RISK FACTORS

You should carefully consider the risks described below before making an investment in Elbit Medical Imaging Ltd. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that we do not presently know of or that we consider immaterial. All of these risks may impair our business operations. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.

RISKS RELATING TO THE COMMERCIAL AND ENTERTAINMENT MALLS BUSINESS

SUITABLE LOCATIONS ARE CRITICAL TO THE SUCCESS OF A COMMERCIAL AND ENTERTAINMENT MALL.

The choice of suitable locations for the development of the commercial and entertainment mall projects is an important factor in the success of the individual projects. Ideally, these sites should be located: (i) within the city center, with well-developed transportation infrastructures (road and rail) in close proximity to facilitate customer access; and (ii) within local areas with sufficient population to support the malls. We cannot be certain that we will be able to find sites in the target cities which meet these criteria, either at all or at viable prices.

ZONING RESTRICTIONS AND LOCAL OPPOSITION CAN DELAY OR PRECLUDE CONSTRUCTION OF A MALL.

Sites which meet our criteria must be zoned for commercial activities of the type contained in commercial and entertainment malls. In instances where the existing zoning is not suitable or in which the zoning has yet to be determined, we will apply for and obtain required zoning classifications. This procedure may be protracted, particularly in countries where the bureaucracy is cumbersome and inefficient, and we cannot be certain that the process of obtaining proper zoning will be completed with sufficient speed to enable the malls to open ahead of the competition or at all. Opposition by local residents to zoning and/or building permit applications may also cause considerable delays. Most of our site acquisitions are conditioned upon the grant of a building permit.

WE DEPEND ON SUBCONTRACTORS TO CONSTRUCT OUR MALLS.

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

COMPETITION IS INCREASING RAPIDLY IN EASTERN EUROPE.

The retail and entertainment industry in Eastern Europe is rapidly becoming more competitive, with a number of developers (particularly from Germany and France) becoming active in our target areas. While their activities in the past have tended to concentrate on large retail centers or "power-centers," the commercial and entertainment mall concept we promote is gaining increasing popularity due to its potentially high yields. Developers compete not only for

patrons, but also for desirable properties, financing, raw materials, qualified contractors, experienced system consultants, expert marketing agents and skilled labor. The public bidding process (the process through which we often acquire new properties) is subject to intense competition and some of our competitors have longer operating histories and greater resources than us, all of which may limit our ability to obtain such projects. There can be no assurance that we will be successful in winning projects that we bid for or which are awarded pursuant to fixed price tenders or will otherwise continue to be successful in competing in Eastern European.

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

An important element in the success of our commercial and entertainment mall projects is the short construction time (generally 8 to 12 months from the receipt of building permits, depending on the size of the project), and our ability to open the malls ahead of competition, particularly in cities which do not have commercial and entertainment malls of the type constructed by us. This makes us subject to a number of risks relating to these activities including:

o delays in obtaining zoning and other approvals;

o the unavailability of materials and labor;

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

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

o environmental uncertainties;

o extraordinary circumstances or acts of god; and

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

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

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

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

WE ARE DEPENDENT ON ENGAGING THIRD PARTIES TO ENTER INTO LEASE AGREEMENTS, AND ON OBTAINING AND RETAINING ATTRACTIVE, HIGH CUSTOMER TRAFFIC LOCATIONS.

We are dependent on our ability to engage third parties to enter into new leases and renew existing leases on favorable terms. We may find it more difficult to engage third parties to enter into leases during periods when market rents are increasing, or when general consumer activity is decreasing. If a significant portion of our existing leases were to expire during such a period, we may experience a decline in rental incomes. We seek agreements in principle with anchor tenants (such as the operators of movie theaters, supermarkets, department stores, electrical appliances stores and video and gaming arcades), either generally or on a property-by property basis, prior to entering into a formal lease. The termination of a lease by any anchor tenant may materially adversely affect the Company. The failure of an anchor tenant to abide by these agreements may cause delays, result in a decline in rental income (temporary or long term) the effect of which we may not be able to offset due to difficulties in finding a suitable replacement tenant.

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

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

The geographical diversity of our portfolio mitigates some of the risk of an economic downturn. In addition, the diversity of our tenant mix also is important because no single retailer is considered as a principal tenant. Bankruptcies and store closings may, in some circumstances, create opportunities for us to release spaces at higher rents to tenants with enhanced sales performance. We have demonstrated an ability to successfully re-tenant anchor and in-line store locations during soft economic cycles. While these factors reflect some of the inherent strengths of our portfolio in a difficult retail environment, we cannot assure you that we will successfully execute our releasing strategy.

