3rd Quarter Results-Part 2

RNS Number:8947K
Atia Group Limited
02 January 2008

PART 2

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

A. Company activities

1. Atia Group Ltd (formerly: Kidron Industrial Holdings Ltd.) (Hereafter -
the Company) is a public company, which, until the beginning of 2007, engaged
primarily in the manufacture, importing, and marketing of plastic products.

2. On 11 November 2007, the Company changed its name from "Kidron
Industrial Holdings Ltd." to its current name.

3. On 15 February 2007, at the request of the Company, the Nazareth
District Court issued a stay of proceedings order (equivalent of U.S. Chapter 11
protection).

The court appointed Alon Fredkin, CPA (Isr.) as special executive and
trustee for the period of the stay and granted him the powers of the board of
directors (for details, see B below).
On 10 June 2007, the Nazareth District Court approved the creditors arrangement
proposed by the trustee of the creditors arrangement.
On 5 July 2007, the general shareholders meeting ratified the creditors
arrangement that was approved by the court.
The trustee for the period of the stay confirmed that, commencing on 15 July
2007; all of the pre-conditions for the going into effect of the creditors
arrangement had been fulfilled.
As a result of these processes, the Company changed its accounting policy
commencing with the financial statements as at 31 December 2006 and started
reporting in accordance with the accounting principles applicable to a business
in liquidation.

The Company continued reporting in the aforementioned format up to and
including the interim financial statements as at 30 June 2007 and for the six
and three-month periods ended 30 June 2007. As detailed in length below, on 10
June 2007, the Nazareth District Court ratified the creditors arrangement and it
went into effect in July 2007. During the month of September 2007, the
liabilities of the Company toward Appswing Ltd. were converted into capital and
shares were allotted to Appswing in return for an amount of NIS 8 million.
Therefore, the Company once again began reporting as a "going concern"
commencing with the financial statements as at 30 September 2007 and for the
nine and three-month periods ended on 30 September 2007.

4. On 30 October 2007, the general shareholders meeting of the Company
ratified the allotment of 907,934,502 shares against the purchase of the shares
of a company that manages a real estate project in the U.S. and the shares of a
company that has contractual rights in property in Croatia. See also Note 3
below.

B. 2007 creditors arrangement

1. Non-compliance with the repayment dates of the loans received from
banking institutions

On 20 December 2006, the Company announced that 14 December 2006 was
one of the quarterly repayment dates of the refinanced loan in an amount of NIS
420 thousand, due to Bank Leumi LeIsrael Ltd. (hereinafter - "Bank Leumi"). The
Company did not make the aforementioned payment to Bank Leumi and, as of the
same date, the Company reported that it was experiencing a real difficulty in
making the payment. The Company conducted negotiations with the Bank regarding
the postponement of the payment date and a meeting was set for 14 January 2007.
The reply of Bank Leumi dated 12 December 2006 (two days before the repayment
date) was that the Company was requested to comply with the provisions of the
interbank agreement, including the payment of the aforementioned amount on time.
Since the receipt of that letter, the Company has been making efforts to
postpone the payment date but, notwithstanding, the Bank remained firm with the
demands presented in its letter of 12 December 2006.

In view of the above and in accordance with the interbank agreement,
Bank Leumi and/or any of the other banks have grounds to demand the immediate
repayment of the debts and liabilities of the Company, which grounds arose 14
days after receipt of the written notice from Bank Leumi and/or any of the other
banks regarding the breach.

Please note that the Company also did not meet the entire quarterly
payment of the fourth quarter of 2006 in an amount of NIS 420 thousand to
Discount Bank. However, regarding that payment, the Company obtained the
consent of the bank to postpone the payment.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

B. 2007 creditors arrangement (cont.)

2. Freezing the business activity of the plastics division

On 4 February 2007, the Company announced that, in view of its
difficult financial position and the lack of financial resources to meet its
liabilities on a regular basis, Company Management decided to freeze in that
phase the business activity of the plastics division which is engaged solely in
the manufacturing of plastic products using the injection method, at the
Company's site in Migdal Haemek.

On 7 February 2007, the Company gave dismissal notices to the vast
majority of its employees.

3. Demand for the immediate repayment of the liabilities of Kidron Plastics
Marketing Ltd. to banking institutions

On 8 February 2007, the Company announced that in accordance with the
agreement from 11 November 2004 and the addendum to the agreement dated 22
February 2006 between Kidron Plastics Marketing Ltd. (hereinafter - "Plastics
Marketing"), a wholly-owned subsidiary of the Company, and First International
Bank of Israel Ltd. (hereinafter - "FIBI"), FIBI granted credit in favour of
Plastics Marketing, secured by a floating charge in favour of FIBI (hereinafter
- the "Agreement").

In view of the difficult financial position of the Company and of
Plastics Marketing and the lack of financial sources to meet their liabilities
on a regular basis, including the liability of Plastics Marketing to FIBI, on 7
February 2007, representatives of the Company met with FIBI and reported to the
bank regarding the financial positions of the Company and Plastics Marketing, on
the functioning of the two companies and on the possibility of seeking Chapter
11 protection.

On 7 February 2007, Plastics Marketing received a letter from FIBI
demanding that Plastics Marketing comply with the provisions of the Agreement.
In view of the financial positions of the Company and of Plastics Marketing at
that time and the ramifications thereof on the assets pledged in favour of FIBI
and in accordance with the provisions of the Agreement, grounds arose for FIBI
to demand the immediate repayment of the debts and liabilities of Plastics
Marketing. In its letter, FIBI stated that it would take immediate steps to
enforce its rights.

On 7 February 2007, FIBI sent a letter to Mr. Michael Zuz, the former
controlling shareholder in the Company and the guarantor for the debts of
Plastics Marketing, demanding immediate repayment of the debts of Plastics
Marketing within 15 days of the date of the letter or, alternatively, that FIBI
be presented within that timeframe with a plan for the repayment of the debt.

On 7 February 2007, Plastics Marketing received a letter from Bank
Igud LeIsrael Ltd. (hereinafter - "Bank Igud") whereby, in accordance with terms
of the credit of the Company in Bank Igud and the loan agreement, Bank Igud has
grounds to demand the immediate repayment of the debts and liabilities of
Plastics Marketing, within nine days of the sending of the letter.

On 8 February 2007, the Company announced that it believes that
Plastics Marketing will be unable to meet its liabilities towards FIBI and
towards Bank Igud under the agreement and the loan agreement, respectively, and
that Plastics Marketing will be unable to comply with the demand for immediate
repayment.

On 13 February 2007, the Company was served with an urgent petition to
appoint a temporary receiver for the assets of Plastics Marketing. The petition
had been filed that same day to the Tel Aviv District Court on behalf of FIBI
and Bank Igud (hereinafter - the "Banks", the "Petition to Appoint a Temporary
Receiver", respectively).

Concurrent with the filing of the petition to appoint a temporary
receiver, the Banks filed a petition with the Tel Aviv District Court to enforce
pledges and to appoint a receiver for the assets of Plastics Marketing.

On 13 February 2007, a decision was handed down on the petition to
appoint a temporary receiver by the Honourable Justice D. Keret, ordering the
appointment of attorney Amir Bartov as the temporary receiver of the assets of
Plastics Marketing.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

B. 2007 creditors arrangement (cont.)

4. Appointment of Special Managers for the shares of Kidron Plastics Ltd.

On 16 May 2005, FITE - First Israel Turnaround Enterprise (Delaware)
L.P. and the limited partnerships in FITE (hereinafter - together the "Fund")
and the Company signed a loan agreement for a period of five years, whereby the
Fund lent an amount of $3.5 million to the Company (hereinafter - the "Loan" and
the "Loan Agreement", respectively). For purposes of guaranteeing its
commitments to the Fund, on 27 July 2005, the Company signed promissory notes in
favour of the Fund, in an amount equal to the amount of the loan and placed a
fixed, first-degree pledge (hereinafter - the "Pledge"), unlimited in amount, on
all of its shares in Kidron Plastics Ltd. (hereinafter - "Plastics").

On 11 February 2007, the Company was served with a demand to enforce
the fixed pledge, which had been filed on that same day with the Tel Aviv
District Court on behalf of the Fund (hereinafter - the "Demand"), claiming that
the Company failed to meet its commitments under the loan agreement.

