Payton Planar — Interim / Quarterly Report 2011

Aug 18, 2011

Payton Planar Magnetics Ltd. and its Consolidated Subsidiaries Financial Statements June 30, 2011 (Unaudited)

Contents

	Page
Board of Directors Report	2
Review Letter	8
Condensed Consolidated Interim Financial Statements:
Statement of Financial Position	9
Statements of Comprehensive Income	11
Statements of Changes in Equity	12
Statements of Cash Flows	14
Notes to the Consolidated Interim Financial Statements	16

The Board of Directors' Report¹ on Corporate Affairs

We are pleased to present the Board of Directors' report on the affairs of Payton Planar Magnetics Ltd. and its consolidated subsidiaries for the six months ended on June 30, 2011.

Notice: This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Management of the Company as well as assumptions made by and information currently available to the Management of the Company. Such statements reflect the current views of the Company with respect to future events. Management emphasizes that the assumptions does not in any way imply commitment towards realization. The outcome of which is subject to certain risks and other factors, which may be outside of the Company's control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as projected, anticipated, believed, estimated, expected or intended.

Reference in this report to forward looking statement shall be by stating that such information is given by way of estimation, evaluation, assessment, intentions, expectations, beliefs and similar terms, but it is possible that such information shall be given under other phrases.

1. A concise description of the corporation and its business environment

A. The Group

Payton Planar Magnetics Ltd. ("the Company") and its consolidated subsidiaries: Payton America Inc. ("Payton America"), Payton Planar Holdings (1996) Ltd. ("Payton Holdings").

B. The Group's main fields of activity and changes that occurred in the period from January to June 2011

The Company, an Israeli high-tech enterprise, develops, manufactures and markets Planar transformers worldwide. The Company was founded in order to revolutionize the traditional approach to the design and manufacture of transformers through the concept of planar transformers. The invention is patented in North America, Europe and Japan. The Company completed its initial public offering in 1998 on the Euronext Stock Exchange.

March 10, 2011 - The Company signed a purchase agreement of a real-estate property for a total amount of NIS 13,250 thousand, excluding 16% VAT (about € 2.7 million excl. VAT). The Company financed the transaction by its own financial resources.

The industrial property will house the activities of the three currently-leased local facilities in one single new building. Management expects that centralizing the activities in the new building will lead to economies of scale and also offer opportunities for synergies between product lines.

The property land is 4,500 square meters and located in the central area of Israel. It consists of a basement/parking lot of 2,000 square meters and two floors above, each of 2,000 square meters. The foundation and framing phases of the industrial building have been finalized. Company anticipates that it could take about two years to be fully operational. The additional costs required for the completion and for the move are estimated to about € 2.8 million.

¹ The financial statements as at June 30, 2011 form an integral part thereof.

On August 16, 2011 - the transaction was completed and the Company received the possession rights.

C. Principal customers

The consolidated sales revenues include sales to major customers (which make up in excess of 10% of the sales of the Group).

	For the six-month period ended June 30	For the year ended December 31	For the six-month period ended June 30
	2011	2010	2010
Customer A	**30.1%	27.8%	26.0%
Customer B	*	**20.2%	**20.9%

* Less than 10% of the Group's consolidated sales.

** It is noted that a major project of this customer ended by June 2011.

D. Marketing

During 2011 the Group participated in the following exhibitions:

• January 2011, "New Tech Motion Control & Power Solutions" exhibition in Tel-Aviv, Israel.
• March 2011, "New-Tech" exhibition in Tel-Aviv, Israel.
• March 2011, "APEC 2011" exhibition in California, USA.
• May 2011, "PCIM" exhibition in Nierenberg, Germany.

In addition, during that period, the Company initiated several seminars and conferences in the USA.

E. Order and Purchase Backlog

Order and purchase backlog of the Group was affected by the global slowdown and by the termination of two major projects (as detailed in paragraph C - Principal customers above).

As of June 30, 2011 this backlog amounted to USD 5,889 thousand (December 31, 2010 - USD 8,710 thousand). The backlog is composed only of firm orders.