GENERAL ECONOMIC CONDITIONS IN A REGION WILL AFFECT OUR TENANTS.

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

ENVIRONMENTAL ISSUES ARE BECOMING OF INCREASING SIGNIFICANCE IN EASTERN EUROPE.

There is increasing awareness of environmental issues in Eastern Europe. This may be of critical importance in areas previously occupied by the Soviet Army where soil pollution may be prevalent. While we generally insist upon receiving an environmental report as a condition for purchase, or alternatively conduct environmental tests during our due diligence investigations, we cannot be certain that all sites acquired will be free of environmental pollution. Should that eventuality arise, it will adversely affect our ability to construct, develop and operate the

commercial and entertainment mall on the relevant site, and may cause us to suffer expenses needed to clean up the polluted site.

RISKS RELATING TO THE HOTEL BUSINESS OF ELSCINT

THE HOTEL AND LEISURE INDUSTRY MAY BE AFFECTED BY ECONOMIC CONDITIONS, OVERSUPPLY, TRAVEL PATTERNS, WEATHER AND OTHER CONDITIONS BEYOND ELSCINT'S CONTROL WHICH MAY ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.

The hotel and leisure industry may be adversely affected by changes in national or local economic conditions and other local market conditions. Elscint's hotels generally, and in particular, in Johannesburg, Budapest London, Amsterdam and Bucharest, may be subject to the risk of oversupply of hotel rooms. Elscint is subject to various risks related to its operations in Eastern Europe, including economic and political instability, political and criminal corruption and the lack of experience and unpredictability of the civil justice system. Other general risks that may affect Elscint's hotel and leisure business are changes in travel patterns, extreme weather conditions, changes in governmental regulations which influence or determine wages, workers' union activities, increases in land acquisition prices or construction costs, changes in interest rates, the availability of financing for operating or capital needs, or changes in real estate tax rates and other current operating expenses. Unforeseen events, such as terrorist attacks, outbreaks of epidemics and economic recessions have had and may continue to have an adverse effect on local and international travel patterns and, as a result, on occupancy rates and prices in Elscint's hotels. Downturns or prolonged adverse conditions in the real estate or capital markets or in national or local economies and difficulties in securing financing for the development of hotels, could have a material adverse effect on Elscint's business, results of operations, ability to develop new projects and the attainment of its goals.

COMPETITION IN THE HOTEL AND LEISURE INDUSTRY COULD HAVE A MATERIAL ADVERSE EFFECT ON ELSCINT'S BUSINESS AND RESULTS OF OPERATIONS.

The hotel and leisure business is highly competitive. This is particularly the case in those areas where there is an over-supply of rooms., such as in London, Amsterdam and Budapest. Competitive factors within the industry include:

o convenience of location and accessibility to business centers;

o room rates;

o quality of accommodations;

o name recognition;

o quality and nature of service and guest facilities provided;

o reputation;

o convenience and ease of reservation systems; and

o the supply and availability of alternative lodging.

Elscint operates, and intends to develop or acquire, most of its hotels in geographic locations where other hotels are or may be located. Elscint expects to compete for guests and development sites with national chains, large franchisees and independent operators. Many of these competitors have greater financial resources and better brand name recognition than Elscint and may have more established relationships with prospective franchisers, representatives in the construction industry and other parties engaged in the lodging industry. The number of competitive lodging facilities in a particular area could have a material adverse effect on Elscint's occupancy and rates and, therefore, revenues of its hotels. Elscint believes that competition within the lodging market may increase in the foreseeable future. Elscint cannot be sure that new or existing competitors will not significantly reduce their rates or offer greater convenience, services or amenities or significantly expand or improve hotels in the markets in which Elscint currently or may subsequently compete, thereby materially adversely affecting its business and results of operations.

ACQUIRING, DEVELOPING AND RENOVATING HOTELS INVOLVES SUBSTANTIAL RISKS, AND ELSCINT CANNOT BE CERTAIN OF THE SUCCESS OF ANY FUTURE PROJECTS.