In the Demand, the Fund requested that the Court issue an order for
the enforcement and crystallization of the pledge and to permit the Fund to sell
the pledged shares.

In addition, on 11February 2007, the Company was served with an urgent
request to appoint a temporary receiver for the pledge, which had been filed by
the Fund (in a one-sided action) with the Tel Aviv District Court together with
the Demand.

On 20 February 2007, the Tel Aviv District Court stayed the hearing on
the motion of the FITE Fund for the enforcement of the fixed pledge on the
shares of Kidron Plastics Ltd. until receipt of the approval of the Nazareth
District Court regarding the proceedings instituted by the FITE Fund, in view of
the stay of proceedings order issued on 15 February 2007 by the Nazareth
District Court.

Further to the decision of the Tel Aviv District Court, on 21 February
2007, the FITE Fund filed a motion with the Nazareth District Court to permit
the Fund to realize the fixed pledge the Fund has on the shares of Kidron
Plastics.

On 22 February 2007, the FITE Fund and the trustee of the Company, CPA
Alon Fredkin, reached the following agreements:

- A representative of the petitioners and a representative of the trustee will
carry out the ongoing management of Kidron Plastics Ltd. In the event of a
dispute between the two, the representative of the petitioners shall have the
decisive vote.

- The trustee will appoint himself or someone on his behalf, and the
petitioners will appoint Mrs. Neomi Enoch, unless they decide to appoint someone
else on their behalf.

- The trustee has the right to appeal to the court any decisions made by the
representative of the petitioners.

- Regarding any matters that are not connected with the ongoing management of
Kidron Plastics Ltd., including the realization of Kidron Plastics or its
shares, decisions will be made with the full consent of both the trustee and the
petitioners, and subject to court approval.

As a result of the aforementioned, in February 2007, Mrs. Neomi Enoch
and Mr. David Shacham were appointed as special managers of Kidron Plastics.

As part of the creditors arrangement detailed in 5 below, it was
determined that the shares of Plastics are to be transferred to the Fund.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

B. 2007 creditors arrangement (cont.)

5. The creditors arrangement (2007)

On 28 February 2007, an invitation was issued on behalf of the trustee
of the stay of proceedings of the Company to the public to submit bids to
purchase the Company and/or its shares and/or its activity and/or its assets,
including its "stock market skeleton", equipment from the plant located in the
Ramat Gavriel industrial zone in Migdal Haemek and the property it owns in
Migdal Haemek and in the "Barakan" industrial zone.

On 10 June 2007, the Nazareth District Court approved the creditors
arrangement proposed by the trustee of the creditors arrangement. The major
features of the approved creditors arrangement are as follows:

- Polymer Logistics (Israel) Ltd. (hereinafter - "Polymer") will purchase the
fixed assets of the Company's Migdal Haemek plant (except for moulds located at
the Company's plant), including real estate in Migdal Haemek, for an amount of
NIS 17 million plus VAT.

- Appswing Ltd. (hereinafter - "Appswing") will purchase a minimum of 126
million shares of the Company, representing at least 70% of the issued and
paid-in capital of the Company, fully diluted, for an amount of NIS 7.3 million.
The purchase must be concluded by 15 July 2007.

- Company acting on behalf of Zuk Bazelet Investment Ltd. (hereinafter - "Zuk
Bazelet") will purchase real estate in the Barakan Industrial Zone and the
moulds located in the Company's plant, for an amount of NIS 5.3 million, plus
VAT.

- In accordance with the creditors arrangement, the shares of the following
subsidiaries will not be sold: the shares of Kidron Plastics will be transferred
to the FITE Fund (see below); and a temporary receiver was appointed for Kidron
Plastics Marketing Ltd. (see B (3) above).

The following pre-conditions apply to the creditors arrangement:

The proposal is contingent on the fulfilment of all of the following
conditions by 15 June 2007, or by dates set out below:

1. Receipt of the approval of the arrangement by the meeting of the various
types of creditors of the Company and the meetings of the shareholders of the
Company, including the meeting of the public shareholders. The arrangement is
to include, among other things, the sale of the purchased assets as per the
proposal;

2. The waiver of all of the rights of the holders of the existing options
in the Company's issued share capital;

3. Receipt of the approval of the court to the creditors arrangement to
include, among other things, approval of the sale of the purchased assets and
the relevant court orders:

Commencing from the date of the closing, as defined below, the Company
will have no debt or liability towards any third parties whatsoever.

The rights of the creditors of the Company which are not suppliers for
VAT purposes (such as banking institutions), in respect of any owed amount that
is not settled in cash under the creditors arrangement, will be purchased by
Appswing for a symbolic amount of NIS 1, to be paid to the trustee upon the
payment of the balance of the aforementioned consideration. This is subject to
the condition that the rights of the creditors in connection with the possible
demand of a refund in respect of a "bad debt" toward the VAT Authority are not
impaired.

In accordance with the above, the trustee of the creditors arrangement
announced that he estimates that the balance of the liabilities of the Company
towards Appswing Ltd. after the creditors arrangement is implemented will amount
to between NIS 5 million - NIS 19 million.

On 2 December 2007, a letter was received from the trustee, whereby he
estimates that the balance of the liabilities of the Company to Appswing, as
mentioned above, amount to NIS 11 million. The trustee announced that this
amount is purely an estimate and the actual amount may change in the future.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

B. 2007 creditors arrangement (cont.)

5. The creditors arrangement (2007) (cont.)

4. 70% of the issued shares of the Company will be sold to Appswing, at the
closing date, subject to the provisions of section 2 above. The shares are to
be free and clear of any third party right whatsoever.

5. Until the closing date, the Company will prepare and submit all of the
reports it is required to by law, including a periodic report for the reporting
year ended 31 December 2006 and the quarterly financial statements for the
quarter ended 31 March 2007.

6. A. The closing date of the transaction will be no later that 15
June 2007.

b. Appswing agrees that if there is a delay in the fulfilment of
the pre-conditions until 12 July 2007 or later, the amount it has to pay will be
reduced by an amount of NIS 400,000.

7. It should be made clear that Appswing and Zuk Bazelet undertook to pay
all of the expenses needed to preserve the stock exchange skeleton in Israel and
abroad, including the costs of the accountant, attorney, etc., both in Israel
and abroad, both in the past and in the future.

In respect of the above, a capital reserve from a transaction with the
controlling shareholder was recorded in the financial statements as at 30
September 2007, in an amount of NIS 396 thousand. The reserve was recorded in
respect of expenses borne by Appswing for purposes of preserving the stock
exchange skeleton in Israel and abroad.

Appswing and the trustee intend on petitioning the court for a decree
confirming that the intention of the parties to the creditors arrangement was
that Appswing would finance these expenses, but it is the Company that shall
bear them after it raises capital.

8. Please note that Zug Bazelet and Appswing will not be guarantors and/or
will not be responsible for the fulfilment of the second part of the
arrangement, even though the arrangement will be subject to the consummation of
the transactions with the two bidders. Please note further that the proposed
arrangement is for the purchase of the purchased assets detailed above as a
package deal and it does not relate to any of the assets separately.

The major features of the creditors arrangement are as follows:

Secured creditors:

- Banking institutions will be paid an amount of NIS 22,350 thousand.

- The FITE Fund will receive the shares of Kidron Plastics Ltd. In the event
that the transfer is taxed, the tax will not be borne by Appswing (the company
purchasing the shares). In any event, the FITE Fund will be able to file a debt
claim in respect of the tax, as a regular creditor.

In addition, as part of the arrangement, the option that the FITE Fund has
to convert the debt it is owed into shares of the Company will be cancelled,
unless the parties reach another agreement.

Creditors in respect of priority:

Income tax and employees - Payment of 100% of the debt approved by the
trustee.

National Insurance and municipal real estate tax - Payment of 50% of
the debt approved by the trustee.

Ordinary creditors:

Payment of 5% to ordinary creditors. Regarding the creditors in the
old arrangement (the creditors arrangement from 2004), the amount is 5% of the
total gross debt of this group.

Payment of NIS 1.5 million to creditor banks of Mr. Michael Zuz, the
former controlling shareholder of the Company, which have pledges on his
holdings in the shares of the Company.