Management estimates that most of the backlog as of 30.6.11 will be supplied until March 31, 2012.

2. Financial position

A. Statement of Financial Position as at June 30, 2011

Cash and cash equivalents, Marketable securities held for trading and Short-term Deposits - these items amounted to a total of USD 18,958 thousand as at June 30, 2011 compared to USD 18,491 thousand as at December 31, 2010 and USD 14,331 thousand as at June 30, 2010. The increase in these items compared to December 31, 2010 is explained by the profit for the period which was shorten mostly due to advance payment made in favor of the real-estate property purchase.

Trade payables - these amounted to USD 4,560 thousand as at June 30, 2011 compared to USD 5,428 thousand as at December 31, 2010 and USD 6,126 thousand as at June 30, 2010. The decrease at June 30, 2011 is explained by the decrease in sales volume.

Marketable securities available for sale - as at June 30, 2011 these amounted to USD 0 thousand compared to USD 953 thousand as at December 31, 2010 and USD 937 thousand as at June 30, 2010.

The decrease in this item resulted from materializing the remaining ARS securities, at 94% from their par value (USD 1,000 thousand) in exchange for USD 940 thousand.

Fixed assets - these amounted to USD 3,438 thousand as at June 30, 2011, compared to USD 1,836 thousand as at December 31, 2010 and USD 1,789 thousand as at June 30, 2010. The increase in this item resulted from purchasing the real-estate property in Israel (See paragraph 1.B above).

Trade payables - these amounted to USD 1,259 thousand as at June 30, 2011 compared to USD 2,211 thousand as at December 31, 2010 and USD 2,860 thousand as at June 30, 2010. The decrease at June 30, 2011 is explained by a decrease in business activity, mainly through manufacturing subcontractors in China.

Other payables - these amounted to USD 1,140 thousand as at June 30, 2011 compared to USD 2,034 thousand as at December 31, 2010 and USD 1,500 thousand as at June 30, 2010. The decrease is attributed to Company decision to decrease its current liabilities to related parties.

B. Operating results

Summary of Consolidated quarterly Statements of Income US Dollars in thousands

Payton Planar Magnetics Ltd. Consolidated Income Statements

	Quarter 4-6/11	Quarter 1-3/11	Quarter 10-12/10	Quarter 7-9/10	Quarter 4-6/10
Sales revenues	4,916	5,717	6,202	7,685	7,059
Cost of sales	2,479	2,875	2,996	4,276	3,764
Gross profit	2,437	2,842	3,206	3,409	3,295
Development costs	(231)	(189)	(227)	(170)	(158)
Selling & marketing expenses	(442)	(491)	(595)	(580)	(569)
General & administrative expenses	(620)	(649)	(597)	(700)	(661)
Other expenses	-	-	(349)	-	(2)
Operating income	1,144	1,513	1,438	1,959	1,905
Finance income (expenses), net	62	204	(45)	259	(142)
Profit before income taxes	1,206	1,717	1,393	2,218	1,763
Income taxes	(260)	(317)	(424)	(507)	(16)
Profit for the period	946	1,400	969	1,711	1,747

General Note: The Group is exposed to erosion of the USD in relation to the NIS and to the Euro. Most of the Group's salaries and other operating costs are fixed in NIS. Revaluation of the local Israeli currency drives to an increase in labor costs and other operating costs, thus, negatively affects the operating results of the Company. The average rate of the USD with relation to the NIS in the first half-year of 2011 went down by 5.7% compared to average rate of year 2010, reflecting an increase in the above-mentioned costs when they are presented in USD.

Sales revenues - The Group's sales revenues for the six-month period ended June 30, 2011 were USD 10,633 thousand compared with USD 11,003 thousand in the six-month period ended June 30, 2010. The Group's sales revenues for the three-month period ended June 30, 2011 were USD 4,916 thousand compared with USD 7,059 thousand in the threemonth period ended June 30, 2010.

The sales in the second quarter of 2011 were affected by 2011 global slowdown.