Part of Elscint's growth strategy is to develop new hotels and to acquire and redevelop old or under-performing hotels. Acquiring, developing and renovating hotels involves substantial risks, including:

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

o competition for acquisition of suitable development sites from Elscint's competitors, who may have greater financial resources;

o the failure to obtain zoning and construction permits;

o the failure of Elscint's hotels to earn profits sufficient to service debt incurred in construction or renovation, or at all;

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

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

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

As of May 31, 2004, Elscint: (i) was in various stages of development of the Thames Riverbank project in London; (ii) closed down the Bucuresti Hotel in Bucharest, Romania and intends to commence the renovation and the refurbishment of the facility as soon as Elscint completes the financing for this project (iii) completed the construction of the oceanarium attraction within the Astrid Park Plaza Hotel in Antwerp, Belgium; and (iv) expects the construction of the Ballet Institute Building in Budapest, Hungary to commence during late 2004. Elscint cannot be certain that present or future development or renovation will be successful. For successful growth, Elscint must be able to develop or acquire hotels on attractive terms and integrate the new or acquired hotels into its existing operations. For acquired hotels,

Elscint must consolidate management, operations, systems, personnel and procedures, which may not be immediately possible due to collective labor agreements or other legal or operational obstacles. Any substantial delays or unexpected costs in this integration process could materially affect Elscint's business, financial condition or results of operations. Elscint cannot be certain that its newly acquired hotels will perform as it expects or that it will be able to realize projected cost savings.

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

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

ELSCINT DEPENDS ON PARTNERS IN ITS JOINT VENTURES AND COLLABORATIVE ARRANGEMENTS.

Elscint owns interests in seven (7) hotels and is developing three additional hotels, generally in partnership with other entities. Elscint may in the future enter into joint ventures or other collaborative arrangements. Elscint's investment in these joint ventures may, under certain circumstances, be subject to (i) the risk that one of its partners may become bankrupt or insolvent which may cause it to be unable to fulfill its financial obligations, may trigger a default under its bank financing agreements or, in the event of a liquidation, may prevent it from managing or administering its business, (ii) the risk that one of its partners may have economic or other interests or goals that are inconsistent with its interests and goals, and that such partner may be in a position to veto actions which may be in its best interests, and (iii) the possibility that disputes may arise regarding the continued operational requirements of jointly owned hotels.

ELSCINT RELIES ON A MANAGEMENT AGREEMENT WITH PARK PLAZA, WHICH MAY NOT PROVIDE THE INTENDED BENEFITS, AND MAY BE TERMINATED.

All of the operating hotels in which Elscint has an interest (other than the Shaw Park Plaza Hotel and the Centreville Apartment hotel in Bucharest) are either directly or indirectly operated under management agreements with Park Plaza Hotels Europe, Ltd. (Park Plaza). Park Plaza is the franchisee for certain territories under territorial license and franchise agreements with Park Inn International Worldwide Hotel Group, which entitles Park Plaza to use the "Park Plaza" tradename. Any significant decline in the reputation of Park Plaza or in its ability to ensure the performance of Elscint's hotels at anticipated levels could adversely affect Elscint's results of operations. If for any reason Park Plaza loses its principal franchise, Elscint will automatically lose its ability to use the Park Plaza name and other benefits, in which case Elscint may suffer in the areas of brand name recognition, marketing, and centralized reservations systems provided by Park Plaza, which, in turn, could materially affect Elscint's operations. If Elscint's agreement with Park Plaza were to be terminated, Elscint cannot be certain that it

would be able to obtain alternative management services of the same standard on similar or better terms.

ELSCINT'S AGREEMENT WITH PARK PLAZA IMPOSES OBLIGATIONS ON ELSCINT THAT MAY FORCE IT TO INCUR SIGNIFICANT COSTS.

The agreement with Park Plaza for each of Elscint's Park Plaza managed hotels contains specific standards for, and restrictions and limitations on, hotel operation and maintenance. These standards, restrictions and limitations may conflict with Elscint's priorities, and impose capital demands upon it. In addition, Park Plaza may alter its standards or hinder Elscint's ability to improve or modify Elscint's hotels. In order to comply with Park Plaza's requirements, or alternatively to change a franchise affiliation for a particular hotel and disassociate itself from the "Park Plaza" tradename, Elscint may be forced to incur significant costs or make capital improvements.

THE VALUE OF ELSCINT'S INVESTMENT IN ITS HOTEL PROPERTIES IS SUBJECT TO VARIOUS RISKS RELATED TO OWNERSHIP AND OPERATION OF REAL PROPERTY.

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

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

o a general or local slowdown in the real property market which would make it difficult to sell a property;

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

o competition from other lodging facilities, and an over-supply of hotel rooms in a specific location;

o material changes in operating expenses, including real property tax systems or rates;

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

o the effect of present or future environmental laws;

o the ongoing need for capital improvements and refurbishments; and

o material changes in governmental rules and policies.