On 5 July 2007, the extraordinary general meeting of the shareholders
of the Company approved the aforementioned creditors arrangement, as approved by
the Nazareth District Court on 10 June 2007.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

B. 2007 creditors arrangement (cont.)

5. The creditors arrangement (2007) (cont.)

In addition, on that date, the extraordinary general shareholders
meeting passed a resolution that the shareholders of the Company will have no
more claims and/or demands of the Company and/or any of its subsidiaries, the
grounds for which derive, in whole or in part, from the period preceding the
date that the arrangement was approved by the court.

In accordance with the notification of the trustee of the stay of
proceedings period, on 15 July 2007 all of the pre-conditions were fulfilled for
the entering into force of the creditors arrangement.

Accordingly, the consideration paid by Appswing was reduced by an
amount of NIS 400 thousand. Appswing and the trustee agreed between themselves
regarding an additional postponement of the postponed date for the fulfilment of
the pre-conditions, as above.

C. Non-compliance with the preservation rules of the Tel Aviv Stock
Exchange (TASE)

On 17th January 2005, the Company was given notice by the Tel Aviv
Stock Exchange as to its lack of compliance with the preservation rules set down
in the Stock Exchange's Regulations and in the guidelines enacted thereunder,
since the Company's shareholders' equity in the last four annual financial
statements was below NIS 2 million. The Company was granted an extension of 6
months, until 30 September 2005, to comply with the aforementioned preservation
rules. The board of directors of the Tel Aviv Stock Exchange, at its September
2005 meeting, decided to transfer the Company's shares to the "Preservation List
".

On 17th August 2006, the Company petitioned the Tel Aviv Stock
Exchange to postpone the meeting of the board of directors of the TASE on the
matter of the delisting the Company's shares, until the first meeting to be held
after 24 months have passed after the shares of the Company ceased being traded
on the TASE's regular list. In its letter to the TASE, the Company noted that
it has been taking steps in the past year and will continue to take further
steps in its efforts to be in compliance with the terms stipulated in the
regulations of the TASE for the relisting of the Company's shares on the regular
list and the transfer of the shares of the Company from the preservation list to
the regular list.

The TASE notified the Company that it decided to postpone the
deliberations on the delisting of the shares of the Company to the first meeting
of the board of directors of the TASE to be held after 5 September 2007.

D. Suspension of trading of the Company's shares on the Tel-Aviv Stock
Exchange

On 14 February 2007, trading of the shares of the Company on the Tel Aviv Stock
Exchange was suspended, as a result of the appointment of a receiver for a
former subsidiary of the Company (see section B (3) above).

On 12 August 2007, the Company petitioned the Stock Exchange and the Israel
Securities Authority to restart the trading of the shares of the Company as part
of the preservation list, in view of the going into effect of the creditors
arrangement.

In addition, the Company requested that, in the event that the allotment of
shares to Appswing Ltd. (as detailed in Note 4A below) is consummated by 3
September 2007, and the requirements in respect of the minimum shareholders'
equity of the Company and the percentage of the holdings of the public in the
shares of the Company are met, the Company's shares will be relisted for trading
on the regular list.

On 15 August 2007, trading of the shares of the Company on the preservation list
was renewed, as a result of the going into effect of the creditors arrangement.

On 6 September 2007, trading of the shares of the Company was renewed on the
regular list as a result of the allotment of the shares of the Company to
Appswing Ltd. and as a result of the fact that the minimum capital requirement
and the requirement for the minimum percentage of holdings of the public were
met.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 2 - GENERAL SIGNIFICANT ACCOUNTING POLICIES

A. The interim financial statements as at 30 September 2007 and for the
nine and three month periods then ended (hereinafter - the "Interim financial
statements") are presented in condensed format, in accordance with Standard No.
14 of the Israel Accounting Standards Board and should be read in conjunction
with the annual financial statements of the Company as at 31 December 2006 and
their accompanying notes. In addition, the interim financial statements are
presented in accordance with the provisions of Chapter D of the Securities
Regulations (Periodic and Interim Reports) - 1970 (hereinafter - "Securities
Regulations"). In respect of the periods in which the Company reported as a
business undergoing liquidation (commencing from the financial statements as at
31 December 2006 and until the financial statements as at 30 June 2007 and for
the six and three month periods then ended), the Company reported in accordance
with the Securities Regulations to the extent that these regulations are
relevant to a business in liquidation.

B. 1. As mentioned in Note 1A(3), during the first quarter of 2007,
the Company ceased it business operations. As a result, the Company changed its
accounting policies and reported in accordance with accounting principles
applicable to businesses in liquidation, for the financial statements as at 31
December 2006 until the financial statements as at 30 June 2007 and for the
three and six month periods then ended.

As detailed fully in Note 1 above, on 10 June 2007, the
Nazareth District Court approved the creditors arrangement and the creditors
arrangement went into effect in July 2007. During September 2007, the
liabilities of the Company toward Appswing were converted in capital and shares
were allotted to Appswing in return for a cash amount of NIS 8 million.
Therefore, the Company once again started reporting as a "going concern",
commencing with the financial statements as at 30 September 2007 and for the
three and nine-month periods ended 30 September 2007.

2. Measurement basis of the financial statements in respect of periods in
which the Company reports as a going concern.

a. In 2001, the Israel Accounting Standards Board issued Accounting
Standard No. 12 - "Discontinuance of Financial Statement Adjustment". In
December 2002, Accounting Standard No. 17 - "Postponement of the Discontinuance
of Financial Statement Adjustment" was approved. According to these standards,
adjustment of financial statements for the effects of inflation was discontinued
as of January 1, 2004. The adjusted amounts in the financial statements as at
31 December 2003 served as the point of departure for nominal financial
reporting commencing on 1 January 2004, until the date on which the Company
commenced reporting in the format of a business in liquidation.

As detailed fully in Note 1 above, the Company was in the midst of
negotiating a creditors arrangement which when completed, left the balance sheet
with cash and other monetary balances against share capital. Therefore, all of
the components of financial reporting as at 30 September 2007 are nominal (in
these financial statements, "reported amounts" refer to nominal amounts).

b. In the financial statements, the term "cost" refers to cost in reported
amounts.

3. Principles of adjustment to realizable value in respect of the periods
in which the Company reported pursuant to accounting principles pertaining to a
business in liquidation:

Statement of net assets in liquidation

The statement is presented on the basis of realizable values, in
accordance with the following principles:

1. Assets

1.1 Cash and cash equivalents

On the basis of the realizable balances as of the date of the
statement.

1.2 Trade accounts receivable

Based on the balance that Management believes to be collectible.

1.3 Accounts receivable and debit balances

Based on the balance actually utilized.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 2 - GENERAL SIGNIFICANT ACCOUNTING POLICIES (cont.)

B. (Cont.)

3. Principles of adjustment to realizable value in respect of the periods
in which the Company reported pursuant to accounting principles pertaining to a
business in liquidation (cont.):

Statement of net assets in liquidation (cont.)

1.4 Investment in investee companies

Investments in investee companies are presented on the basis of their
expected realizable value under the arrangement.

1.5 Fixed assets

Fixed assets are presented on the basis of expected realizable value,
as known on the balance sheet

2. Liabilities

2.1 Credit from banking institutions and other credit providers

Based on the outstanding balance as of the balance sheet date. The
balance includes interest accrued but not yet paid, in accordance with the terms
of the loans.

2.2 Suppliers and service providers

Based on the balance as of the balance sheet date.

2.3 Accounts payable and credit balances

a. Employees and payroll-related liabilities

Based on the balance owed as of the balance sheet date.

b. Institutions, accrued expenses and others

Based on the balance owed as of the balance sheet date.