It is noted that, during the second quarter of 2011, the sales of "Customer A" project continued. However, all open orders for this project were supplied (see also paragraph 1C - Principal customers, above).

Gross profit - The Group's gross profit for the six-month period ended June 30, 2011 amounted USD 5,279 thousand (50% of sales) compared with USD 4,706 thousand (43% of sales) in the six-month period ended June 30, 2010.

The Group's gross profit for the three-month period ended June 30, 2011 amounted USD 2,437 thousand (50% of sales) compared with USD 3,295 thousand (47% of sales) in the three-month period ended June 30, 2010. The increase in the gross profit ratio relates to the products mix sold during each quarter.

Development costs - Payton's R&D strategy is aimed on maintaining the leadership of the Planar Technology. The R&D department works in conjunction with R&D departments of the forerunners of today's global technology, and together they define tomorrow's technological needs. Costs were based upon time expended by the department's employees. The group's development costs for the six months ended June 30, 2011 were USD 420 thousand compared with USD 322 thousand in the six months ended June 30, 2010. The increase in these expenses relates mainly to a research process of upgrading materials used in planar transformers.

General & Administrative expenses - The Group's General & Administrative expenses for the six months ended June 30, 2011 amounted USD 1,269 thousand compared with USD 1,172 thousand in the six months ended June 30, 2010 (see general note above).

Finance income (expenses), net - The Group's finance income for the six-month period ended June 30, 2011 amounted USD 266 thousand, compared with an expense of USD 182 thousand for the six-month period ended June 30, 2010.

Erosion of cash & cash equivalent mostly in Euro versus the US Dollar attributed the increase in the Finance net income.

Income Taxes - Tax expenses for the six-month period ended June 30, 2011 amounted USD 577 thousand (19.7%), which is in line with 2010 yearly tax rate (18.2%). The increase in the tax expenses percentage relates to a decrease in revenues entitled to local tax benefits.

3. Liquidity

A. Liquidity Ratios

The following table presents the financial ratios in the Statement of Financial Position:

Payton Planar Magnetics Ltd. Consolidated financial ratios
June 30, 2011 December 31, 2010 June 30, 2010
Current ratio2	6.81	4.52	4.18
Quick ratio3	6.21	4.13	3.77

B. Operating activities

Cash flows generated from operating activities for the six-month period ended June 30, 2011 amounted USD 1,127 thousand compared with cash flows generated from operating activities of USD 304 thousand for the sixmonth period ended June 30, 2010. The cash flow for the first half of 2011 was mostly affected by decrease in trade receivables as result of the decrease in business activity as well as by payoff of current liabilities to related parties and to trade payable.

² Current ratio calculation – Current assets / Current liabilities

C. Investing activities

Cash flows used for investing activities in the six-month period ended June 30, 2011 amounted USD 3,627 thousand, compared with cash flows generated from investing activities of USD 1,042 thousand in the six-month period ended June 30, 2010.

During the first half of year 2011 this cash flows were used mainly for investments in real-estate property and in short-term bank deposits.

4. Financing sources

The Group financed its activities during the reported period from its own resources.

5. External factors effects

• 5.1 Revaluation/devaluation of the local Israeli currency in relation to the U.S. Dollar leads to an increase/decrease (respectively) in labor costs and other operating costs. Most of the Group's salaries and other operating costs are fixed in NIS, therefore, the operating results of the Company are being affected.
• 5.2 Devaluation of the Euro in relation to the U.S. Dollar leads to a decrease in Company's assets in Euro.

To the best of the Board of Directors' and management's knowledge, except the above mentioned, there have been no significant changes in external factors that may materially affect the Company's financial position or results of operations.

The Company's Board of Directors wishes to thank our shareholders for their continuance trust and belief.

The Company's Board of Directors wishes to extent its sincere thanks to the entire personnel for their efforts and contribution to the Group's affairs.

David Yativ Chairman of the Board of Directors and C.E.O.

Rishon Lezion, August 18, 2011.