THE FAILURE TO COMPLY WITH GOVERNMENT REGULATION MAY ADVERSELY AFFECT ELSCINT'S BUSINESS AND RESULTS OF OPERATIONS.

The hotel industry is subject to numerous national and local government regulations, including those relating to building and zoning requirements and fire safety control. In addition, Elscint is subject to laws governing its relationships with employees, including minimum wage requirements, overtime, working conditions, and work permit requirements, and in some

localities to collective labor agreements. A determination that Elscint is not in compliance with these regulations could result in the imposition of fines, an award of damages to private litigants and significant expenses in bringing its hotels into compliance with the regulations. In addition, Elscint's ability to dismiss unneeded staff may be hampered by local labor laws and courts which traditionally favor employees in disputes with former employers.

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

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

ELSCINT'S OWNERSHIP RIGHTS IN THE BUCURESTI HOTEL HAVE BEEN CHALLENGED.

Since the acquisition of the controlling interest in the Bucuresti Hotel complex in Bucharest, Romania, Elscint has encountered a number of attempts to challenge both the validity of the acquisition of the complex and its control over the company owning the rights to the hotel. To date, all of these claims have been rejected by the courts. However, certain criminal proceedings which have been instituted against certain individuals involved in the privatization of the facility, may have an effect on the validity of the privatization and an indirect effect on the rights acquired by Elscint in the Bucuresti Hotel, notwithstanding that neither Elscint nor its subsidiaries have been indicted nor are in any way involved in these proceedings.

RISKS RELATING TO ELSCINT'S ENTERTAINMENT AND COMMERCIAL CENTER IN HERZLIA, ISRAEL (THE ARENA) THERE ARE MANY COMPETING ENTERTAINMENT AND COMMERCIAL CENTERS.

There are several entertainment and commercial centers in Israel in general, and specifically in the greater Tel Aviv area (which includes Herzlia). There are two operational shopping centers within approximately 1 to 8 kilometers from the location of the Arena. These other centers compete for customers as well as for third party retailers and operators to lease space in such centers. There can be no assurance that Elscint will be successful in competing with the other entertainment and commercial centers.

ELSCINT IS DEPENDENT ON ENGAGING THIRD PARTIES TO ENTER INTO LEASE AGREEMENTS, AND ON OBTAINING AND RETAINING HIGH CUSTOMER TRAFFIC.

Elscint is dependent on its ability to induce food and commodity retailers and entertainment service providers to enter into leases for units in the Arena, or to renew existing leases on favorable terms. There is active competition to attract tenants to other locations suitable for entertainment and commercial centers. The general economic recession in Israel may also deter businesses from entering into new lease agreements or renewing existing lease agreements, or from incurring the costs required to set up their rented units in an acceptable manner. If a significant portion of Elscint's existing leases expire, Elscint may find it more expensive or less profitable to continue to operate the Arena.

RISKS RELATING TO THE IMAGE GUIDED TREATMENT BUSINESS INSIGHTEC REQUIRES VOLUNTEERS TO TEST ITS PRODUCT UNDER DEVELOPMENT.

The principal product of InSightec is the ExAblate 2000, a magnetic resonance (MR) guided Focused Ultrasound (FUS) system which has received regulatory approval for the treatment of uterine fibroids in Europe and Israel. In the United States, the system is awaiting FDA clearance for commercial use (see developments relating to InSightec below). The system is presently still undergoing clinical trials and beta-site testing for the uterine fibroids treatment in the United States under a so-called "continued access" protocol mainly in aim to gain additional clinical experience until FDA approval will be granted. The system is also undergoing trials for several other clinical applications worldwide at various medical institutions in North America, Europe and Israel. In order to complete these trials in compliance with the United States Food and Drug Administration (FDA) requirements, it is necessary to recruit volunteers to undergo the treatment offered by the new product, subject to the strict guidelines imposed by regulatory authorities. InSightec's inability to attract volunteers in sufficient numbers will result in delays in obtaining regulatory approvals, which may have an adverse impact on projected time-to-market factors.

DELAYS IN OBTAINING REIMBURSEMENT BY HEALTH PROVIDERS FOR THE USE OF INSIGHTEC'S PRINCIPAL PRODUCT MAY ADVERSELY EFFECT INSIGHTEC'S ABILITY TO SELL THE PRODUCT IN EUROPE.