4. A. Data pertaining to the Israeli Consumer Price Index ("ICPI") and
the representative foreign currency exchange rates are as follows:
As at 30 September As at 31 December
2007 2006 2006 2005 2004
Israeli Consumer Price Index (Base 1993) 189.10 186.48 184.87 185.04 180.74
Representative exchange rate of US$1/NIS 4.013 4.302 4.225 4.603 4.308
Representative exchange rate of Euro 1/ 5.6898 5.4552 5.5643 5.4465 5.8768
NIS

b. The percentage change in the Israeli Consumer Price Index ("
ICPI") and in the representative foreign currency exchange rates are as follows:
Nine month period Three month period Year ended 31
ended 30 September ended 30 September December
2007 2006 2007 2006 2006
% % % % %
Israeli Consumer Price Index 2.29 0.77 1.30 (0.77) (0.10)
Representative exchange rate of US (5.02) (6.54) (5.55) (3.11) (8.21)
dollar
Representative exchange rate of the 2.26 0.16 (0.41) (3.34) 2.16
Euro

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 2 - GENERAL SIGNIFICANT ACCOUNTING POLICIES (cont.)

C. Accounting changes

1. Initial implementation of accounting standards

Since, as mentioned above, the Company reported on the basis of realizable
values, commencing with the financial statements as at 31 December 2006 until
the financial statements as at 30 June 2007 and for the three and six-month
periods ended 30 June 2007, the new accounting standards which went into effect
on 1 January 2007 and thereafter had no impact whatsoever.

2. Disclosure of the effects of new accounting standards in the period
prior to implementation

Accounting Standard No. 29 - "Adoption of International Financial
Reporting Standards (IFRS)"

In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29 - "Adoption of International Financial Reporting Standards
(IFRS)" (hereinafter - the "Standard"). The Standard prescribes that entities
that are subject to the Israeli Securities Law - 1968 and that are required to
file reports under the provisions of this law shall present their financial
statements in accordance with International Financial Reporting Standards
(hereinafter - "IFRS Standards"). This stipulation applies to periods
commencing on or after January 1, 2008 (i.e., the interim financial statements
for the first quarter of 2008), with the entity's first comprehensive financial
statements in accordance with IFRS Standards being the annual financial
statements of 2008. The Standard permits and encourages such entities to
present their financial statements, issued subsequent to July 31, 2006, in
accordance with IFRS Standards.

An entity that presented its financial statements in the past not in
accordance with international standards and is required or elects to present
them in accordance with international standards shall implement International
Financial Reporting Standard No. 1 (IFRS 1), "First-time Adoption of
International Financial Reporting Standards", for transition purposes.

IFRS 1 provides guidelines as to the transition from reporting under
previous accounting principles (accounting principles generally accepted in
Israel) to reporting in accordance with international standards. In order to
alleviate the transition, financial statements presented for the first time
under International Financial Reporting Standards (the financial statements for
the year ended December 31, 2008) are required to present comparative amounts in
respect of only one year (as of December 31, 2007 and for the year then ended)
instead of the two years that is the accepted practice in Israel.

IFRS 1 stipulates that an entity implement the same accounting policy
in its opening balance as of January 1, 2007 (hereinafter - "Opening Balance" or
"Transition Date") in accordance with the IFRS that are in effect on the
reporting date of the first annual financial statements. All comparative
amounts presented in the financial statements must also be presented
accordingly. In other words, the IFRS in effect on the reporting date of the
first annual financial statements must be applied retrospectively. Changes and
adjustments to balances to be included in the balance sheet that is presented
for the first time in accordance with IFRS as opposed to the balances included
in accordance with previously accepted accounting principles, should be carried
directly to retained earnings (or, if appropriate, another category of equity).

To alleviate implementation, IFRS 1 allows an entity that adopts IFRS
for the first time to elect leniencies regarding 12 issues (in whole or in
part), in respect of which there is no requirement to implement IFRS
retroactively in the opening balance sheet. In addition, IFRS 1 includes four
prohibitions regarding the retrospective application of some aspects of other
IFRS Standards.

The IFRS provisions for recognition and measurement of assets and
liabilities, disclosure requirements, and reporting formats differ from, those
generally accepted in Israel. Therefore, the initial adoption of IFRS Standards
may have a material impact on the financial position and results of operations
of the Company.

D. Convenience translation

The financial statements at 30th September 2007 (including the profit and loss
account and the balance sheet) have been translated into Sterling using the
representative exchange rate at that date (� 1 = NIS 8.138). The translation
has been made solely for the convenience of the reader. The amounts presented
in these financial statements should not be construed to represent amounts
receivable or payable in Sterling or convertible into Sterling, unless otherwise
indicated in these statements.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 3 - SIGNIFICANT EVENTS DURING AND AFTER THE REPORTING PERIOD

A. Agreement pertaining to the allotment of shares to Appswing Ltd.

On 20 July 2007, the Company issued an invitation to a general meeting
of the shareholders of the Company, the agenda of which included the approval of
the agreement pertaining to the allotment of shares to Appswing Ltd.

The details of the agreement are as follows:

On 19 July 2007, the Company entered into an agreement with Appswing,
the controlling shareholder in the Company (hereinafter - the "Allotment
Agreement"), whereby Appswing undertook to convert all amounts owed to it by the
Company into 107,518,540 shares, to be allotted to Appswing against the
aforementioned liabilities.

The amounts owed to Appswing by the Company derive from the Company's
creditors arrangement, as part of which Appswing purchased the rights of the
Company's creditors which are not suppliers for VAT purposes (such as banking
institutions) in respect of any amount owed that was not settled by cash as part
of the creditors arrangement. The total amount of the debts to Appswing as of
the balance sheet date is not known, since it will be finally determined after
the trustee of the creditors arrangement decides on the manner of proof of debts
submitted as part of the arrangement. The trustee notified Appswing and the
Company regarding his estimate whereby the amount owed is between NIS 5 - 19
million. The quantity of shares to be allotted to Appswing against the
conversion of the debt will remain constant, regardless of the amount of the
final debt owed to Appswing, as determined in accordance with the results of the
creditors arrangement and the entire debt will be converted into capital.

In addition, according to the allotment agreement, the Company will
allot Appswing 64,516,129 shares in return for an amount of NIS 8,570 thousand
in cash.

The audit committee and board of directors of the Company and approved
the allotment agreement by the general meeting of the shareholders of the
Company.

In September 2007, after conversion of the liabilities toward Appswing
to equity, and after receipt of the cash in respect of the allotment of shares
to Appswing, the shareholders' equity of the Company was greater than NIS 8
million.

B. Agreements to purchase companies in Croatia and the U.S. against an
allotment of shares

On 19 July 2007, after receipt of approval of the audit committee (on
the same date), the board of directors of the Company decided to approve and
recommend to the general meeting the implementation of a private placement and
related agreements with Emvelco Corporation and AP Holdings Ltd. (hereinafter -
the "Investors"). In accordance with the resolution, the Investors will sell
the Company 75,000 shares of Verge Living Corporation (hereinafter - "Verge"),
constituting 100% of the issued capital of Verge, and 20,000 shares of Sitnica
D.O.O. (LLC) (hereinafter - "Sitnica"), constituting 100% of the issued capital
of Sitnica, respectively, against a private placement of 907,934,502 shares of
the Company, constituting 72% of the issued capital of the Company following the
completion of the aforementioned allotments.

Verge is a company incorporated under the laws of the State of Nevada,
U.S., and it is engaged in property promotion in the U.S. The major asset of
Verge is land in Las Vegas, Nevada, on which it intends on building a project to
include 309 condominium apartments covering an area of 28,800 square meters and
commercial space covering an area of 3,600 square meters, as well as underground
parking for 650 vehicles.

Sitnica is a company incorporated under the laws of Croatia and it is
engaged in the development and sale of real estate in Croatia. Sitnica is the
owner of contractual rights in real estate covering an area of 74,000 square
meters in the central Croatian city of Samobor.

The investors will be jointly referred to herein as the "Offerees".

Upon completion of the allotments detailed above, Appswing is entitled
to receive a payment of US$ 1,000 thousand from the Investors, in respect of
consulting and initiation fees in connection with the allotment. Immediately
prior to the date of approval of the financial statements as at 30 June 2007,
the Investors paid Appswing US$ 250 thousand, as an advance payment on account
of the abovementioned amount. Until the completion of the allotment detailed
above, this advance payment is considered as a loan and will be repaid to the
Investors in the event that the allotment transaction is not carried out.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 3 - SIGNIFICANT EVENTS DURING AND AFTER THE REPORTING PERIOD (cont.)