Somekh Chaikin Telephone 972 3 684 8000 KPMG Millennium Tower Fax 972 3 684 8444 17 Ha'arba'a Street, PO Box 609 Internet www.kpmg.co.il Tel Aviv 61006 Israel

Review Report to the Shareholders of Payton Planar Magnetics Ltd.

Introduction

We have reviewed the accompanying financial information of Payton Planar Magnetics Ltd. and its subsidiaries comprising of the condensed consolidated interim statement of financial position as of June 30, 2011 and the related condensed consolidated interim statements of comprehensive income, changes in equity and cash flows for the six and three-month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 "Interim Financial Reporting". Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with IAS 34 "Interim Financial Reporting."

Somekh Chaikin Certified Public Accountants (Isr.) (A Member of KPMG International)

August 18, 2011

Condensed Consolidated Interim Statement of Financial Position as at

		June 30 2011	June 30 2010	December 31 2010
		(Unaudited)	(Unaudited)	(Audited)
	Note	\$ thousands	\$ thousands	\$ thousands
Current assets
Cash and cash equivalents		10,532	7,449	12,932
Short-term deposits		6,941	5,195	3,921
Marketable securities held for trading		1,485	1,687	1,638
Trade accounts receivable		4,560	6,126	5,428
Other accounts receivable		208	176	105
Inventory		2,267	2,208	2,245
Total current assets		25,993	22,841	26,269
Non-current assets
Long-term deposits		2,089	2,038	2,064
Marketable securities available for sale	4	-	937	953
Other investment		-	348	-
Fixed assets		3,438	1,789	1,836
Deferred taxes		130	181	107
Total non-current assets		5,657	5,293	4,960

Total assets	31,650	28,134	31,229

David Yativ Michal Lichtenstein Chief Executive Officer and V.P. Finance & CFO Chairman of the Board of Directors

August 18, 2011

Condensed Consolidated Interim Statement of Financial Position as at (cont'd)

	June 30 2011	June 30 2010	December 31 2010
	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands
Liabilities and equity
Current liabilities
Trade payables	1,259	2,860	2,211
Other payables	1,140	1,500	2,034
Current tax liability	1,419	1,110	1,571
Total current liabilities	3,818	5,470	5,816
Non-current liabilities
Employee benefits	276	197	250
Total non-current liabilities	276	197	250
Equity
Share capital	4,836	4,836	4,836
Share premium	8,993	8,993	8,993
Capital fund for available-for-sale assets	-	(63)	(47)
Retained earnings	13,727	8,701	11,381
Total equity	27,556	22,467	25,163
Total liabilities and equity	31,650	28,134	31,229

	For the six months ended June 30		For the three months ended June 30		Year ended December 31
	2011	2010	2011	2010	2010
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Revenues Cost of sales	10,633 (5,354)	11,003 (6,297)	4,916 (2,479)	7,059 (3,764)	24,890 (13,569)
Gross profit	5,279	4,706	2,437	3,295	11,321
Development costs Selling and marketing	(420)	(322)	(231)	(158)	(719)
expenses General and administrative	(933)	(937)	(442)	(569)	(2,112)
expenses	(1,269)	(1,172)	(620)	(661)	(2,469)
Other expenses	-	(2)	-	(2)	(351)
Operating income	2,657	2,273	1,144	1,905	5,670
Finance income	337	115	136	66	318
Finance expenses	(71)	(297)	(74)	(208)	(286)
Finance income
(expenses), net	266	(182)	62	(142)	32
Profit before income taxes	2,923	2,091	1,206	1,763	5,702
Income taxes	(577)	(108)	(260)	(16)	(1,039)
Profit for the period	2,346	1,983	946	1,747	4,663
Other comprehensive income
Net change in fair value of available-for-sale assets
transferred to profit or loss Net change in fair value of	60	89	60	49	89
available-for-sale assets	(13)	10	13	21	26
Total other comprehensive income	47	99	73	70	115
Total comprehensive income for the period	2,393	2,082	1,019	1,817	4,778
Basic earnings per ordinary share (in \$)	0.13	0.11	0.05	0.10	0.26

