8 million. During 2005, the IRS audited 2003 the refund request. Further to management’s estimates that the likelihood of receiving the refund is strong; the Company recorded a Federal income tax receivable asset of $7.8 million under discontinued operations.

  On July 14th, 2006 a refund of $12.6 million was received from the IRS for said years. The difference of $4.8 million, between the amount provided for in the 2005 books and the actual receipt, was charged as income in the statement of operations, under discontinued operations in 2006.

Note 9 – Linkage bases balance sheet:

  For details of linkage bases balance sheets as of December 31st, 2007 and December 31st, 2006 – see section 6.6 to the director’s repot.

Note 10 – Supplementary Financial Statement Information

  Balance sheets:

  a. Cash and cash equivalents:

  Most of the Company’s cash balances which are not invested in US government bonds and foreign corporate bonds of high investment grade ratings, are held in daily deposits with US banks, at an average annual interest rate of 5.1% and 5% in 2007 and 2006, respectively.

  b. Financial assets – available-for-sale:

  At year-end, the Company held financial assets available-for-sale in a total amount of NIS 1,186.1 million. An amount of NIS 3.9 million is invested in high credit rating bonds traded in USA and the remaining amount of NIS 1,182.3 is invested in shares of ORL.

F - 35



SCAILEX CORPORATION LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Supplementary Financial Statement Information (continued)

  The following are the changes in the financial assets available-for-sale:

2007
2006
NIS thousands
 
Balance, beginning of year      61,765    104,856  
Additions    1,013,566    2,785  
Disposals    (57,996 )  (27,888 )
Received dividend    *(2,190 )  (12,878 )
Impairment / revaluation    665    (2,946 )
Revaluation, charged to equity    175,227    6,863  
Interest and exchange rate  
differences, net    (4,889 )  (7,320 )


Balance, end of year    1,186,148    63,472  
Lees: non-current assets    -    (1,707 )


Current assets    1,186,148    61,765  



  * Dividend received in respect of shares of ORL in amount of NIS 43.1 million was recorded as other income in the statement of operations, – see note 10h.

  c. Investments held to maturity:

  To the end of 2007 the Company has NIS 43.1 million invested in traded US government bonds and agencies. The average maturity time of the held to maturity bonds was 11 month to the end of 2007.

  The following are the changes in the investments held-to-maturity:

2007
2006
NIS thousands
 
Balance, beginning of year      190,446    187,144  
Additions    -    84,665  
Disposals    (135,742 )  (66,845 )
Interest and exchange rate differences    (11,629 )  (14,518 )


Balance, end of year    43,075    190,446  
Lees: non-current assets    (35,032 )  (97,103 )


Current assets    8,043    93,343  


   
Market value of the held to maturity bonds    43,656    188,947  



  d. Other receivables:

December 31
2007
2006
NIS thousands
 
Government institutions      2,530    1,107  
Prepaid expenses