B. Agreements to purchase companies in Croatia and the U.S. against an
allotment of shares (cont.)

The board of directors of the Company approved the employment
agreement between the Company and Mr. Yosef Attia, the controlling shareholder
and CEO of Emvelco Corporation. The agreement goes into effect on the date that
the aforementioned allotments are consummated and stipulates that Mr. Yosef
Attia will serve as the CEO of the Company in return for a salary that costs the
Company an amount of US$ 10 thousand a month. Mr. Atia is also entitled to
reimbursement of expenses in connection with the affairs of the Company, in
accordance with Company policy, as set from time to time. In addition, Mr.
Yosef Attia is entitled to an annual bonus of 2.5% of the net, pre-tax income of
the Company in excess of NIS 8 million.

In addition, the board of directors of the Company approved an
employment agreement between the Company and Mr. Shalom Attia, the controlling
shareholder and CEO of AP Holdings Ltd. The agreement goes into effect on the
date that the aforementioned allotments are consummated and stipulates that Mr.
Shalom Attia will serve as the VP - European Operations of the Company in return
for a salary that costs the Company an amount of US$ 10 thousand a month. Mr.
Attia is also entitled to reimbursement of expenses in connection with the
affairs of the Company, in accordance with Company policy, as set from time to
time. In addition, Mr. Shalom Attia is entitled to an annual bonus of 2.5% of
the net, pre-tax income of the Company in excess of NIS 8 million.

The aforementioned agreements were ratified by the general
shareholders meeting of the Company on 30 October 2007.

On 2 November 2007, the shares were allotted to the investors.

C. Increasing the registered share capital of the Company

On 30 October 2007, the general shareholders meeting of the Company
approved the increase in the registered share capital of the Company to
5,000,000,000 ordinary shares, no par value.

The increase in share capital was executed on 2 November 2007.

D. Replacement of the Company's articles of association, the granting of a
writ of indemnification and exemption to senior officers, and the purchase of
indemnification insurance for senior officers

1. On 30 October 2007, the general shareholders meeting of the Company
ratified the replacement of the Company's articles of association with new
articles that set out, among other things, the scope of the allowable
indemnification of directors and senior officers. The proposed articles permit
the Company, among other things, to insure the liability of directors and senior
officers and to grant them indemnification of the maximum amount allowed by law,
and permit the Company to exempt directors and senior officers from the duty of
care, all subject to the restrictions under law.

2. After obtaining the approval of the audit committee and the board of
directors of the Company, the general shareholders meeting of the Company
ratified the granting of a writ of indemnification to all of the currently
serving senior officers of the Company and to senior officers that will serve
the Company from time to time in the future.

3. After obtaining the approval of the audit committee and the board of
directors of the Company, the general shareholders meeting of the Company
ratified the Company's purchase of an insurance policy covering the liability of
directors and senior officers of the Company, in respect of all senior officers
that will serve the Company, including those that do not have an
employee-employer relationship with the Company, including those senior officers
that may be considered as controlling shareholders in the Company, with limited
liability per event of up to $3 million and $6 million per period, for an annual
premium of $15 thousand and a deductible that will not exceed $15 thousand per
event.
The policy will not include claims and/or known circumstances that may lead to
claims deriving from or in connection with the non-compliance by the Company
with the preservation rules, or suspension of trading on the stock exchange.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 3 - SIGNIFICANT EVENTS DURING AND AFTER THE REPORTING PERIOD (cont.)

D. Replacement of the Company's articles of association, the granting of a
writ of indemnification and exemption to senior officers, and the purchase of
indemnification insurance for senior officers (cont.)

4. After obtaining the approval of the audit committee and the board of
directors of the Company, the general shareholders meeting of the Company
ratified the granting in advance of an exemption from liability in respect of
damages resulting from a breach of the duty of care to senior officers and
directors serving in the Company or that will serve from time to time, in
respect of liability for damages that shall be caused and/or that were caused by
them to the Company, in respect of a breach of the duty to care towards the
Company, except for a breach of the duty to care in a distribution (as the term
is defined in the Companies Law), on condition that such acts were done by
virtue of their being directors and/or senior officers of the Company. The
exemption is in effect commencing on the date of their appointment as directors
and/or senior officers of the Company.

E. Granting a loan to the Verge subsidiary

On 2 November 2007, a loan was granted to the Verge subsidiary in an
amount of $1.7 million for a period of one year. The loan is denominated in
dollars and bears interest of 12% per annum.

NOTE 4 - PRO-FORMA DATA

A. General

As mentioned in Note 1A of the financial statements, subsequent to the
balance sheet date an allotment of Company shares was made against an investment
in the shares of the subsidiaries in Croatia and the United States.

The pro forma data reflect the financial position of the Company and
the results of its operations under the assumption that the aforementioned share
allotment was effected prior to 30 September 2007. The pr forma data were
prepared on the basis of the data from the financial statements of the
subsidiaries in Croatia and the U.S. on the basis of the assumptions detailed in
item B below and in accordance with the reporting principles and accounting
policies set out in item C below.

B. The assumptions used for purposes of presenting the pro forma
consolidated balance sheet as at

30 September 2007

1. By 30 September 2007, Emvelco Corporation converted the shareholders
loans in gave to Verge Living Corporation in an amount of $10 million (NIS
40,130 thousand as at 3 September 2007), into share capital of Verge Living
Corporation.

2. All of the preconditions of the agreement for the purchase by Sitnica of
the properties in Samobor, Croatia from Atia Project were met and as at 30
September 2007, the properties in Samobor, Croatia were presented as real estate
assets fully-owned by Sitnica (this real estate was presented in the pro forma
consolidated balance sheets as investment real estate).

3. Liabilities of Sitnica to Atia Project in an amount of $1.2 million (NIS
4,816 thousand as at 30 September 2007) were converted by 30 September 2007 into
share capital of Sitnica.

4. The increase in the value of the property in Samobor, Croatia, in
accordance with the valuation of an external appraiser, occurred until 11 July
2007.

5. Until 30 September 2007, the Company allotted 907,934,502 ordinary
shares to AP Holdings and Emvelco, in return for 100% of the share capital of
Sitnica and Verge Living Corporation held by them, respectively. Accordingly,
the pro forma balance sheet as at 30 September 2007 includes the financial
statements of the Company and of Sitnica and Verge Living Corporation.
For more information pertaining to the allotment of the shares set out above,
see Note 3 of the financial statements.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

B. The assumptions used for purposes of presenting the pro forma
consolidated balance sheet as at

30 September 2007 (cont.)

The assumptions used for purposes of presenting the pro forma
consolidated profit and loss account

1. The pro forma consolidated profit and loss account were prepared to
reflect the situation whereby, in all reporting periods, the Company is in its
current position, i.e., after the going into effect of the creditors arrangement
which was approved by the court on 10 June 2007. Accordingly, the former
activities of the Company were presented in the pro forma profit and loss
account for 2006 and for the six and three-month periods ended 30 June 2007 and
30 June 2006 as discontinued operations, in accordance with the principles of
Accounting Standard No. 8 of the Israel Accounting Standards Board.

2. The allotment of shares to AP Holdings and Emvelco, in return for 100%
of the share capital of Sitnica and Verge Living Corporation held by them,
respectively, occurred on the date that their former owners incorporated those
companies. In other words, in return for the shares of Verge Living
Corporation, the allotment took place on 13 February 2006 and in return for the
shares of Sitnica, the allotment took place on 23 May 2007. Accordingly, the
operations of the subsidiaries are reflected in the pro forma statements of
income, commencing from the date of inception of the operations of those
companies. In other words, the results of operations of Verge Living
Corporation are reflected commencing on 13 February 2006 and thereafter, and the
results of Sitnica commencing on 1 March 2007 and thereafter.

3. The Company paid management fees of $10,000 a month to the CEO of the
Company, Mr. Yosef Attia, commencing in February 2006 and to the Deputy CEO of
the Company, Mr. Shalom Attia, commencing in March 2007.

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements:

The financial statements were presented in accordance with accounting
principles generally accepted in Israel and in accordance with the Securities
Regulations (Presentation of Annual Financial Statements) - 1993.