Condensed Consolidated Interim Statements of Comprehensive Income

Payton Planar Magnetics Ltd. and its Subsidiaries

	Share capital		Share	Capital fund for available-	Retained
	Number of shares	\$ thousands	premium \$ thousands	for-sale assets \$ thousands	earnings \$ thousands	Total \$ thousands
For the six months ended June 30, 2011 (Unaudited) Balance at January 1, 2011 Total comprehensive	17,670,775	4,836	8,993	(47)	11,381	25,163
income for the period Profit for the period Other comprehensive income	-	-	-	-	2,346	2,346
Net change in fair value of available-for-sale assets transferred to profit or loss Net change in fair value of	-	-	-	60	-	60
available-for-sale assets	-	-	-	(13)	-	(13)
Total comprehensive income for the period	-	-	-	47	2,346	2,393
Balance at June 30, 2011	17,670,775	4,836	8,993	-	13,727	27,556
For the six months ended June 30, 2010 (Unaudited) Balance at January 1, 2010	17,670,775	4,836	8,993	(162)	6,718	20,385
Total comprehensive income for the period Profit for the period Other comprehensive income	-	-	-	-	1,983	1,983
Net change in fair value of available-for-sale assets transferred to profit or loss Net change in fair value of available-for-sale assets	- -	- -	- -	89 10	- -	89 10
Total comprehensive
income for the period	-	-	-	99	1,983	2,082
Balance at June 30, 2010	17,670,775	4,836	8,993	(63)	8,701	22,467
For the three months ended June 30, 2011 (Unaudited) Balance at April 1, 2011	17,670,775	4,836	8,993	(73)	12,781	26,537
Total comprehensive income for the period
Profit for the period Other comprehensive income Net change in fair value of	-	-	-	-	946	946
available-for-sale assets transferred to profit or loss Net change in fair value of	-	-	-	60	-	60
available-for-sale assets Total comprehensive	-	-	-	13	-	13
income for the period Balance at June 30, 2011	- 17,670,775	- 4,836	- 8,993	73 -	946 13,727	1,019 27,556

Condensed Consolidated Interim Statement of Changes in Equity

Condensed Consolidated Interim Statement of Changes in Equity (cont'd)

	Share capital		Share	Capital fund for available-	Retained
	Number of shares	\$ thousands	premium \$ thousands	for-sale assets \$ thousands	earnings \$ thousands	Total \$ thousands
For the three months ended June 30, 2010 (Unaudited)
Balance at April 1, 2010 Total comprehensive income for the period	17,670,775	4,836	8,993	(133)	6,954	20,650
Profit for the period Other comprehensive income	-	-	-	-	1,747	1,747
Net change in fair value of available-for-sale assets transferred to profit or loss Net change in fair value of	-	-	-	49	-	49
available-for-sale assets	-	-	-	21	-	21
Total comprehensive income for the period	-	-	-	70	1,747	1,817
Balance at June 30, 2010	17,670,775	4,836	8,993	(63)	8,701	22,467
For the year ended December 31, 2010 (Audited) Balance at January 1, 2010 Total comprehensive	17,670,775	4,836	8,993	(162)	6,718	20,385
income for the year Profit for the year Other comprehensive income	-	-	-	-	4,663	4,663
Net change in fair value of available-for-sale assets transferred to profit or loss Net change in fair value of	-	-	-	89	-	89
available-for-sale assets	-	-	-	26	-	26
Total comprehensive income for the year	-	-	-	115	4,663	4,778
Balance at December 31, 2010	17,670,775	4,836	8,993	(47)	11,381	25,163