Although InSightec's principal product has received regulatory approval for the commercial treatment of uterine fibroids in Europe and Israel, any delays in the approval of the reimbursement and coverage by the health providers in different countries for the use of such product may adversely affect InSightec's ability to sell the product as well as its, and therefore EMI's, results of operations.

SURGEONS MAY NOT UTILIZE AND MAY OPPOSE INSIGHTEC'S NEW TECHNOLOGY.

The high intensity focused ultrasound (HIFUS) product, applied in conjunction with magnetic resonance imaging systems, creates a product that may be described as a "thermal scalpel," which may be used by surgeons and interventional radiologists to non-invasively detect, monitor and destroy tissues and organs under direct real-time magnetic resonance image guidance. We believe that use of InSightec's product will fundamentally change the treatment of various medical conditions such as breast tumors, uterine fibroids and brain tumors. Surgeons may be reluctant, however, to use such technology, and instead elect to use current methods of treatment, which may result in our inability to realize our investment in InSightec, which totaled at the date of this report approximately $32 million.

INSIGHTEC'S PRODUCT MAY FACE COMPETITION AND IT DOES NOT HAVE A RECOGNIZABLE BRAND NAME.

InSightec's product faces competition from alternative minimal invasive surgery (MIS) and competing HIFUS products. There are a number of competitors in these fields, although we are not aware of any HIFUS company that has reached InSightec's stage of clinical trials and beta-site testing and, to our knowledge, none have obtained regulatory approval for competing applications. Even if InSightec begins to market its product prior to its competitors, competing products may attain a significant market share. In addition, several competitors enjoy high domestic brand name recognition, which InSightec presently lacks, and have significantly greater marketing resources.

PATIENTS MAY SEEK LEGAL REDRESS IF TREATMENTS ARE UNSUCCESSFUL OR CAUSE BODILY HARM.
As the developer and manufacturer of the HIFUS system, InSightec may face claims for compensation in the event that treatments administered using the system are unsuccessful or cause bodily harm to patients. While InSightec adopts customary legal tools such as disclaimers of liability, product liability insurance clinical trials insurances and indemnities from operators, to limit its liability in such instances, an adverse judgment awarding actual or punitive damages could have a material adverse effect both on the financial condition of InSightec and on its ability to market its products.

RISKS RELATING TO ISRAEL

SECURITY AND ECONOMIC CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS.

We are incorporated under Israeli law and our principal offices are located in Israel. Political, economic and security conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, various armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Israel signed a peace treaty with Egypt in 1979 and a peace treaty with Jordan in 1994. As of the date of this annual report, Israel has not entered into any peace agreement with Syria or Lebanon. Since 1993, several agreements have been signed between Israel and the Palestinians, but a final agreement has not been achieved. Since October 2000, there has been a marked increase in hostilities between Israel and the Palestinians, characterized by terrorist attacks on civilian targets, suicide bombings and military incursions into areas under the control of the Palestinian Authority. These developments have adversely affected the peace process, placed the Israeli economy under significant stress, and have negatively influenced Israel's relationship with several Arab countries. In addition, some neighboring countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of our business. In addition, we could be adversely affected by the interruption or curtailment of trade between Israel and its trading partners, a significant increase in the rate of inflation, or a significant downturn in the economic or financial condition of Israel.

MANY OF OUR DIRECTORS, OFFICERS AND EMPLOYEES ARE OBLIGATED TO PERFORM ANNUAL MILITARY RESERVE DUTY IN ISRAEL. WE CANNOT ASSESS THE POTENTIAL IMPACT OF THESE OBLIGATIONS ON OUR BUSINESS.

Our directors, officers and employees who are male adult citizens and permanent residents of Israel under the age of 49 are, unless exempt, obligated to perform annual military reserve duty and are subject to being called to active duty at any time under emergency circumstances. The deteriorating security situation in the Middle East has caused, and will continue to cause a sharp increase in the army reserve obligations of those of our directors, officers and employees who are subject to such reserve duty obligations. Although we have operated effectively under these requirements in the past, including during recent hostilities with the Palestinians and the war in Iraq, we cannot assess the full impact of these requirements on our workforce or business if conditions should change, and we cannot predict the effect of any increase or reduction of these requirements on us.

AN INCOME TAX REFORM IN ISRAEL MAY ADVERSELY AFFECT OUR SHAREHOLDERS AND US.