A. Measurement basis of the financial statements

1. General

As detailed fully in Note 1A above, the Company was in the midst of
negotiating a creditors arrangement which when completed, left the balance sheet
with cash and other monetary balances against share capital. Therefore, all of
the components of financial reporting as at 30 September 2007 are nominal (in
these financial statements, "reported amounts" refer to nominal amounts).

b. The amounts of non-monetary assets do not necessarily reflect the
economy or realisable value of such assets. Rather, they reflect the reported
value of these assets.

c. In the financial statements, the term "cost" refers to cost in reported
amounts.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements (cont.):

A. Measurement basis of the financial statements (cont.)

2. Translation of the financial statements of foreign operations

The Company implements Accounting Standard No. 13, The Impact of
Changes in Foreign Currency Exchange Rates (hereinafter - "Standard No. 13").
Standard No. 13 deals with the translation of transactions in foreign currency.
It also addresses the issue of the translation of the financial statements of
foreign operations and the consolidation thereof into the financial statements
of the reporting entity. The Standard also sets out rules for the
classification of foreign operations as the long arm of the Company or as an
autonomous unit held abroad.

Investee companies constituting autonomous units abroad

When translating the financial statements of an investee company that
operates autonomously abroad (hereinafter - the "autonomous unit"), the Company
applied the following procedures:

(a) The assets and the liabilities, monetary and non-monetary, of the
autonomous unit were translated on the basis of the closing rate.

(b) Income and expense items of the autonomous unit were translated on the
basis of the average exchange rate for the period.

(c) The exchange rate differentials resulting from the translation of the
financial statements of the autonomous unit, including in respect of monetary
items that constitute part of the investment, are carried directly to
shareholders' equity, until the realization of the investment, net.

Data pertaining to the Israeli Consumer Price Index ("ICPI")
and the representative foreign currency exchange rates are as follows:
Change in Change in
representative exchange representative
rate of the Croatian exchange rate of the
Kuna US dollar
% %
Exchange change during the period
Nine months ended 30 September 2007 4.13 (5.02)
For the period 15 March 2007 to 30 September 2007 4.39 (4.72)
Three months ended 30 September 2007 0.56 (6.54)
Three months ended 30 September 2006 (5.06) (3.11)
For the period 13 February 2006 to 31 December 2006 (0.91) (10.2)

Representative exchange Representative
rate of the Croatian exchange rate of the
Kuna US dollar
NIS NIS
As at:
30 September 2007 0.7900 4.013
30 September 2006 0.7399 4.302
30 June 2007 0.7856 4.249
30 June 2006 0.7793 4.440
31 December 2005 0.7400 4.603
31 December 2006 0.7587 4.225
13 February 2006 0.7657 4.704

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements (cont.):

B. Financial statement consolidation and implementation of reverse purchase
accounting

The consolidated financial statements include the financial statements
of the Company and its subsidiaries.

As part of the merger of the Company with Verge and Sitnica, the
controlling shareholders of Verge and Sitnica obtained control of the merged
entity. Since the largest of the companies involved in the transaction was
Verge, it was determined that from the accounting standpoint, Verge is the
accounting purchaser of the rest of the companies. Therefore, the transaction
was treated from an accounting standpoint under the reverse purchase method.

Accordingly, the assets and liabilities of Verge the accounting
purchaser were recorded in the pro forma consolidated financial statements on
the basis of their book values in the accounting records of Verge immediately
prior to the reverse purchase. In addition, in view of the fact that the
Company, which was the acquired company in the reverse purchase transaction
constituted a stock exchange skeleton, no original differences or goodwill were
generated in respect of the purchase.

In addition, the investment of the Company in Sitnica was handled
pursuant to the principles of decision 2-10 of the Israel Securities Authority,
"The Handling of Transactions Involving Combinations of Businesses Under Mutual
Control". Accordingly, the investment in Sitnica was treated as a pooling of
interests.

C. Use of estimates in preparation of the financial statements

Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities presented in the
financial statements, the disclosure of contingent assets and liabilities at the
date of the financial statements and the amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

D. Cash and cash equivalents

Cash and cash equivalents include highly liquid investments, which
include short-term bank deposits (with original maturity dates of up to three
months from date of deposit) that are not restricted as to withdrawal or use.

E. Restricted cash

The balance of restricted cash includes amounts deposited by the Group
to secure its liabilities toward apartment purchasers. See Note 4F below.

F. Fixed assets

1. Fixed assets are presented on the basis of the cost model - fixed asset
items treated as such are presented at cost, net of accumulated depreciation,
and where necessary, net of losses on decline in value. In addition to the
purchase price, cost includes all of the costs that can be directly attributed
to bringing the item to the location and condition that enable it to operate in
the manner intended by Management, as well as an estimate of the costs of
dismantling and removing the asset and rehabilitating the site on which the
asset was located, if the entity has a commitment to do so.

2. Financing expenses in real terms in respect of loans and credit used to
finance the purchase or construction of qualified fixed assets pursuant to
Accounting Standard No. 3, Capitalization of Credit Costs - in the period until
its preparation for the intended use - are carried to the cost of the fixed
asset.

3. Expenses in respect of improvements are carried to the cost of the
assets, whereas maintenance and repair expenses are expensed when incurred.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements (cont.):

F. Fixed assets (cont.)

4. Depreciation is calculated on the straight-line method, on the basis of
the estimated useful lives of the assets.

Annual depreciation rates are as follows:
%
Computers 20 - 33
Office furniture and equipment 6 - 7
Leasehold improvements The shorter of the contract period or the life
expectancy of the improvement

G. Decline in value of non-monetary assets

At every balance sheet date, the Company evaluates the recoverable value of its
non-monetary assets, if events occurred or if indications exist that there was a
possible decline in asset value.

When the value of an asset in the consolidated balance sheet exceeds its
recoverable value, the Company recognizes a loss on decline in value in an
amount equal to the difference between the book value of the asset and its
recoverable value. A loss in respect of a decline in value that was recognized
in the past is cancelable, except if it relates to goodwill, only if changes
occurred in the estimates used to determine the recoverable value of the asset,
subsequent to the date on which the last loss on decline in value was
recognized.

H. Deferred taxes

Deferred taxes are computed in respect of temporary differences
between the amounts presented in the financial statements and the amounts taken
into consideration for income tax purposes. Deferred tax assets are recognized
(in respect of unutilized tax losses) only up to the amount expected to be
utilized in the future.

Deferred taxes were computed using the tax rates expected to be applicable when
the deferred tax balances are carried to the income statement, based on the tax
laws in effect at the balance sheet date.

Due to the uncertainty in connection with the utilization of the losses of the
U.S. subsidiary, no deferred tax assets were included in the pro forma financial
statements.

I. Revenue recognition

Revenues are recognized in the financial statements if the amount of the revenue
can be measured reliably and as long as the revenue is expected to be
collectible, in accordance with the following principles:

1. Sale of apartments

Revenues from sales of apartments are recognized in accordance with the
percentage of completion method pursuant to Accounting Standard No. 2 of the
Israel Accounting Standards Board. According to this method, revenues are
recognized as the product of the proceeds of the sale and the rate of completion
of the project, but not until the proceeds of the sales in the project
constitute at least 50% of the total expected revenues and the rate of
completion of the project is at least 25%. In view of the fact that the
construction of the project by the subsidiary in Las Vegas has not yet begun, no
revenues on the sale of apartments were recognized in the pro forma income
statements for all of the reported periods.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements (cont.):

I. Revenue recognition (cont.)

2. Rental income

Revenues from rents are carried to the income statement using the straight-line
method over the rental period.

J. Capitalization of credit costs and other direct costs

Credit costs directly attributable to the purchase or construction of qualified
assets are carried to the cost of such assets over the construction period (the
period in which actions are taken to prepare the asset for its intended use), in
accordance with the provisions of Accounting Standard No. 3 pertaining to
capitalize credit costs. A qualified asset is an asset under construction or
preparation, the preparation of which for the intended use requires a
considerable amount of time (mainly inventory of buildings under construction).

The selling and marketing expenses and the general and administrative expenses,
which can be specifically attributed to a specific project, constitute direct
costs of the project and, as such, are carried to the cost of the project.

K. Buildings under construction

The buildings under construction are presented at the lower of cost and the net
estimated realizable value. Cost includes direct identifiable costs (see J
above), costs of subcontractors, joint indirect costs, and capitalized credit
costs.