				Year ended
	For the six months ended June 30		For the three months ended June 30		December 31 2010
	2011 (Unaudited)	2010 (Unaudited)	2011 (Unaudited)	2010 (Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Operating activities
Profit for the period	2,346	1,983	946	1,747	4,663
Adjustments to reconcile
profit to net cash generated
from operating activities:
Depreciation	150	135	80	68	281
Capital loss on sale of
fixed assets	-	2	-	2	3
Impairment loss on other
investment	-	-	-	-	348
Increase (decrease) in
employee benefits	26	3	7	(7)	56
Decrease (increase) in trade
accounts receivables	868	(3,639)	1,140	(2,607)	(2,941)
(Increase) decrease in other
accounts receivable	(103)	(35)	1	(40)	35
Increase in inventory (Decrease) increase in trade	(22)	(204)	(21)	(143)	(241)
payables	(978)	1,745	(386)	1,191	1,098
(Decrease) increase in other
payables	(894)	262	(95)	546	796
(Decrease) increase in tax
liability	(152)	(78)	93	(81)	384
Increase in deferred taxes	(23)	(110)	(7)	(94)	(36)
Finance (income) expenses, net	(91)	240	18	179	44
Cash flows generated from
operating activities	1,127	304	1,776	761	4,490
Investing activities
Proceeds from sale of
marketable securities held
for trading	179	-	179	-	103
Proceeds from sale of
marketable securities
available for sale	940	1,886	940	926	1,886
Investments in short-term
deposits, net	(3,020)	(663)	(12)	(17)	611
Payments in advance and
investment in fixed assets	(1,738)	(203)	(1,380)	(136)	(415)
Proceeds from sale of
fixed assets	12	22	-	22	38
Cash flows (used for)
generated from investing
activities	(3,627)	1,042	(273)	795	2,223

Condensed Consolidated Interim Statements of Cash Flows

Condensed Consolidated Interim Statements of Cash Flows (cont'd)

				Year ended
	For the six months ended June 30 2011	2010	For the three months ended June 30 2011	2010	December 31 2010
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Financing activities Dividend paid	-	(1,679)	-	-	(1,679)
Cash flows used for financing activities	-	(1,679)	-	-	(1,679)
Net (decrease) increase in cash and cash equivalents	(2,500)	(333)	1,503	1,556	5,034
Cash and cash equivalents at beginning of the period	12,932	7,961	8,995	6,002	7,961
Effect of exchange rate fluctuations on cash held	100	(179)	34	(109)	(63)
Cash and cash equivalents at end of the period	10,532	7,449	10,532	7,449	12,932
Supplementary disclosure
Interest received included in cash flows generated from
operating activities	104	76	60	37	269
Tax paid included in cash flows used for operating activities	752	295	172	189	691

Note 1 - General

Payton Planar Magnetics Ltd. ("the Company") was incorporated in December 1992 and its headquarters are located at 14 Hahoma Street, Rishon Le Zion. The Company is a subsidiary of Payton Industries Ltd. (the "Parent Company"). In June 1998, the Company completed its initial public offering in the Euro NM.

The condensed consolidated interim financial statements of the Group as at June 30, 2011 comprise the Company and its subsidiaries (together referred as the "Group").

The Group develops, manufactures and markets planar power transformers for high density, high frequency off-line power supplies and operates abroad through its subsidiary and distributors.

Note 2 - Basis of Preparation

A. Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". They do not include all the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements as at December 31, 2010 (hereinafter "annual financial statements"). These condensed consolidated interim financial statements were authorized for issue by the Group's Board of Directors on August 18, 2011.

B. Use of estimates and judgments

The preparation of interim financial statements in accordance to IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual financial statements.

Note 3 - Significant Accounting Policies

Except as described below in Item (1), the accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its annual financial statements.

Note 3 - Significant Accounting Policies (cont'd)

Presented hereunder is a description of the changes in accounting policies that were applied in these condensed consolidated interim financial statements and their effect:

(1) Initial implementation of new standards

A. Related party disclosures

As from January 1, 2011 the Group implements IAS 24 (2009) Related Party Disclosures (hereinafter - "the Standard"). The Standard includes changes in the definition of a related party and changes with respect to disclosures required by entities related to government. The Standard was applied retrospectively.

For the purpose of implementing the Standard for the first time, the Group mapped its relationships with related parties. No new related parties have been identified according to the new definition and as a result of the mapping.