Effective as of January 2003, the Israeli Parliament has enacted a wide ranging reform of the Israeli income tax system. These tax reforms have resulted in significant changes to the Israeli tax system, and may have adverse tax consequences for our shareholders and us.

IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US AND OUR OFFICERS AND DIRECTORS OR TO ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON US AND SUBSTANTIALLY ALL OF OUR OFFICERS AND DIRECTORS.

All of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws in an Israeli court against us or any of those persons or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. Notwithstanding the foregoing, Israeli courts may enforce a U.S. final executory judgment for liquidated amounts in civil matters, obtained after due process before a court of competent jurisdiction (according to the rules of private international law currently prevailing in Israel) which recognizes and enforces similar Israeli judgments, provided that: (i) adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard; (ii) such judgment and the enforcement thereof are not contrary to the law, public policy, security or sovereignty of the State of Israel; (iii) such judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; (iv) an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and (v) the judgment is no longer subject to a right of appeal.

Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency. The usual practice in Israel in an action to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in effect on the date thereof. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the rate of exchange of such foreign currency on the date of payment or in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency will ordinarily be linked to the Israeli Consumer Price Index plus interest at the annual rate (set by Israeli regulations) prevailing at such time. Judgment creditors must bear the risk of unfavorable exchange rates.

In April 1998, the Israeli government announced its intention to liberalize its foreign currency control regime by, in effect, permitting any foreign currency activity or transaction, except for certain restrictions on institutional investors and on some derivatives transactions of non-residents. For example, in May 1998, the Israeli government adopted regulations that replaced many of the restrictions on foreign currency transactions with the requirement that such

transactions be reported to the Controller of Foreign Currency at the Bank of Israel. Over time, if enacted, this liberalization may ultimately include the NIS becoming a fully convertible currency. No assurance may be given that the Israeli government's intentions as announced will receive legislative or regulatory approval, that any such approvals will be received in any particular time frame or that the risks described above will be alleviated.

RISKS RELATING TO OPERATIONS IN EUROPE

WE AND ELSCINT ARE SUBJECT TO VARIOUS RISKS RELATED TO OUR AND ELSCINT'S OPERATIONS IN EUROPE, INCLUDING ECONOMIC AND POLITICAL INSTABILITY, POLITICAL AND CRIMINAL CORRUPTION AND THE LACK OF EXPERIENCE AND UNPREDICTABILITY OF THE CIVIL JUSTICE SYSTEM.

Many of the Eastern European countries in which we or Elscint operate are countries that until the last decade were allied with the former Soviet Union under a communist economic system, and they are still subject to various risks. For example, Romania, which is still economically and politically unstable, suffers from rapid devaluation of the Romanian Lei (local currency) against the U.S. dollar, political and criminal corruption, and lack of experience and unpredictability of the civil justice system. Romania also continues to suffer from high unemployment, low wages and low literacy rates. These risks could be harmful to us and are very difficult to quantify or predict. Although many governments of the European countries have liberalized policies on international trade, foreign ownership and development, investment, and currency repatriation to increase both international trade and investment, such policies might change unexpectedly. We and Elscint will be affected by the rules and regulations regarding foreign ownership of real and personal property. Such rules may change quickly and dramatically and thus may have an adverse impact on ownership and may result in a loss without recourse of our or Elscint's property or assets. Domestic and international laws and regulations, whether existing today or in the future, could adversely affect our and Elscint's ability to market and sell our or Elscint's products and could impair our and Elscint's profitability.

With respect to Elscint's operations in Romania, any foreign company or litigant may encounter difficulty in prevailing in any dispute with, or enforcing any judgment against, the Romanian government or any of officers or directors under the Romanian legal system. If Elscint's ownership rights in the company that owns the Bucuresti Hotel complex are successfully challenged, this may affect Elscint's ability to obtain compensation for its original investment. Elscint has faced several challenges to its acquisition under the privatization contract, In addition the privatization process itself has been challenged as illegal. All of these claims have been dismissed. Criminal proceedings against individuals involved in the privatization process may detrimentally affect our rights if restitution of the legal position is sought and obtained by reason of fraudulent acts, notwithstanding that Elscint has not been indicted in those proceedings Some countries, including Romania, may regulate or require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is a deterioration in a country's balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad. Any such restrictions may adversely affect our and Elscint's ability to repatriate investment loans or to remit dividends. Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain emerging countries. In addition, in an attempt to control inflation, price controls at our hotels have been imposed at times in certain countries, which may affect our ability to increase our room rates.

GENERAL