In cases in which a loss is expected from buildings under construction, a
provision is recorded at the date of the expectation, in an amount equal to the
entire expected loss, based on the best estimate of Company Management regarding
the expected loss. The amount of the decline in value or the cancellation of
the decline in value is carried to the profit and loss account under the item
entitled "Cost of Sales".

L. Investment property

Investment property is defined as real estate (land or buildings, part of a
building, or both) held (by the owners or by a financial lessee) for the purpose
of generating rental income, generating an increase in value, or both, and not
for use in the manufacture or supply of goods or services, or for administrative
purposes, or sale during the normal course of business.

Investment property assets are initially measured at cost, including the direct
purchase costs. After initial recognition, they are measured at fair value,
which reflects the market conditions at each balance sheet date. Changes in
fair value are recognized in the income statement. Such real estate is not
depreciated.

For purposes of determining the fair value of investment property assets, the
Company used valuations conducted by outside independent appraisers who are
experts in property valuations, possessing the required know-how and experience.

M. Fair value of financial instruments

The fair value of financial instruments included in the Company's working
capital is identical with or approximates the value at which they are presented
in the pro forma consolidated balance sheet.

N. Operating cycle

The normal operating cycle of the Group in the field of apartment construction
contracting (construction contractor) usually exceeds one year and is 3 years.
Taking this into consideration, the current assets and current liabilities
include items, which the Group expects to realize within its normal operating
cycle.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

C. The following are the major accounting principles of the Company and
determined for purposes of preparing the pro forma financial statements (cont.):

O. Disclosure of the effects of new accounting standards in the period prior
to implementation

Accounting Standard No. 29 - "Adoption of International Financial
Reporting Standards (IFRS)"

The Company intends in applying IFRS commencing with the financial
statements for the period starting on 1 January 2008.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

D. Pro-forma consolidated balance sheet
Convenience
translation
30 September 30 September
Note 2007 2007
NIS' 000 �' 000
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and cash equivalents 8,533 1,049
Accounts receivable and debit balances 2,012 247
Restricted cash 4F1b 17,477 2,148
Buildings under construction 4F1 44,087 5,417
_______ _______
Total current assets 72,109 8,861
----------- -----------

Long-term Assets and Investments
Fixed assets, net 48 6
Investment property 4F2 68,943 8,472
_______ _______
Total long-term assets and investments 68,991 8,478
----------- -----------
_______ _______
Total assets 141,100 17,339
_______ _______
_______ _______

LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Loans from related parties 8,616 1,059
Sellers of land 4F3 43,485 5,343
Suppliers, accounts payable and credit balances 6,273 771
Advances from customers 4F1b 17,477 2,148
_______ _______
Total current liabilities 75,851 9,321
----------- -----------

Long-term Liabilities
Deferred taxes 4F4a 3,479 428
_______ _______
Total long-term liabilities 3,479 428
----------- -----------

Shareholders' Equity 61,770 7,590
----------- -----------
_______ _______
Total liabilities and shareholder equity 141,100 17,339
_______ _______
_______ _______

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

E. Pro-forma consolidated profit and loss account
Nine month period ended 30 Three month period ended 30 Year ended
September September 31 December
Note 2007 2006 2007 2006 2006
NIS' 000 NIS' 000 NIS' 000 NIS' 000 NIS' 000
(Unaudited) (Unaudited) (Audited)
Changes in fair value of investment 4F2 17,487 - - - -
property

Rental income - - - - 13

______ ______ ______ ______ ______
Gross profit 17,487 - - - 13
Selling and marketing expenses 554 - 406 - -
General and administrative expenses 2,817 642 1,137 404 782
______ ______ ______ ______ ______
Operating profit (loss) 14,116 (642) (1,543) (404) (769)
Financing expenses 3,207 - 1,459 - 1,271
______ ______ ______ ______ ______
Income (loss) before taxes on 10,909 (642) (3,002) (404) (2,040)
income
Taxes on income 4F4 (3,363) - 38 - -
______ ______ ______ ______ ______
Net profit (loss) from continuing 7,546 (642) (2,964) (404) (2,040)
activities
Income (loss) from discontinued 4F5 31,521 (6,758) 34,037 (3,565) (18,383)
activities (including income from
creditors arrangement)
______ ______ ______ ______ ______
Net income (loss) 39,067 (7,400) 31,073 (3,969) (20,423)

______ ______ ______ ______ ______
______ ______ ______ ______ ______

Nine month period Three month period
ended ended
30 September 30 September
Note 2007 2007
�' 000 �' 000
(Unaudited) (Unaudited)
Changes in fair value of investment real estate 4F2 2,149 -

Rental income - -

______ ______
Gross profit 2,149 -
Marketing and selling expenses 68 50
General and administrative expenses 346 140
______ ______
Operating profit (loss) 1,735 (190)
Financing expenses 394 179
______ ______
Income (loss) before taxes on income 1,341 (369)
Taxes on income 4F4 (413) 5
______ ______
Net profit (loss) from continuing activities 928 (364)
Income from discontinued activities (including income from creditors 4F5 3,873 4,182
arrangement)
______ ______
Net profit 4,801 3,818

______ ______
______ ______

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

F. Notes to the significant items in the pro forma consolidated financial
statements

1. Investment in buildings under construction and restricted cash

a. The major asset of the U.S. subsidiary - as a single asset entity - is
the asset in Las Vegas, comprised of ten adjacent lots, covering an overall are
of 2.87 acres (13 thousand square meters). Part of the asset is empty and
undeveloped, while the other part contains a paved parking lot and a small
structure, which was used in the past as, a garage (which was rented out for a
short period during 2006 to a third party) and which is slated for demolition.

The subsidiary intends on constructing on the asset in Las Vegas a
project to contain apartments in a cooperative apartment building, as well as
commercial space, a sports centre, theatre, and a playground for pets.

On 30 November 2005, approval was obtained from the Las Vegas
municipal council to use the asset for development and the construction of a
project containing 296 dwelling units in a cooperative apartment building and 3
thousand square meters of commercial space. The permit was granted for a
limited amount of time, so that the Company has to commence construction within
a two-year period. The permit is expected to expire at the end of November
2007, unless it is exercised (i.e., construction begins) or extended. The
subsidiary intends on beginning actual construction before the aforementioned
date.

The asset is located north of the Central Business District, not far
from the Las Vegas strip. In close proximity to the project are hotels and
casinos, office buildings, courts and apartments housing a relatively low
economic population.

The project is slated to contain one six-story building with studio
apartments, two, three and four room apartments, and luxury loft apartments. In
addition to the dwelling units, the building is expected to contain commercial
space, a sports centre, theatre, and a playground for pets. The addresses of
the lots are as follows:

NV 89101 604 N Main Street, Las Vegas
NV 89101 634 N Main Street, Las Vegas
NV 89101 601 1st Street, Las Vegas
NV 89101 603 1st Street, Las Vegas
NV 89101 605 1st Street, Las Vegas
NV 89101 607 1st Street, Las Vegas
NV 89101 625 1st Street, Las Vegas
NV 89101 617 1st Street, Las Vegas
NV 89101 701 1st Street, Las Vegas
NV 89101 703 1st Street, Las Vegas
NV 89101 705 1st Street, Las Vegas

The following table summarizes the book value of the buildings under
construction:
Convenience
translation
30 September 30 September
2007 2007
NIS' 000 �' 000
(Unaudited) (Unaudited)
Land purchased from a third party and subsequently transferred to the 11,236 1,381
Company, mainly against debt
Other capitalized costs (mainly direct marketing costs) 32,851 4,036
_______ _______
Total investment in buildings under construction 44,087 5,417
_______ _______
_______ _______

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

F. Notes to the significant items in the pro forma consolidated financial
statements (cont.)

1. Investment in buildings under construction and restricted cash (cont.)

b. On 2 June 2007, the subsidiary started selling apartments in the
project. As at 7 November 2007, the subsidiary signed contracts for the sale of
257 apartments costing $95 million. Deposits amounting to $4.4 million were
placed in trust as at 30 September 2007. Law restricts the use of these
deposits, and they will be transferred to the subsidiary upon completion of the
sale or after the apartment is registered in the name of the buyer.
Accordingly, these deposits are presented as restricted cash and as a liability
(deferred income) in the balance sheet.