B. Interim financial reporting

As from January 1, 2011 the Group implements the amendment to IAS 34 Interim Financial Reporting - Significant events and transactions (hereinafter - "the Amendment"), which was issued in the framework of Improvements to IFRSs 2010. The Amendment expanded the list of events and transactions that require disclosure in interim financial statements and also removed the materiality threshold from the minimum disclosure requirements that was included in the Standard before its amendment. Implementation of the Amendment did not have any effect on these condensed interim financial statements.

(2) New standards and interpretations not yet adopted

A. IFRS 9 (2010), Financial Instruments (hereinafter - "the Standard")

Further to that mentioned in the annual financial statements in the note on significant accounting policies with respect to new standards and interpretations not yet adopted, the Group is examining the effects of adopting the Standard on the financial statements and has no plans for early adoption.

B. A new suite of accounting standards on Consolidation, Joint Arrangements and Disclosure of Involvement with Other Entities

The new suite of standards replaces existing standards regarding consolidation of financial statements and joint arrangements and includes a number of changes with respect to investments in associates.

Presented hereunder are the new standards that were issued:

(1) IFRS 10 Consolidated Financial Statements (hereinafter - "IFRS 10")

IFRS 10 replaces the requirements of IAS 27 Consolidated and Separate Financial Statements and the requirements of SIC-12 Consolidation - Special Purpose Entities with respect to the consolidation of financial statements, so that the requirements of IAS 27 will continue to be valid only for separate financial statements.

Note 3 - Significant Accounting Policies (cont'd)

• (2) New standards and interpretations not yet adopted (cont'd)
• B. A new suite of accounting standards on Consolidation, Joint Arrangements and Disclosure of Involvement with Other Entities (cont'd)
• (1) IFRS 10 Consolidated Financial Statements (hereinafter "IFRS 10") (cont'd)

IFRS 10 introduces a new single control model for determining whether an investor controls an investee and should therefore consolidate it. This model is implemented with respect to all investees. According to the model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee and has the ability to affect those returns through its power over that investee.

Presented hereunder are certain key changes from the current consolidation guidance:

• IFRS 10 introduces a model that requires applying judgment and analyzing all the relevant facts and circumstances for determining who has control and is required to consolidate the investee.
• IFRS 10 introduces a single control model that is to be applied to all investees, both those presently in the scope of IAS 27 and those presently in the scope of SIC-12.
• De facto power should be considered when assessing control. This means that the existence of de facto control could require consolidation.
• When assessing control, all "substantive" potential voting rights will be taken into account. The structure, reasons for existence and conditions of potential voting rights should be considered.
• IFRS 10 provides guidance on the determination of whether a decision maker is acting as an agent or as a principal when assessing whether an investor controls an investee.
• IFRS 10 provides guidance on when an investor would assess power over portion of the investee (silos), that is over specified assets of the investee.
• IFRS 10 provides a definition of protective rights, while there is no such definition in existing IFRS.
• The exposure to risk and rewards of an investee does not, on its own determine that the investor has control over an investee, rather it is one of the factor of control analysis.

IFRS 10 is applicable retrospectively (with a certain relief) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided and that the entire consolidation suite is early adopted, meaning also the two additional standards that were issued - IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Involvement with Other Entities.

Note 3 - Significant Accounting Policies (cont'd)

(2) New standards and interpretations not yet adopted (cont'd)

B. A new suite of accounting standards on Consolidation, Joint Arrangements and Disclosure of Involvement with Other Entities (cont'd)

(2) IFRS 12 Disclosure of Involvement with Other Entities (hereinafter - "IFRS 12")

IFRS 12 contains extensive disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and unconsolidated structured entities.

IFRS 12 is applicable for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that the entire consolidation suite is adopted at the same time, meaning also the two additional standards published - IFRS 10 consolidated financial statements and IFRS 11 joint arrangements.

Nevertheless, it is permitted to voluntarily provide the additional disclosures required by IFRS 12 prior to its adoption without early adopting the other standards.