2. Investment property

The Croatian subsidiary obtained the rights to the assets listed below
(hereinafter - the "Land" or the "Assets") from the Atia Project at the value of
these assets on the books of the Atia Project. For purposes of preparing the
pro forma financial statements, the investments in the land were treated as if
they had always been made by the Croatian subsidiary. In view of the fact that
these real estate assets are held for an as yet undetermined future use, Sitnica
reported this real estate in the pro forma financial statements as investment
real estate in accordance with Accounting Standard No. 16 of the Israel
Accounting Standards Board. The subsidiary elected to measure the investment
real estate at fair value as its accounting policy. Gains deriving from a
change between the cost of the assets and their fair value derive mainly from
the consolidation of individual assets into one large lot, the value of which as
a single unit is greater than the costs of its parts.

As at 30 September 2007, the rights of the subsidiary in these assets
included the following rights in land in Samobor, Croatia:

Detail Sq.m.

3782 1,574
3783 1,965
3780 1,554
3783 1,965
3777 5,927
3778 6,289
3779 6,992
3723 3,257
3724/1 3,227
3724/2 3,007
3722/2 3,420
3732/1 2,454
3743 1,664
3740 2,604
3737 3,038
3738 1,562
3742 1,612
3731 5,224
3744 2,588
3726 899
3727/2 714
3727/1 1,947
3737 3,038
3738 1,562
3776 6,618
______
74,701
______
______

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

F. Notes to the significant items in the pro forma consolidated financial
statements (cont.)

2. Investment real estate (cont.)

The cost of the real estate as at 30 September 2007 includes 5%
purchase tax on the real estate, for a total amount of NIS 51,358 thousand.

The fair value of the real estate as at 30 September 2007 amounted to
NIS 68,943 thousand.

The fair value of the property was determined on the basis of a
valuation conducted by Dr. Ali Kreisberg, a partner in the firm of Giza, Zinger
Even, a professional appraiser in Israel, as at 11 July 2007. The appraisal was
based on the method of comparing the market value of the assets with similar
assets having similar characteristics in similar transactions, all at the time
the appraisal was made.

This information was based on a visit to the area of the property in
Samobor, Croatia. Other appraisers and real estate sites on the Internet
provided additional information.

According to the valuation, the value of a square meter of property,
which was purchased, is $216 (equivalent to Euro160 and 1,182 Croatian Kuna).

In making his evaluation, the appraiser assumed the following:

A. There are no rental agreements in respect of the property.

B. Since the property is comprised of adjacent lots, the property was
appraised as a single lot.

In the opinion of Company Management, based on, among other things,
the position of the appraiser, the fair value of the property is influenced by
changes in exchange rates of the euro and the kuna (the Croatian currency) that
are relevant to Croatia and less influenced by changes in the exchange rate of
the dollar. Therefore, in the opinion of Company Management, a decline in the
exchange rate of the dollar will not impact on the fair value of the property.

3. Sellers of land

The Atia Project (a related party) paid the sellers of the land 10% of
the agreed-upon amount in respect of the land. The balance of the debt, in an
amount of NIS 43,486 thousand, has to be paid by the subsidiary to the sellers
of the land directly. The subsidiary has to make the payments by May 2008.

4. Taxes on income

Taxation in Croatia

a. Corporate tax

Regular income is taxed in Croatia (hereinafter - "Croatian Corporate
Tax") at a rate of 20%. Therefore, income from construction, sale or rental of
real estate in Croatia is liable for Croatian Corporate Tax at this rate. Tax
losses may be carried forward over a five-year period but they cannot be carried
back to prior periods. There is no limit to the amount of the loss that can be
carried forward.

Deferred taxes in the balance sheet were recorded on the basis of a
20% tax rate.

b. Recognition of financing expenses for tax purposes

Financing expenses are tax deductible in Croatia. However, a
distinction is made between loans from third parties and loans granted or
guaranteed by related parties.

According to the thin financing rules in Croatia, the company may not
take into account for tax purposes interest charges on loans received from
foreign shareholders holding at least 25% of the share capital or voting rights
in the Company, if the amount of the loan is four times the share of the
shareholder in the capital of the loan at any given point in time during the tax
period. This law applied to loans granted by a third party but guaranteed by a
shareholder.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

F. Notes to the significant items in the pro forma consolidated financial
statements (cont.)

4. Taxes on income (cont.)

Taxation in Croatia (cont.)

c. VAT and purchase tax

The sale of apartments and commercial properties is subject to VAT of
22%. However, the part of the purchase price attributed to land is exempt from
VAT, but is subject to purchase tax of 5%. According to Croatian law, the
purchaser is required to pay the transfer tax.

This law is also applicable to the sale of buildings for business
purposes.

Taxation in Nevada, USA

Corporate tax in the U.S. amounts to 35% (progressive).

To the best of the knowledge of the Company, Nevada has no state tax.

d. Deferred taxes are comprised as follows:
Convenience translation
Nine month period Three month period Nine month period Three month period
ended ended ended ended
30 September 30 September 30 September 30 September
2007 2007 2007 2007
NIS' 000 NIS' 000 �' 000 �' 000
(Unaudited) (Unaudited)
Deferred tax income (expenses) (3,363) 38 (413) 5
_____ ____ _____ ____
_____ ____ _____ ____

5. Income (loss) on discontinued operations

The income (loss) on discontinued operations includes the results of
operations of the Company in the field of plastics (the former field of
operations of the Company) and the income deriving to the Company as a result of
the creditors agreement in an amount of NIS 31,521 thousand, included in the pro
forma income statements for the nine and three months periods ended 30 September
2007.

6. Events during the reporting period

a. On 16 July 2007, the U.S. subsidiary submitted a request for a loan to
a banking institution, in an amount of $75 million, for purposes of financing
the costs of construction of the Las Vegas project. The CEO of Emvelco provided
a personal guarantee to secure the loan, to be repaid on 16 January 2009. The
loan bears interest at a rate of LIBOR + 3.75%. Only the interest payments will
be made at the end of each month.

In addition, on 16 July 2007, the subsidiary submitted a request for a
mezzanine loan from a third party in an amount of $20 million. The terms of the
loan are subordinate to the terms of the loan from the banking institutions.
The interest rate on the loan will vary between 25% to 27%, contingent on the
number of apartments to be sold in the construction phase. According to the
wording of the loan request, Mr. Yosef Attia, the controlling shareholder of the
Company, will provide a personal guarantee to secure the loan. The loan is
expected to be repaid on 16 January 2009.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PRO-FORMA DATA (cont.)

F. Notes to the significant items in the pro forma consolidated financial
statements (cont.)

7. Subsequent events

a. In November 2007, the Company provided a shareholders loan in an amount
of $1.7 million, for a period of 12 months to the Verge subsidiary. The loan is
dollar denominated and bears annual interest of 12%. The loan was used to repay
US$ 1.5 million of the loan given to Verge by Emvelco Corporation, the
controlling shareholder, which was not reclassified to equity of Verge.

b. The mortgage credit markets in the U.S. are undergoing difficulties as
a result of the fact that many borrowers are finding it difficult to obtain
financing (hereinafter - the "Sub-Prime Crisis"). The sub-prime crisis derived
from a number of factors, as follows: the increase in the volume of
repossessions of houses and apartments, the increase in the volume of
bankruptcies of mortgage companies, the significant decrease in accessible
resources for purposes of mortgage financing, and the decrease in the prices of
dwelling units.

The financing of the construction project of the Verge subsidiary is
contingent on the future impact of the sub-prime crisis on the financial
institutions operating in the U.S. The sub-prime crisis may affect the ability
of the Verge subsidiary to procure the financing needed to complete the
construction project and on the terms of the procured financing, should such be
procured. In addition, the crisis may affect the ability of the customers of
the Company to obtain mortgages, should they be necessary, and on the terms of
such mortgages.

c. See also Note 3 of the financial statements.

NOTE 5 - ACCOUNTS RECEIVABLE AND DEBIT BALANCES

The balance includes the debt balance of Appswing Ltd., an interested party, in
an amount of NIS 376 thousand, deriving from the payment that was made to
Appswing in September 2007 in respect of the expenses that Appswing paid in
favour of the Company. Subsequent to the balance sheet date, the amount was
repaid by Appswing to the Company.

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