The Group has not yet started assessing the effects of adopting the standards in its financial statements.

C. IFRS 13 Fair Value Measurement (hereinafter - "IFRS 13")

IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value.

IFRS 13 applies to assets, liabilities and an entity's own equity instruments that, under other IFRSs, are required or permitted to be measured at fair value or when disclosure of fair value is provided. Nevertheless, IFRS 13 does not apply to share based payment transactions within the scope of IFRS 2 Share-Based Payment and leasing transactions within the scope of IAS 17 Leases. IFRS 13 does not apply to measurements that are similar to but are not fair value (such as the measurement of the net realizable value of inventory, in accordance with IAS 2 Inventories, and the measurement of value in use, in accordance with IAS 36 Impairment of Assets).

IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. Earlier application is permitted with disclosure of that fact. The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

The Group has not yet started assessing the effects of adopting IFRS 13 in its financial statements.

Note 3 - Significant Accounting Policies (cont'd)

(2) New standards and interpretations not yet adopted (cont'd)

D. Amendments to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income (hereinafter - "the amendment")

The amendment changes the presentation of items of other comprehensive income (hereinafter - "OCI") in the financial statements, so that items of OCI that may be reclassified to profit or loss in the future, would be presented separately from those that would never be reclassified to profit or loss. Additionally, the amendment changes the title of the Statement of Comprehensive Income to Statement of Profit or Loss and Other Comprehensive Income. However, entities are still allowed to use other titles. The amendment is effective for annual periods beginning on or after July 1, 2012. The amendment will be applied retrospectively. Early adoption is permitted providing that disclosure is provided.

The Group has not yet started assessing the effects of adopting the amendment in its financial statements.

E. Amendment to IAS 19, Employee benefits (hereinafter - "the amendment")

The amendment introduces a number of changes to the accounting treatment of employee benefits.

The key changes are as follows:

• The amendment eliminates the possibility of postponing recognition of actuarial gains and losses, known as the "corridor" and, in addition, eliminates the option of recognizing actuarial gains and losses directly in profit or loss. As a result, all actuarial gains and losses will be recognized immediately in equity through other comprehensive income.
• The amendment requires immediate recognition of past service costs regardless of whether the benefits have vested or not.
• The calculation of net interest income or expense will be determined by applying the discount rate used to measure the defined benefit obligation to the net defined benefit liability (asset). Accordingly, calculation of actuarial gains or losses will also change.
• The amendment changes the definitions of short-term employee benefits and of other long term employee benefits, so that the distinction between the two will depend on when the entity expects the benefits to be wholly settled, rather than when settlement is due.
• The amendment enhances the disclosure requirements for defined benefit plans, in an effort to provide better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.
• The definition of termination benefits has been clarified so that termination benefits are recognized at the earlier of when the entity recognizes, in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, costs for a restructuring that includes the payment of termination benefits, and when the entity can no longer withdraw the offer of the termination benefits

Note 3 - Significant Accounting Policies (cont'd)

(2) New standards and interpretations not yet adopted (cont'd)

E. Amendment to IAS 19, Employee benefits (hereinafter - "the amendment") (cont'd)

The amendment is applicable retrospectively (excluding certain exceptions stated in the standard) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided.

The Group has not yet started assessing the effects of adopting the amendment in its financial statements

Note 4 - Marketable Securities Available For Sale

In April 2011 the Company accepted an offer to materialize its ARS securities at a rate of 94% from their par value (Par value - USD 1,000 thousand). In exchange for this sale of ARS, the Company received USD 940 thousand.

Note 5 - Real Estate Property Purchase Agreement

On June 20, 2011 the suspending condition included in the purchase agreement of a real-estate property signed on March 10, 2011, concerning the completion of the property registration in the local real-estate registration office, was fulfilled.

As at June 30, 2011 the Company has paid in favor of the property an amount of USD 1,375 thousand classified under fixed assets (see also Note 25 to the yearly financial statements as of December 31, 2010).

On August 16, 2011 the transaction was completed and the Company received the possession rights.